Indonesia's rating outlook downgraded to negative
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)