Indonesia downgraded, Thailand may be next

Indonesia downgraded, Thailand may be next

LONDON (Reuters): Indonesia's long-term foreign currency rating was cut two notches yesterday, and Thailand appeared next in line as the Asian financial crisis deepened.

International agency Fitch IBCA said Indonesia's downgrade to BB minus from BB plus reflected uncertainty after this week's 1998/99 budget proposals which had failed to maintain the confidence needed to roll over the high level of external debt.

"The tabling of unrealistic budget proposals which publicly flout recently agreed targets with the International Monetary Fund is a severe blow to confidence," Fitch IBCA said.

Indonesia's planned balanced budget for 1998/99 fell short of recommendations from the IMF last year for a budget surplus of one percent of gross domestic product.

The rating news came at the end of a frantic day of plummeting asset prices in Indonesia, the developing world's fourth largest debtor, amid fears of a debt moratorium.

Both the stock market and the currency plunged more than 18 percent at one point, with the rupiah quoted at 10,000 to the dollar in late trade.

There was talk that long-time leader President Soeharto, 76, might not stand for reflection in March and witnesses reported panic buying of food and other essentials.

Fitch IBCA said political as well as economic stresses were rising within Indonesia, since Soeharto's government had drawn much of its legitimacy from economic success.

"This may increasingly complicate the succession to the ageing president," it said.

A further factor in the downgrade was the fact that Indonesia's export earnings would be hit by recent oil price falls, since it is a major oil exporter.

The sharp fall in the rupiah this month has placed mounting strain on Indonesian companies who have to find more rupiahs each day to service their dollar debts, in turn hurting the banks.

"This may complicate the task of rolling over short term credit lines to Indonesia," Fitch IBCA said.

It estimated the country's gross external debts at close to $120 billion, equivalent to almost 200 percent of foreign exchange receipts.

But Thailand was putting a brave face on its expected rating cut, saying it would only be a small one-notch cut that would keep it above junk bond grade.

International rating agency Standard and Poor's will downgrade Thailand's sovereign rating to "BBB minus" or one notch above junk bonds, Finance Minister Tarrin Nimmanahaeminda said yesterday.

In an unprecedented move, Tarrin called a press conference to announce the long-term foreign exchange ceiling downgrade a day before the agency itself was due to release its report.

Analysts said the move was possibly an attempt to limit the impact on the sharemarket which closed shortly before the announcement.

In December, Moodys Investors' Services downgraded Thailand's foreign currency ceiling for bonds to the equivalent of junk bond status, along with Indonesia, Malaysia and South Korea.

Standard and Poor's expected downgrade from "BBB" to "BBB minus" follows discussions between Tarrin and ratings chiefs last month, at which Tarrin asked for a fair assessment of Thailand's economic fundamentals.

Thai government officials criticized Moody's for being too severe and jeopardizing the country's recovery plans under the International Monetary Fund's tough austerity measures.

The government was forced to put a moratorium on all new bond issues following the Moody's review, as most fund managers are prevented by law from buying junk bonds which are below investment grade.