Fitch downgrades RI sovereign rating

Fitch downgrades RI sovereign rating

Hong Kong , Dow Jones

International ratings agency Fitch said Friday it has downgraded its outlook for Indonesia's sovereign ratings to stable from positive.

It cited growing concerns about authorities' intentions to explore interest rescheduling with the Paris Club of creditors. Fitch said it was concerned about the potential burden-sharing implications for private creditors of such a move.

Fitch said its sovereign ratings of B- for both long-term foreign currency and long-term local currency remain unchanged. It also maintained its short-term foreign currency rating of B, applicable to issues with an original maturity of up to one year.

The Paris Club is an informal group of government representatives who meet irregularly in the French capital to consider debt rescheduling for debtor nations.

Fitch said a B- foreign currency rating remains appropriate for Indonesia because of the small amount of sovereign capital market debt outstanding and the low probability of this becoming caught up in a Paris Club rescheduling.

"However, recent indications that the Indonesian authorities might seek to reschedule interest as well as principal falling due at the next round of Paris Club negotiations represents a clear break with the past," it said.

"Such a strategy would raise the probability of coupon payments on a Yankee sovereign bond falling due in 2006 being subjected to comparable treatment."

Fitch noted the government is aware of the risks of seeking interest rescheduling, and is expected to argue against including the Yankee in any such burden sharing arrangement.

"Nonetheless, the nominal value of the Yankee is much larger, as are the coupon payments, and the risks of contagion are accordingly that much greater," it said. "Fitch cautions that were these risks to materialize, a more severe rating action would likely ensue."

Fitch also said its change in outlook reflects its disappointment with the first 100 days or so of President Megawati Soekarnoputri's administration.

"Weaker investor sentiment has led to a renewed slide in the currency that has a direct effect on the budget, while the deteriorating outlook for the U.S. and Japan will hit Indonesia's exports hard in 4Q 2001," it said in a statement.

"In contrast to much of the surrounding region, high public debt limits the government's ability pump prime the economy, while relatively high inflation militates against looser monetary policy."

Fitch said Indonesia is seeking an extension of its current arrangements with the International Monetary Fund by one year to 2003 and a new accord should be announced within the next few weeks.

"A new IMF program will be an essential prerequisite to any further rounds of Paris Club negotiations," it said.