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