Fitch affirms RI sovereign ratings

Fitch affirms RI sovereign ratings

The Jakarta Post, Jakarta

In its first assessment of Indonesia since the Bali attack in
October, London and New York-based Fitch Ratings has affirmed its
long-term foreign and local currency sovereign rating at "B",
which implies a stable outlook.

In a media release on Monday, the agency argued that the broad
thrust of restructuring and fiscal consolidation, which had
underpinned Fitch's upgrade of Indonesia's ratings earlier this
year, remained intact and that only a very deep and prolonged
loss of confidence or renewed political instability would put
public debt sustainability at risk.

"Early indications suggest that the fallout from the Bali
attack should be containable.

"Nonetheless, the incident seems certain to exact some cost in
terms of delayed recovery from the Asia crisis, reduced investor
confidence and a weaker balance of payments," Fitch said.

Affirmation of the ratings and the outlook recognized the
government's prompt response in confronting terrorism
domestically since the Bali bombings and forcefully restating its
commitment to macroeconomic stabilization and reform, most
notably in a recent supplementary letter of intent to the IMF, it
said.

President Megawati Soekarnoputri's position still looked
secure and her genuine popularity, coupled with continuing
internal divisions among her opponents, suggested the 2004
presidential election was hers for the taking, it said.

Arguably, the terrorist incident has strengthened her hand
domestically, but Fitch hesitated to discount the significant
risks that may remain ahead of 2004, as she continued to steer a
narrow path between pro-Islamic and pro-Western factions.

Despite encouraging external trade data for October, Fitch
said it was too early to assume that the economy would simply
shrug off the Bali attack, and growth in 2002 might do no better
than match the 3.3 percent of 2001.

It said recently revised official macroeconomic forecasts for
2003 represented a more sober assessment of the short-term
outlook and formed the backdrop to a slight easing of fiscal
retrenchment in 2003 and a higher budget deficit of 1.8 percent
of GDP, up from an originally budgeted 1.3 percent, aimed chiefly
at bringing relief to Bali.

"Yet the authorities could hardly be accused of abandoning
fiscal consolidation: better-than-expected budget outcomes for
2001 and 2002 to date have dispelled fears of fiscal indiscipline
and allayed concerns that public debt could be on an explosive
path," Fitch said.

Having peaked at close to 90 percent of GDP in 2000 to 2001,
Fitch expected central government debt per GDP to fall to 73
percent by the end of 2002 and 68 percent by the end of 2003.

Fitch believed the main impact of the Bali attack would be
felt on the balance of payments. For 2003, the agency was
assuming a 30 percent drop in tourism receipts, roughly in line
with Indonesia's experience following the riots of May 1998,
reducing the current account surplus to under US$5 billion, from
more than $6 billion in 2002. The impact on foreign direct
investment promises to be less, primarily because it is already
running well below precrisis levels.

"Even so, signs of a nascent recovery in investor sentiment
earlier this year could now be at risk," it said.

While the Bali bombing could knock the economy sideways, Fitch
did not expect it to go into a tailspin. Recent improvements in
policy fundamentals should put a floor under the currency,
reinforced by a resilient current account surplus and US$30
billion of international reserves.

Moreover, it said, very little of the nation's external
financing gap was met from market sources, insulating it from any
broader deterioration in emerging market investor sentiment.

Aid donors have already indicated their support for Indonesia
post-Bali and it seems highly likely that Indonesia could secure
additional IMF support if necessary, according to Fitch.

"Further rating actions will hang upon evidence of sustained
economic recovery and restructuring, continued budgetary
discipline and lasting improvements in the public and external
debt ratios," it said.