Fitch upgrades RI ratings on economic progress

I Made Sentana, Dow Jones/Jakarta

The government's policy direction and improvements to the macroeconomy received a vote of confidence Thursday, with Fitch Ratings raising the country's sovereign creditworthiness.

Fitch upgraded Indonesia's long-term foreign and local currency ratings to BB- from B+, and affirmed its short-term rating at B. The outlook on the ratings remains positive.

The international rating agency said the move was due to the country's easing political risk, better policy initiation and coordination, anticipated bureaucratic and legislative reforms, stronger economic growth and continued improvements in public and external finances.

"The current phase in the political and economic cycle presents the government with an important window of opportunity to build on macroeconomics stability and mitigate pressures on the balance of payments and the public finances," Fitch said in a statement.

Although Indonesia's ratings remain below investment grade, Fitch's action bodes well for the government's plan to sell between US$1 billion and $1.5 billion of bonds in offshore markets later this year, analysts said.

"The actual rating itself is not important; the uptrend is more important," said Fauzi Ichsan, an economist with Standard Chartered in Jakarta.

The news boosted Indonesian assets. The main index of the Jakarta Stock Exchange posted a 1 percent rise after the announcement early Thursday, although profit-taking later shaved some of the gains.

The $1 billion government bonds due 2014 were quoted at 101.75-102.50 following the Fitch news, up around 0.375 from Wednesday. The rupiah was flat at Rp 9,135 as dollar demand from local companies ahead of the month's end prevented the local unit from rising.

The administration of President Susilo Bambang Yudhoyono has promised to jump-start economic growth in Indonesia, which has lagged that of its regional neighbors. The government pledged to improve the investment climate by fighting corruption, removing legal uncertainties, providing tax incentives to investors and cutting bureaucratic red tape.

"By prioritizing structural adjustment, the government is sending a strong signal that it is determined to reduce further Indonesia's country risk profile," says Ai Ling Ngiam, associate director in Fitch's Asian Sovereigns team, said in the statement.

Fitch said the macroeconomic impact from tsunami-hit Aceh will likely be minimal, given that the province accounts for only 1.8% of Indonesia's economy. Fitch forecasts Indonesia's economy to grow 5 percent this year, lower than the government's 5.5 percent target.

Indonesia's total losses and damages due to the disaster last month are estimated at $4.5 billion.

Lenders in the Paris Club have offered a debt moratorium to countries affected by the calamity.

Fitch noted that falling debt service costs and accelerating economic growth provide more room for Indonesia's government debt-to-GDP ratio to fall to 55 percent in 2005, bringing it close to the 52 percent median for the BB rating category.

But it said that a further ratings upgrade will depend on clear signs that the government is delivering on its ambitious reform agenda, maintenance of macroeconomics stability and continued fiscal prudence.

"Conversely, failure to exploit the current window of opportunity, leading to a weak reform agenda, could erode market confidence and sovereign creditworthiness over time."