Fitch Rates PT Penjaminan Infrastruktur Indonesia (Persero) at 'AAA(idn)'; Outlook Stable

(Fitch Ratings-Jakarta-29 August 2019)-- Fitch Ratings Indonesia has assigned PT Penjaminan Infrastruktur Indonesia (Persero)'s National Long-Term Rating at 'AAA(idn)'. The Outlook is Stable.

The company is also known by its English name Indonesia Infrastructure Guarantee Fund (IIGF), which is wholly owned by the Indonesian state (BBB/Stable). IIGF has a Long-Term Foreign-Currency Issuer Default Rating of 'BBB' as well.

IIGF is the only state-owned enterprise (SOE) mandated to provide government guarantees for public-private partnership (PPP) infrastructure projects. The company guarantees for political risk, which is backed by a recourse agreement with the contracting agencies including ministries, government institutions, local governments and SOEs. In addition, it has mandates to provide guarantees for non-PPP projects run by SOEs as well as non-guarantee activities in project preparation and transaction advisory.

'AAA(idn)' National Ratings denote the highest rating assigned by the agency in our National Rating scale for Indonesia. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country.

KEY RATING DRIVERS

'Very Strong' Status, Ownership, Control: Fitch factors in IIGF's wholly owned status as well as the Indonesian Ministry of Finance's (MoF) control over the company's board of commissioners and directors and approval of IIGF's annual budget. In addition, MoF regulation 8/2016 provides clarity on the recourse mechanism between IIGF and the government agencies that it guarantees. This requires the MoF to offset any payments IIGF may make under any called guarantees and allocate sufficient budgetary resources for payment.

'Very Strong' Support Record, Expectations: The government has provided consistent financial support through capital injections, with authorised capital of IDR9 trillion. This suggests that there may be further government injections. MoF decree (PMK) 95/2017 stipulates MoF's role in ensuring IIGF can fulfil its obligation, including providing support on counter guarantees and capital injections. Fitch sees IIGF's two-step loan with the government and the World Bank as evidence of strong multilateral support, even though the government disbursed the loan to IIGF. The company had a two-step loan of IDR55.1 billion at end-2018, which accounted for all of its interest-bearing debt obligations.

'Moderate' Socio-Political Implications of Default: Infrastructure investment is a key government policy and IIGF's role is to attract wider private-sector participation to bridge the large funding gap. An IIGF default would disrupt economic growth and the private sector's confidence in infrastructure investment. However, providing guarantees for infrastructure development is not a mandatory government responsibility, which constrains higher attribute strength.

'Very Strong' Financial Implications of Default: Fitch sees IIGF as the government's platform to provide guarantees for infrastructure investment after considering the state's ownership and recourse agreement. In a stressed situation, Fitch believes IIGF's ability to fulfil its guarantee obligations will be tied to the government's willingness to provide support. IIGF is also there to ringfence the government's contingent liabilities and hence minimise sudden shocks to the state budget. This means its default would have serious implications for the government and its borrowing and refinancing capacity in capital markets, as well as for wider investor sentiment towards the sovereign, other government-related entities and Indonesia's infrastructure sector.

Increased Activity: IIGF's operating profit increased slightly by 4.9% yoy to IDR617 billion in 2018 due to an increment in the amount guaranteed. Its guaranteed projects also increased to 18, from 15 in 2017, paving the way for growth. IIGF's gearing ratio rose to 3.7x, but remained well within the regulatory limit of 10.0x.

High Liquidity: IIGF maintained high liquidity, with cash and investments of IDR10.4 trillion at end-2018, against total guarantees of IDR38.9 trillion.

DERIVATION SUMMARY
Fitch classifies IIGF as a government-related entity (GRE) that is credit linked to the Indonesia sovereign. Its rating factors in its full state-level government ownership and record of government financial support, including multilateral support. In addition, the rating takes into consideration IIGF's policy role in supporting fiscal stability from sudden shock to government contingent liabilities and developing private-sector participation in infrastructure. The rating is also supported by the social, political and financial implications of IIGF's default.

Fitch believes the government has a strong incentive to provide extraordinary support, if needed. The rating is derived from our GRE score of 45, which results in equalisation with the Indonesia sovereign. Fitch has not assign IIGF a Standalone Credit Profile, since it is difficult to detach the entity from the government framework in which it operates. IIGF's entire guarantee is directed towards its core policy-focus segment. IIGF guaranteed 17 PPP projects and one non-PPP project with recourse mainly to state level government as at end-2018.

RATING SENSITIVITIES
IIGF's ratings are credit-linked with those of the Indonesian sovereign.

Any significant dilution of IIGF's policy role or a weakening of the incentive of the government to provide support could lead to downward notching. A dilution of the state's shareholding in IIGF, resulting in the loss of its controlling stake, could lead to IIGF no longer being classified as a GRE and therefore being delinked from the Indonesian sovereign.

The rating is at the highest level of National Rating scale and no upside is possible. (ends)