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Indonesia-S&P-analysis

S&P warns of oil price impacts on Indonesia

JP/13/Rating

The Jakarta Post
Jakarta

The current high oil prices have the potential to adversely
affect the country's national budget, but are likely to have only
a slight effect on inflation, Standard & Poor's (S&P) Ratings
Services said on Monday.

In its latest analysis on the country's economy as posted on
its website, S&P said high oil prices had led to concerns over
their potential budgetary impact, given that the Indonesian
system of fuel subsidies meant that a rise in oil prices entailed
higher subsidy spending.

According to World Bank estimates, however, the effect would
actually be positive at a given level of production, with the
rise in revenue exceeding the increase in subsidy spending, S&P
said.

"The key question therefore is whether production can be
sustained at current levels, as underinvestment over the past few
years has left Indonesia's oil industry with deteriorating
production capacity.

"If the country remains a net oil importer as it did in
February and March this year, the budget deficit target of 1.2
percent of GDP for 2004 could be jeopardized," it said.

The report added that the recent slide in the rupiah despite
the favorable economic fundamentals demonstrated Indonesia's
continued vulnerability to adverse external developments.

"The move was triggered by capital outflows based on
expectations of a rising interest rate differential between local
and global rates, and is likely to have only a slight
inflationary effect," it said.

On May 12, S&P revised its outlook on the country's long-term
ratings to positive, reflecting continuing progress in
macroeconomic stability, as evidenced by a stable exchange rate,
falling inflation, and lower interest rates.

"Credit fundamentals in Indonesia have been improving
steadily, if not dramatically, for the past few years," it said
in its May 12 press release.

According to the S&P analysis, the country's continuing
ability to meet its external debt obligations remains dependent
on confidence in the government and economy. Successful recent
legislative elections prove that the country's democracy is
maturing and indicate that the country's first-ever direct
presidential elections later this year have every chance of being
conducted peacefully.

"The potential for faster economic growth, however, remains
contingent on a broad range of reforms, particularly in the
judicial, legal and labor sectors. If there is only slow
improvement in these issues, it would adversely affect the
country's growth potential," S&P warned.

S&P now rates the country's foreign currency at B/positive/B,
while its local currency is rated at B+/Positive/B.