Analysts call govt debt rating target difficult

Analysts call govt debt rating target difficult

JAKARTA (JP): The new economic team's plan to upgrade the
country's credit rating from CCC+ to BB within six months may
prove to be a difficult task, with a gaping state budget deficit
crippling the country's ability to repay debts, analysts said on
Wednesday.

Citibank vice president, economist Anton Gunawan, said that
ongoing concerns over budget sustainability made a drastic rating
improvement difficult to achieve.

"The government must seek ways to improve its cash flow,"
Anton told The Jakarta Post.

He said a better cash flow would show investors Indonesia's
improved ability to repay both local and foreign debts.

On Tuesday, Coordinating Minister for the Economy Dorodjatun
Kuntjoro-Jakti said he would seek to upgrade Indonesia's rating
to increase the flow of foreign investment and lower the cost of
borrowing funds from overseas.

Investment has been hampered in Indonesia, with ratings agency
Standard & Poor's classifying Indonesia's long term foreign
currency rating as CCC+.

At CCC+, Indonesia is designated as a non-investment country,
meaning bond issuers here are vulnerable to payment defaults due
to adverse business conditions.

Consequently, investors charge a high interest spread on
Indonesian bonds to cover its country risk.

Anton said Indonesia's state budget best reflected the
government's risk and payment abilities.

Right now, the government faces payment difficulties due to
higher expenditure and missed revenue targets during the first
semester, he said.

In that period, a weaker than expected rupiah and soaring
interest rate led to doubts as to whether the 2001 budget deficit
of 3.7 percent could be achieved.

Political instability affecting market sentiment has also
stalled the government's asset sale and privatization programs.

Divesting government stakes and selling off state assets is
expected to help plug the deficit margin.

"Thus far, our privatization proceeds amount to zero," Anton
said, referring to the government's plan to reap in Rp 6.5
trillion (about US$773.80 million) through its massive selloff.

With the return of political stability, however, most analysts
expect an economic turnaround in the second half.

Analyst Wi Wan at PT Vickers Ballas Tamara warned that an
upgrade from CCC+ to BB was too ambitious for the government to
achieve within six months.

"Even under normal circumstances the jump to a BB rating
sounds difficult to achieve," he added.

He said Indonesia must pass four levels; the first one from
CCC+ to B-, then B+, BB- and finally BB+.

"Also, ratings usually go down faster than they go up," Wi Wan
added.

Erwin S. Widjojo of Mega Capital Indonesia, formerly known as
Indovest Securities, said hopes for an improved rating depended
on Indonesia mending ties with its donor countries.

With the International Monetary Fund (IMF) almost certain to
approve a lending agreement with Indonesia, he said, the
government was likely to earn a rating upgrade.

A deal with the IMF would pave the way for the Paris Club
group of creditors to approve the rescheduling of $2.8 billion in
sovereign debts.

That should relieve the pressure of paying the debts this
year.

On the back of these deals, the government seeks to secure new
loans from the Consultative Group for Indonesia (CGI).

Erwin said the CGI loans would help the 2002 state budget,
thus further enhancing Indonesia's payment capability.

He added that Indonesia's abundant natural resources also
remained an effective support for its credit rating.

"Investors rely on Indonesia's natural resources to pay back
its debts," he said.

However, he said, Standard & Poor's rating also depended on
whether current political stability would prevail.(bkm)