S&P cuts Indonesia forex rating to BBB-minus
S&P cuts Indonesia forex rating to BBB-minus
NEW YORK (Reuter): Standard & Poor's lowered Saturday its
long-term foreign currency rating on the Republic of Indonesia to
triple-'B'-minus from triple-'B'.
Standard & Poor's also lowered its long-term local currency
rating on Indonesia to single-'A'-minus from single-'A'-plus.
The outlook on the ratings is stable.
According to the rating agency, the ratings downgrade reflects
the government's diminished balance of payments and fiscal
flexibility because of:
-- The steep rise in corporate external indebtedness, which could
pressure the government to provide financial assistance, given
the linkages between public and private sector leaders;
-- Deteriorating asset quality and the potentially sizable
recapitalization needs of the financial sector; and
-- The prospect of slower economic growth delaying needed
economic reforms and compounding existing political tensions in
the run-up to the presidential elections in 1998 and beyond.
The local currency rating downgrade reflects the adverse
fiscal impact of potential official support operations, higher
government debt servicing costs, and the setback to inflation
performance caused by the rupiah's sharp depreciation.
Corporate external indebtedness has surged in recent years,
heightening the private sector's exposure to adverse economic
trends.
Net private external debt, including that of banks, is
expected to reach 90 percent of exports this year, up from 64
percent in 1995.
More than half of private external debt is in short-term
maturities, and therefore a source of external payments
vulnerability.
The corporate sector also has borrowed heavily from domestic
banks.
Private bank lending surged on average 26 percent annually in
real terms during 1993-1996, with one-fifth of loan portfolios
exposed to the softening property sector. Given the private
sector's elevated leverage, high interest rates could cause non-
performing loans to double from an already substantial 8 percent
of total credit in 1997.
Large loan losses would impose a fiscal burden on the
government, keep credit scarce and expensive, and hamper an
economic recovery.
The concentration of political power and Indonesia's weak
political institutions also pose risks to long-term growth
prospects.
Uncertainties over the transition to a post-President Soeharto
era and pervasive favoritism throughout the public and private
sectors could impede the restoration of investor confidence.
Slower per capita income growth likely will test the political
commitment to microeconomic reform and reduce popular acceptance
of income disparities and protected special interests.
Indonesia's investment-grade ratings continue to reflect:
-- Competent economic management, which underpin Indonesia's
orthodox macroeconomic policies. The central bank's prompt
flotation of the rupiah and cautious interventions in the foreign
exchange markets should support Indonesia's external financial
position.
-- The steady decline in the net public external debt burden to
58 percent of exports in 1997 from 100 percent in 1994.
-- Continued growth of non-oil exports, which should cushion the
cyclical downturn in the economy.
S&P said that outlook is stable
Indonesia's adequate external liquidity and commitment to
cautious fiscal policies are expected to stabilize its
creditstanding under reasonable downside scenarios. A
stabilization program under a standby agreement with the
International Monetary Fund likely would ease ongoing balance of
payments pressures.
However, restoring capital inflows hinges on improving the
soundness of the financial sector, accelerating microeconomic
reforms, and taking credible steps to reduce moral hazard in the
economy, the rating agency said.
Moody's
Meanwhile, Steven Hess, senior analyst at Moody's Investors
Service, said in New York Friday that Indonesia's sovereign
rating is unlikely to be affected by the currency-related
problems plaguing the country's corporate and banking sector,
"Our sovereign rating is appropriate because we don't expect
that the Indonesian government will have problems repaying its
own external obligations, despite the recent currency turmoil,"
Hess said.
But Hess stressed that Moody's will continue to carefully
monitor the damage suffered by Indonesia's private sector.
Indonesian corporations and banks have been hurt by a sharp
depreciation of the rupiah.
"The major area we are watching is the level of corporate
sector foreign exchange debt and what effect financial problems
could have on the Indonesian banking system," the Moody's analyst
added.
Hess said Indonesian corporations and banks were likely to
experience significant problems as a result of the country's
currency depreciation. But he said it was too early to quantify
the magnitude of the problems.
"Over the next couple of months, it will be revealed how
severe the problems are," he said.
Hess declined to comment on Standard & Poor's decision to cut
Indonesia's foreign currency rating to BBB-minus from BBB. But he
noted that Moody's already rates Indonesia Baa3 -- the equivalent
of BBB-minus.
"We think the recent International Monetary Fund (IMF)
agreement is a relatively positive factor in this situation,"
Hess said, helping to provide funds to repay short-term foreign
exchange obligations.
The Moody's analyst stressed the IMF's monitoring of
Indonesia's fiscal situation will boost global investors'
confidence.