Fitch Assigns ‘BBB’ Rating to Indonesia’s Proposed USD Sukuk

In a significant update, Fitch Ratings has assigned a ‘BBB’ rating to Indonesia’s proposed USD Sukuk, issued through Perusahaan Penerbit SBSN Indonesia III (PPSI-III). This rating underscores Indonesia’s strong sovereign credit and highlights the government’s commitment to meeting its financial obligations. By securing this rating, the Indonesian government aims to attract global investors, support economic growth, and strengthen the country’s financial stability through Sharia-compliant investment vehicles.

Key Details of the USD Sukuk

The USD Sukuk is structured to be sharia-sharia-compliant and be issued by PPSI-III, an entity established specifically for issuing the Indonesian government’s Islamic securities in international markets. As the trustee, PPSI-III ensures the compliance and management of these financial instruments, which are vital for Indonesia’s strategy to attract global investors.

Rating Drivers and Sovereign Support

The rating of the proposed sukuk is directly linked to Indonesia’s Issuer Default Rating (IDR) of ‘BBB’, with a stable outlook, affirmed by Fitch on March 15, 2024. This connection underscores the fact that the payment obligations of the sSukukare fundamentally dependent on the Indonesian government’s creditworthiness.

Structural Features and Government Guarantees

The sukuk’s structure involves several key features, including:

• Ijara and Wakala Series: Under the ijara series, the government (as lessee) pays rental fees to PPSI-III, which are intended to cover the periodic distributions to sukuk holders. The wWakalaseries involves the government paying amounts reflecting the rental due for project assets upon their completion and delivery.
• Dissolution Events: PPSI-III can require the government to repurchase the trust assets before the scheduled dissolution, ensuring the sukuk holders’ investments are protected.
• Loss Events: In case of total or partial loss events, the government must replace the underlying assets or redeem the certificates at an equivalent amount to the dissolution distribution amount.

Legal and Compliance Aspects

The transaction documents governing the sSukukinclude a mix of English and Indonesian laws. While Fitch does not express an opinion on the sharia compliance of the sukuk, it highlights that the government’s obligations under the sukuSukukucture are direct, unconditional, and rank pari passu with Indonesia’s other unsecured marketable external debt.

Environmental, Social, and Governance (ESG) Considerations

Fitch’s analysis also incorporates ESG factors, assigning Indonesia a score of ‘5’ for both Political Stability and Rights, and for Rule of Law, Institutional and Regulatory Quality, and Control of Corruption. This reflects Indonesia’s political environment, governance standards, and institutional framework, which play a crucial role in the country’s overall rating.

Implications for Investors

The assignment of a ‘BBB’ rating to Indonesia’s USD Sukuk indicates a moderate credit risk, suggesting that while there are factors that could affect repayment, the government’s robust economic policies and commitment to maintaining fiscal stability provide a strong backing for the Sukuk Investors can view this sukuk as a relatively secure investment within the sovereign bond market, given Indonesia’s consistent economic performance and strategic growth initiatives.

The rating of the proposed sukuk is sensitive to changes in Indonesia’s Long-Term foreign currency IDR. Factors that could lead to a downgrade include a substantial increase in public debt or a decline in foreign exchange reserves. Conversely, improvements in government revenue ratios, external financial buffers, or governance standards could lead to an upgrade.

The proposed USD Sukuk from Indonesia, rated ‘BBB’ by Fitch, reflects the country’s stable economic outlook and the government’s strong fiscal management. With its sharia-compliant structure and robust government guarantees, this sukuk presents a valuable investment opportunity for those looking to engage in Indonesia’s growing Islamic finance sector.