Indonesia seeks to improve debt rating

JAKARTA (JP): The new economics team aims to improve the country's credit rating from the current non-investment rating to investment grade within six months, Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti said on Tuesday.

Dorodjatun said that the debt rating upgrade would allow both the country and its business sectors to tap international funds at an affordable cost.

"We will immediately seek to improve our image before the international community," Dorodjatun told reporters at a press meeting following the first economic ministers' meeting of the new government.

"If we achieve that, we can return to the international money market," he said.

International rating agencies had cut the country's debt rating to non-investment grade due to domestic political problems and economic woes.

Standard & Poor's has assigned a CCC+ on Indonesia's long term foreign currency rating, according to Dorodjatun.

He said with a CCC+ rating, Indonesia has been classified as a non-investment country by the rating agency.

He expected Indonesia's economy and political conditions to continue to progress sufficiently well within the next five to six months for a rating of BB.

Last week Dorodjatun said Indonesia's low credit rating made it difficult to seek affordable funds from the money market.

"Our rating isn't good, the additional interest spread that shows Indonesia's risk, is still high," he said.

"They (Standard & Poor's) won't disclose the interest spread, but my guess is that it's well above the American government bonds, which is a world benchmark," he added.

He said the spread could be as high as 600 to 700 basis points, where 100 points reflects 1 percent.

"For developing countries the usual spread should be around 300 to 400 basis points, or 3 to 4 percentage points above the 10-year U.S. bonds," he explained.

By Standard & Poor's definition, an insurer rated CCC is currently vulnerable and is dependent upon favorable business, financial and economic conditions to meet its financial commitments.

At BB, the insurer is less vulnerable, but faces major ongoing uncertainties and exposures to adverse business, financial or economic conditions.

These could lead to the insurer's incapacity to meet its financial commitments.

Dorodjatun said that at BB, Indonesia's importers would find it easier to open a Letter of Credit (L/C) with foreign banks.

"With BB, importers don't have to go to Singapore or Hong Kong to open L/Cs," he said.

An L/C is a payment guarantee issued by a bank to temporarily cover the payments of its customer to a foreign bank.

Since the 1997 economic crisis struck the country, many local banks' L/Cs have been rejected by their foreign counterparts.

But the real benefit of an improved credit rating was the cheaper foreign funds required to invest in Indonesia.

Economist Faisal Basri said the government would lend the economy a major boost if it could improve Indonesia's rating.

"If the credit rating improves, foreign investment will return, debt burden will ease, companies will get back on track to reschedule their debts," he said.

Faisal said the government could achieve a BB rating within six months time providing it does all its "homework."

The preparation, he said, was taking the necessary measures to meet the 2001 state budget deficit target of 3.7 percent of gross domestic product and drafting the 2002 state budget prior to the meeting of the Consultative Group on Indonesia (CGI).

CGI groups together Indonesian donor countries to help it finance its development spending.

Dorodjatun said earlier Indonesia must present to the CGI a clean and convincing state budget, as a prerequisite for receiving the group's aid.

The CGI meeting is slated for October and Dorodjatun said he hoped the meeting would be held in Jakarta.

Securing a lending agreement with the International Monetary Fund (IMF) was another target the government must meet, Faisal continued.

Credit rating agencies have cut Indonesia's rating partly on the IMF's suspension of its loan program to the country late last year after the previous government failed to implement a number of major economic reform programs.(bkm/03/tnt)