IBCA rates RI's long-term foreign currency BBB minus

IBCA rates RI's long-term foreign currency BBB minus

LONDON (Reuter): IBCA, the European credit rating agency, yesterday assigned a long-term foreign currency rating of BBB- (BBB minus) to all senior, unsecured debt issues of the Republic of Indonesia.

This investment grade rating applies to over US$50 billion of public and publicly guaranteed foreign currency debt and will set a ceiling for IBCA rated banks and corporates in Indonesia. A short-term foreign currency rating of A3 will apply to issues of up to one year.

IBCA also issued a long-term local currency rating of A in recognition of the Republic's strong fiscal position and low inflation.

The agency says Indonesia has an outstanding record of economic development: real gross domestic product (GDP) growth has averaged 7 percent per annum over the last 25 years, putting it among the High Performing Asian Economies.

Per capita GDP has risen over ten-fold from less than $100 in 1970 to $1,132 in 1996, elevating the country to lower middle income status, while absolute levels of poverty have fallen from 70 percent of the population in 1970 to 15 percent at present.

Steadfast adherence to sound macro-economic policy management, complemented by structural adjustment has been the key to this success.

In contrast to many other emerging market countries in its peer group, Indonesia has consistently demonstrated a readiness to adjust economic policy in response to external shocks: these have included the collapse in world oil prices in the mid-1980s, economic overheating induced by the sharp rise in oil prices in 1990-91, and the fall-out from the Mexico peso crisis in 1994-95.

Measures to wean the economy off its dependence on oil and gas and promote the development of the private sector have stimulated significant inflows of foreign investment.

However, IBCA points out that political risk and the size of the country's external debt act as major constraints on the rating.

President Soeharto's New Order government has provided thirty years of political stability but a major question mark hangs over his successor. Three decades of economic prosperity have given all Indonesians a large stake in a smooth transition of power but it is still unclear when and how this transition will take place and to whom the mantle will pass.

Although the continuity of economic policy does not appear to be under threat, this lack of transparency is a growing source of uncertainty. So, too, are persistent outbreaks of social unrest which may be symptomatic of deeper undercurrents in Indonesian society.

Indonesia has established a record of sound external debt management, unblemished by any payment interruptions. This is no small achievement given the size of the debt -- in excess of $100 billion -- and the stress tests that Indonesia has endured over the past thirty years. The unwavering commitment of aid donors in the guise of the Consultative Group for Indonesia has been an important support factor.

Nonetheless, 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, a significant component of this debt is short-term. With a growing share of external debt being contracted on commercial terms, the need to sustain investment and non-oil export growth will remain of paramount importance.