BI to ask S&P over downgraded rating

BI to ask S&P over downgraded rating

WASHINGTON (Dow Jones): Bank Indonesia Governor Sjahril Sabirin said Monday that he will ask Standard & Poor's to explain why certain of the country's foreign-currency credit ratings were downgraded earlier to selective default.

"We will have to ask Standard & Poor's what is really behind this," he told Dow Jones Newswires in an interview.

Then "we can pass good information to them so that we hope they can revise this tomorrow," he added.

Earlier, S&P said it downgraded its long-term foreign currency issuer credit rating on Indonesia to SD, or selective default, from triple-C-plus and cut its short-term foreign currency issuer credit rating on the republic to SD from single-C.

"The downgrades reflect the fact that Indonesia is now effectively in default on $850 million of foreign currency commercial bank loans," the rating agency said.

"The loans ... will be restructured on terms that are disadvantageous to creditors, reflecting Indonesia's commitment to seek similar magnitudes of debt relief from private lenders as that secured from the Paris Club of 19 bilateral creditor governments on April 13, 2000."

S&P also said it affirmed Indonesia's long-term and short-term local currency issuer credit and senior unsecured debt ratings at single-B-minus and single-C, respectively. Local currency bank- recapitalization bonds, with a face value of about $42 billion are affected.

The outlook on the long-term local currency issuer credit rating is stable. All ratings have been removed from CreditWatch with negative implications, where they were placed on Sept. 13.

Bank Indonesia Deputy Governor Achjar Iljas, who also attended the interview, said he too was surprised by the downgrade but said it most likely related to the Paris Club debt rescheduling.

"The result of the Paris Club itself should have a positive effect" at least on perceptions of the country's exchange rate, he said.

On the rupiah overall, the central bankers said the currency's exchange rate against the dollar should be higher.

"The fundamentals in our view would say that the exchange rate should be stronger than what it is right now," Sjarhil said. "According to our estimation, the realistic exchange rate should be a little bit stronger than Rp 7,000."

Indonesia's economy has recovered over the past quarter with growth picking up in most sectors, the central bank governor said.

"We have done surveys of the real (economy's) sectors," he said. "Growth in production occurred almost in all sectors except agriculture" in the first quarter, a trend that began in late 1999.

But despite stronger growth, there aren't yet signs of much higher inflation because a large portion of the economy's output capacity lies idle.

The central bank has set an inflation target of between 5 and 7 percent for 2000.

"We still think that figure is realistic," Sjahril said. Although "it is more likely that it will be closer to the upper end of that range."

Excluding the effects of increases in government-set prices, underlying inflation is targeted at between 3 and 5 percent in 2000, they said.

The two central bankers also said that they weren't overly concerned about the effect of falls in U.S. share prices on Indonesian share prices.

Achjar said that in the past, U.S. share price falls have been more keenly felt in other Asian countries rather than in Indonesia.

Sjahril also said that the fall in U.S. share prices may not continue and would therefore be a correction after recent strong rises.

But more worrying, they said, is the effect of falling U.S. share prices on global growth in the medium term.

"What we are concerned with is the prospect for economic growth in the United States because that would imply (lower) demand for our products," Sjahril said.

Lower U.S. and overall world economic growth wouldn't be a significant problem in the short term because domestic demand in Indonesia is picking up. But in the medium term, weaker world economic growth would be a concern, he said.