Financial outlook shaky on slow reforms: Moody's

Berni K. Moestafa, The Jakarta Post, Jakarta

Indonesia's financial position remains fragile, according to a new report by Moody's Investors Service, citing prolonged political instability and slow progress over reforms implementations.

In its annual report on Indonesia, Moody's said on Thursday that the country's B3 country rating and stable outlook reflected the continued fragility of its external financial position.

This weakness, it said, stemmed from political uncertainty, unstable relations with foreign creditors, a high public debt sector, continued weakness in the banking sector, and an overall lack of investor confidence.

Moody's acknowledged that the current administration appeared to have improved stability and made progress in the area of reform.

"The budget deficit target was met, as was the target for IBRA (the Indonesian Bank Restructuring Agency) asset sales. In addition, some privatization of public enterprises occurred," said the author of the report, Moody's vice president and senior analyst Steven Hess in a statement.

But Moody's added that President Megawati Soekarnoputri's ability to implement strong policies and win legislators' approval had yet to be clearly demonstrated.

The slow pace of reforms have raised doubts about continued support for financial aid from foreign official creditors, said Hess.

So far, the government has been able to maintain a working relationship with its foreign sovereign lenders.

It signed a new lending agreement in December with the International Monetary Fund (IMF) after an eight-month suspension under the previous, and often erratic, administration of Abdurrahman Wahid.

But barely two months into the latest agreement with the IMF, the government's ability to meet reform targets set out in the deal remains to be seen.

"Mounting political pressures leading up to the 2004 parliamentary and presidential elections will inevitably add to the difficulty of achieving targets and implementing reforms," said Hess.

More difficult to achieve, Moody's said, would be the government's "ambitious budget and asset sales targets."

Fresh doubts arise from the budget's inflation target, which for January alone, stood at 1.99 percent against a full year target of nine to 10 percent.

The government also hopes to raise some Rp 42.9 trillion (about US$4.1 billion) from the sale of IBRA assets and loans, and Rp 6.5 trillion from its privatization program.

But achieving these goals depends on the government's ability to lure back foreign investors amid the still adverse investment climate.

A wrecked legal system, rampant security problems, and a shaky political picture have been a constant menace to investors.

The country's reform policies, Moody's said, address these issues, yet implementation has been weak, and concern runs high over whether the situation could improve under Megawati's administration.

What may further discourage the inflow of foreign capital is Indonesia's sluggish country rating. The lower the rating, the more expensive the cost of investing here.

Standard & Poor's said that it might downgrade Indonesia's long-term sovereign debt rating to "selective default," Reuters has reported.

It said that Indonesia's rating was at risk should the country's sovereign foreign creditors insist on equal treatment for private lenders in rescheduling its debts under the Paris Club.

Indonesia seeks to reschedule some $3.8 billion in sovereign foreign debts through the Paris Club meeting later this year.

Expanding the rescheduling to outside the Club raises the risk of nonpayment to private lenders to Indonesia, hence rating drops.

But rescheduling debt payments to private lenders should, by itself, ease the state budget's burden, and eventually help improve the country's rating.