Govt's decentralization could affect ratings: S and P

Govt's decentralization could affect ratings: S and P

Indonesia's move to quickly decentralize government could affect its sovereign ratings as few incentives for fiscal prudence exist at provincial and local levels, ratings agency Standard and Poor's said on Friday.

Due to a lack of stringent controls on provincial access to debt financing, imprudent borrowing and the accumulation of debt by provinces could emerge as risks, the agency said in a statement.

This would have implications for Indonesia's sovereign credit standing by adding to the liabilities of the central government, it warned.

"Minimizing exposure of the sovereign to undue contingent risk, while enabling access to debt finance for pressing development needs at the sub-national level, will require both the strengthening of legal and administrative frameworks and the imposition of hard budget constraints by the center," SP credit analyst Agost Benard said.

"That would expose the provincial borrowers to market discipline," he added.

Decentralization, which started in 2001, has resulted in a substantial shift of balance in the revenue powers and expenditure responsibilities between the three levels of government -- central, provincial, and local.

Much responsibility for public services has been transferred to the local and provincial levels, doubling its share in total government spending overall.

SP said that with the greater responsibilities came generous fund transfers from the center which lack specific spending targets and sufficient administrative controls.

Another result has been duplication of services, it said.

"The combination of duplication of services and transfers that were bigger than what their allocated expenditure responsibilities warranted has significantly contributed to operating surpluses in provincial finances," Benard said. -- AFP