Fitch upgrades RI ratings on economic progress

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."