Indonesia's Yankee bond issue gets BBB rating

JAKARTA (JP): The U.S. rating firm Standard & Poor's Corp. has assigned a "triple-B" long-term foreign currency rating to the Indonesian government's upcoming Yankee bond issue.

The company said in a statement yesterday that the rating is supported by Indonesia's long-standing commitment to prudent fiscal management, which, supported by improving resource mobilization and expenditure restraint, has strengthened public finance.

Yankee bonds are dollar-denominated securities sold in U.S. capital markets by non-U.S. issuers.

The statement said that Indonesia's fiscal accounts have been in broad balance since 1990, while the net public external debt burden has declined to 75 percent of exports in 1996 from 127 percent in 1990.

Bank Indonesia, representing the government, plans to offer bonds worth US$300 million on the U.S. market. It has registered its bond offering plan with the U.S. Securities and Exchange Commission.

The offering will be made through Salomon Bros Inc., Goldman, Sachs & Co., J.P. Morgan & Co. and Merrill Lynch & Co.

The government has said that the proceeds of the bonds, which will mature in 2006 and be the first to be offered since 1988, will be used for general funding purposes related to its development plans, not for financing the country's deepening current account deficit.

"It is not the money we want to get but to set a benchmark for private offshore borrowings," Bank Indonesia Governor J. Soedradjad Djiwandono said recently.

Bond offerings made by private Indonesian companies overseas generally have been more expensive than those floated by other countries due to the absence of government bonds.

By floating government bonds, Indonesian bond issuers will have a benchmark or a guideline for setting up bond terms and conditions.

Bank Indonesia has issued a number of bond instruments overseas in the past, including those floated in Germany, Japan, the Netherlands and Kuwait. The latest issue worth DM300 million was floated in Germany in 1988. It matured in 1994.

In assessing Indonesia, Standard & Poor's has also considered Indonesia's savings and investment rates of more than 30 percent of gross domestic product -- among the highest in the triple-B rating category. The high rate is expected to sustain Indonesia's economic growth, averaging over 7 percent per annum.

The company also took into account the growth of Indonesia's non-oil exports, which are expected to grow 16 percent this year and next. Non-oil exports now account for 80 percent of Indonesia's total merchandise exports, helping insulate the trade balance from commodity price swings.

Country rate

Standard & Poor's gave Indonesia a triple-B-minus foreign currency rating in 1992, which was upgraded in April 1995 to triple-B. The company assigned an A-plus local currency credit rating to Indonesia in May of this year.

Rating distinctions between an issuer's local and foreign currency debts reflect the distinctive credit risks of local and foreign currency debts. Local currency debt refers to debt denominated in the currency of an issuer's country or territory of domicile. Foreign currency debt, by contrast, refers to debt denominated in other currencies.

According to Standard & Poor's, a securities issuer that is rated triple B has adequate capacity to meet its commitments, though adverse economic conditions or changing circumstances could lead to a weakened capacity of the issuer to meet its commitments.

In its assessment, Standard & Poor's noted a robust political consensus -- rooted in decades of rapidly rising per capita gross domestic product -- in favor of market-oriented economic policies.

"Popular support is expected to underpin economic policy continuity despite potential changes in government or political institutions in a post-President Soeharto era," Standard & Poor's said.

It further noted that Indonesia's consensus-based political culture, the widely shared benefits of economic development, and a technocratic leadership auger well for economic policy stability during the transition and beyond.

However, Standard & Poor's cautioned that the country's credit-worthiness could be threatened by pressing infrastructure needs, heavy overall external debt burdens and a weak banking system.

It said substantial infrastructure development needs -- in the context of low per capita income -- will, in the medium term, pressure government finances.

Indonesia's heavy -- although favorably structured and declining -- net external debt burden equal to 136 percent of exports reduces its external financial flexibility.

As for political risk, Standard & Poor's said that the eventual political transition may slow, but not derail, the ongoing macroeconomic reform process and the uneven trend toward improving transparency.

The company predicted that Soeharto is likely to run again and be re-elected in the 1998 presidential election. It noted, however, that Soeharto's eventual exit from politics will test confidence and challenge his successors to maintain support for economic policy orthodoxy and further structural reform. (rid/hen)