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.