On-lending is not managed by DGFRM but by the DG Treasury. Hence, on-lending is not in scope of the risk management framework developed at DGFRM. However, due to the similar nature of credit risk involved in on-lending, the design and implementation of the risk management process described here could be easily extended to include on-lending.<sup>47</sup>

# **_Data availability_**

DGFRM has recently started to collect historic information on the performance of guarantee beneficiaries, including information from financial statements such as balance sheets and income statements as well as qualitative information (e.g. assessment of regulatory environment, management quality, competitive environment, etc.). Outright defaults of beneficiaries where beneficiaries default to commercial creditors who then accelerate debt service payments have not materialized in the past. PLN has not defaulted. Water utilities have defaulted in the past and information on defaults is available. However, defaults have only occurred at water utilities that borrowed through on-lending from the government, not at water utilities conducting commercial borrowing with government guarantees. Given the potential difference in willingness to repay in on-lending operations discussed above, and a potential bias towards less viable water utilities borrowing through on-lending from the government, historic default events at water utilities may be inappropriate for use in the analysis of guaranteed water utilities. Going forward DGFRM has discussed an adaptation of the definition of default. Rather than focusing on outright defaults to commercial creditors, DGFRM may define default as missed debt service payments (e.g. individual installments) that are paid for to the creditor by the government.

PLN has been rated by international rating agencies (Moody’s, S&P, and Fitch) and has traded corporate bonds outstanding for which information is available on Bloomberg. It is important to note that market prices factor in implicit government support and spreads between the Indonesian government and PLN are relatively tight. For water utilities, however, only very few companies are rated by local rating agencies and no traded corporate debt securities are outstanding.

# **_Resources and capacity_**

The contingent liabilities team at DGFRM consists of three sub-units, including risk analysis, the structuring of guarantee agreements, and risk monitoring and reporting. The head of the team is supported by seven staff who rotate between sub-units to balance workloads and build skills across the entire spectrum of guarantee risk management. Staff have a general background in finance and economics and have often worked in various units of the debt management office. However, staff mostly do not have previous professional experience in credit risk analysis.

The Risk Management Unit from the Fiscal Policy Office (FPO) has recently been integrated into DGFRM. This unit also has responsibilities with respect to managing risks from government guarantees and state-owned enterprises. The integration of this team into DGFRM could help strengthen risk management capacity. Other government(-related) entities involved in credit risk analysis include the

> 47 Attention has to be given to differences in the institutional setup of guarantees and on-lending. While ability to repay would be the same in both cases and only dependent on the credit quality of the respective beneficiary, willingness to repay may differ depending on whether on-lending or guarantee agreements are in place.

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