Indonesia's rating outlook downgraded to negative

JAKARTA (JP): Indonesia's descent into political and social chaos have prompted major credit rating agencies to issue warnings about the country's future, reversing the trend toward improving sentiment that began a little more than a year ago.

International rating agency, Standard & Poor's, downgraded on Thursday the outlook for Indonesia's long term credit ratings to negative from stable due to the country's political instability.

The rating agency said that the outlook revision reflects the increasingly uncertain socio-political situation in Indonesia and their implications on the country's economic performance and policy.

Earlier this week, Moody's Investors Service Inc. removed its positive outlook from Indonesia's sovereign rating and ruled out any chance of an upgrade soon.

Both agencies cited President Abdurrhman Wahid's faltering grip on power and ethnic violence across the archipelago as major reasons behind the outlook changes.

According to Standard and Poor's, spreading social unrest could trigger unpredictable swings in the demand for rupiah liquidity and foreign currency, challenging Indonesia's hard-won disinflation.

The capacity of central bank, Bank Indonesia (BI), to effectively implement monetary policy has been eroded by Abdurrahman Wahid administration's sustained efforts to replace BI's governor and control its board, the rating agency said.

Additionally, proposed amendments to the BI Act, if passed, could dilute BI's independence and inflation-targeting mandate, further imperiling financial stability.

A growing confrontation between the legislature and the President is impairing policy coordination and creating near- term, budget-financing uncertainties.

"Political pressures on BI, and on the privatization process, have also led to disagreements with the IMF, which in turn, could trigger a chain reaction that sees Indonesia's Paris Club rescheduling suspended, arrears to bilateral creditors build, and disbursement rates fall across a range of creditor categories," it added.

The pressure on the budget might increase due to the uncertainty in interest rates and fiscal decentralization. "Although the consolidated budget remains broadly exchange-rate neutral, with oil revenues balancing external interest payments, half of the general government debt stock is now rupiah- denominated and three-fourths of this is in floating-rate or inflation-indexed instruments.

"Financial instability, therefore, will raise Indonesia's risk premium and with it, the overall interest burden, while fiscal decentralization eats into needed primary surpluses," it added.

Standard & Poor's however said that it had affirmed its sovereign credit and senior unsecured debt ratings on Indonesia.

At the same time, the rating agency said it had assigned its single -`B' issue rating to Indonesia's new local currency bank recapitalization bonds.

The rating agency said the rating affirmation is supported by its ongoing export-led recovery, by an asset-sales program that proceeds despite considerable odds, and by expectations that the Government Bond Issuance bill will be passed shortly, opening the way to domestic budget financing through T-bill issuance from 2002.

Indonesia's ratings could be downgraded if financial instability mounts. Conversely, an early resolution to the current bout of political unrest would stabilize the ratings at their current levels, Standard & Poor's said. (hen)