Indonesia's planned $1 billion bonds rated B+ by S&P

Indonesia's planned $1 billion bonds rated B+ by S&P

Bloomberg, Jakarta

Indonesia's proposed US$1 billion global bond was assigned a B+ foreign-currency rating by international ratings company Standard & Poor's Corp., four levels below investment grade.

The rating is supported by the country's declining debt and the government's handling of the budget, S&P analysts Agost Benard and Ping Chew said in a statement from Singapore. The rating applies to a total of $145.4 billion of overseas debt.

Investors such as Stephen Chang said he may buy the bonds depending on the price. "We don't have a problem with the credit," said Chang, who helps manage about $2 billion of Asian bonds at JF Asset Management in Hong Kong. "It will depend on the value of the bonds."

S&P in December lifted the nation's long-term foreign- currency rating one step to B+. Moody's Investors Service assigns a ranking of B2, five rungs below investment grade.

"We can foresee within this year a further rating upgrade if the fundamentals, like growth, continue to improve," said Chang.

Southeast Asia's largest economy is selling bonds to help plug a budget deficit estimated at Rp 28 trillion (US$3 billion) this year.

The Indonesian government plans to meet investors for the sale of its third dollar-denominated bond since 1996 starting in Hong Kong on March 17 and Singapore the following day, Mulia Nasution, director general of treasury at the Finance Ministry, said on Monday.

Indonesia's 6.75 percent dollar-denominated bond maturing in March 2014 was bid to yield 6.6 percent, according to Deutsche Bank prices at 4:10 p.m. in Jakarta.

The extra yield, or spread, investors demand to hold the security instead of like-maturity U.S. Treasuries widened to 2.09 percentage points from 1.89 percentage points Monday, according to data compiled Bloomberg. The securities were priced to yield 2.77 percentage points more than Treasuries when they were sold in March.

President Susilo Bambang Yudhoyono's government decided on March 1 to reduce fuel subsidies in a bid to narrow the budget deficit, leading to an average 29 percent rise in the cost of fuel. Lower subsidies will help to trim the deficit to 1 percent of gross domestic product this year from 1.3 percent in 2004, according to the Finance Ministry in February.

"It is encouraging that the administration has made good on its promise to cut fuel subsidies, and that it was able to accomplish this at minimal political cost," Standard & Poor's said. The government may be able to balance its budget in 2007, the statement said.

The bonds were assigned a BB- ranking by Fitch Ratings, three levels below investment grade. The rating outlook is positive, Fitch said in a statement.

Indonesia in January hired Citigroup Inc., Deutsche Bank and UBS AG, the leading underwriters of Asian debt sales in 2004, to help manage the bond sale. The government also appointed JPMorgan Chase & Co. and Credit Suisse First Boston to help in its third overseas bond sale.

The government sold $1 billion of 10-year bonds in March last year, its largest overseas debt sale and the first since the 1997 financial crisis, drawing demand for more than eight times the amount offered. JPMorgan and Deutsche Bank helped manage the sale.

Indonesia's rating is constrained by the slow pace of growth and "heavy" external debt payments, S&P said in the report. "The trend rate of economic expansion remains below potential, averaging just 4.1 percent in the past five years," S&P said.

Susilo, who came to power in October, wants growth to average 6.6 percent a year in the next five years as he creates more jobs, he said in Singapore Feb. 16. The economy expanded 5.1 percent last year, the strongest since 1996. It is forecast to expand 5.5 percent this year.

The government's debt was equivalent to an estimated 78.5 percent of gross domestic product in 2004, declining from 96.6 percent in 2001, S&P said. The debt consists of $78.5 billion of overseas borrowing and 621.2 trillion rupiah of local-currency debt, according to central bank data in January.

In its 2005 budget, the government estimated overseas debt payments, including interest, would be equivalent to $7.7 billion, or about 3.2 percent of GDP.