Fri, 10 Oct 2003

Indonesia to go ahead with bond plan despite 'low' rating

The Jakarta Post, Jakarta

The government will go ahead with plans to issue US$400 million in global bonds next year, even though the country's sovereign rating has yet to the reach investment grade, Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti says.

While acknowledging that the country's rating was still five notches below the investment grade in the latest reports of two global rating agencies, Dorodjatun said on Thursday that Indonesia should not put the planned bond issue on hold, especially as the country was narrowing that gap.

"I do not think we should wait (for the rating to reach such a grade) for the bond issue. I think, in the next two or three months, when our economic reform package is in progress, the spread or gap will keep getting smaller," Dorodjatun said.

He was referring to an economic package as outlined in the recently released white paper, which contains a set of time-bound targets for particular economic actions to be undertaken by the government after the International Monetary Fund (IMF) bailout program for the country expires.

Indonesia is planning to issue the global bonds next year, the first since the crisis, as part of its external sources to help finance the budget deficit, estimated to reach Rp 24.9 trillion, or some 1.2 percent of the country's gross domestic product.

The plan has had positive repercussions, as two global rating agencies have upgraded the country's sovereign rating in less than two weeks.

On Wednesday, the Standard and Poor's (S&P) Ratings Services raised its long-term foreign and local currency ratings for Indonesia by one notch to B from B- and to B+ from B, respectively. The upgrade came around a week after Moody's Investors Services raised Indonesia's sovereign rating one notch from B3 to B2.

The assessments reflect the rating agencies' confidence in the country's fiscal and economic stability, something that analysts say is important to spur the interest of investors in the planned bond issue.

Meanwhile, Minister of Finance Boediono was of the opinion that the country's rating would continue to improve next year, provided that the reform program was not disrupted by the elections.

The improved rating would be of great benefit to the country, Boediono said, as "it would improve our bargaining position, while it would also make the bonds' coupon cheaper and more competitive."

Moody's rating definitions:

1. Aaa : Highest quality with minimal credit risk 2. Aa : High quality and subject to very low credit risk 3. A : Upper-medium grade and subject to low credit risk 4. Baa : Medium grade, subject to moderate credit risk and may possess certain speculative characteristics 5. Ba : Having speculative elements and subject to substantial credit risk 6. B : Speculative and subject to high credit risk 7. Caa : Poor standing and subject to very high credit risk 8. Ca : Highly speculative and likely, or very near, default with some prospect of recovery of principal and interest 9. C : extremely speculative and typically in default, with little prospect for recovery of principal and interest

Note: Moody's appends numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.

S&P rating definitions:

1. AAA : "extremely strong" capacity to meet financial commitments 2. AA : "very strong" capacity to meet financial commitments 3. A : "strong" capacity to meet financial commitments but somewhat more susceptible to the adverse effects of changes than higher-rated levels 3. BBB : "adequate" capacity to meet financial commitments 4. BB : "less vulnerable" in near term than other lower-rated levels 5. B : "more vulnerable" than the BB level, but still has the capacity to meet most financial commitments 6. CCC : "currently vulnerable" and is dependent upon favorable business, financial and economic conditions to meet financial commitments 7. CC : "currently highly vulnerable"

Note: Ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories