Fitch IBCA may cut RI's debt ratings

Fitch IBCA may cut RI's debt ratings

NEW YORK (Reuters): International rating agency Fitch IBCA said Wednesday it may cut Indonesia's BBB-minus long-term foreign currency rating and F3 short-term rating because of political and policy uncertainty.

At the same time, Fitch IBCA said that the possibility of the government imposing foreign exchange controls meant that there is potential transfer risk of economic origin, which might prevent support for foreign currency creditors.

Fitch IBCA's legal rating -- the rating designed to indicate whether support would be likely for distressed institutions -- of the 13 Indonesian commercial banks rated by Fitch IBCA will henceforth have "T" added. The "T" indicates transfer risk, and is normally added to banks domiciled in non-investment grade countries to show the potential lack of the sovereign's ability to provide foreign currency support.

The legal rating of Bank Dagang Nasional Indonesia (BDNI) has also changed from 4 to 4T (see table) and the agency has placed the individual rating of C, short-term rating of B and long-term rating of BB-plus on RatingWatch with negative implications.

Because of the difficulties in Indonesia, we expect BDNI's asset quality to decline and non-performing loan ratios to at least double in 1998.

BDNI's risk weighted capital ratio will also decline on account of balance sheet inflation resulting from the upward revaluation of U.S. dollar loans.

The current environment makes it very difficult to raise capital but we believe that the Gajah Tunggal Group which controls the bank has sufficient resources, should the bank require additional capital.

Concern about President Soeharto's health, albeit unsubstantiated, has renewed fears about the manner and timing of a regime change, should the president die or his capabilities be impaired.

The agency comments that while these fears are not new, such an event would undoubtedly divert policy-makers attention away from the country's current troubles.

Likewise, the initial optimism which accompanied the announcement of the IMF rescue package in October has been dispelled by concerns about backsliding and an ill-defined policy agenda.

Fitch IBCA acknowledges that structural adjustments take longer to implement, but says international investors need more transparent indicators against which to measure Indonesia's program performance.

Growing concern about these factors has undermined investor confidence, causing the currency to fall to new lows and adding to pressures on the corporate and financial sectors.

Fitch IBCA says although Indonesia wasted little time in approaching IMF when the Asia crisis broke, compared to some other countries in the region it has little room for maneuver, given its high level of external debt.

As the fourth largest debtor in the developing world, Indonesia has the highest net external debt ratio of any country in the BBB category.

Moreover, the fact that a significant component of this debt is short-term, intensifies its susceptibility to shocks. The agency assigned Indonesia a long-term foreign currency rating of BBB-minus and a short-term rating of F3 in June 1997.

Table: Fitch IBCA's legal rating

Banks New Previous

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Bank Central Asia 4T 4

Danamon 4T 4

Bank Internasional Indonesia 4T 4

Lippo Bank 4T 4

Bank Niaga 4T 4

Bank Umum Nasional 4T 4

Panin Bank 4T 4

Bank Duta 4T 4

Bank Negara Indonesia 2T 2

Bank Ekspor-Impor 2T 2

Bank Rakyat Indonesia 2T 2

Bank Dagang Negara 2T 2