Financial outlook shaky on slow reforms: Moody's

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.