S&P cuts Indonesia's credit ratings

S&P cuts Indonesia's credit ratings

NEW YORK (Reuters): Standard & Poor's cut Indonesia's credit ratings Wednesday as Jakarta's uneven progress at implementing economic reforms deepened its financial crisis and led to the suspension of official international support.

The U.S. credit rating agency downgraded Indonesia's long-term foreign currency rating to B-minus from single-B, and its local currency rating to B-plus from BB-minus. S&P also said it may lower the ratings further.

The downgrades reflected the crisis of confidence in Indonesia's political leadership and the country's rapidly diminishing external payments flexibility, S&P said.

"The crisis of confidence is translating into continued capital flight, and that is a source of pressure on reserves," said Cem Karacadag, sovereign analyst at S&P. "As they look forward, there's less of a cushion. That is the material reason why their credit-worthiness is less today."

The country's fragile external liquidity position could weaken further if the current policy disarray persists or if a currency board is established prematurely, S&P said.

International reserves have fallen by about $6 billion since the beginning of 1998 to $12 billion as of the end of February, reflecting the continued withdrawal of foreign currency deposits from the Indonesian banking system.

S&P said it might cut the ratings further due to President Soeharto's lukewarm commitment to reform, as well as due to eroding credibility in Indonesian policy.

Further risks could be found in the danger of a prolonged suspension of international support led by the International Monetary Fund, which would severely limit Indonesia's capacity to service its high public external debt burden, S&P said.

"If there's a sustained suspension of official creditor capital, there would be risk to debt-service capacity," Karacadag said.

Mismanagement

Over the longer term, the continued mismanagement of the economy threatened to undermine support for the current regime, and risked a prolonged period of political paralysis, he said.

The ratings would be stabilized only if an agreement between Indonesia and the IMF about a revised adjustment program that would lead to a resumption of official creditor loan disbursements, the S&P analyst said.

The agency would also be looking for Indonesia to make progress restructuring private external debt and restoring liquidity to export-oriented sectors of the economy, and for Soeharto's new cabinet to implement financial sector and other microeconomic reforms consistently over the coming months.

Absent a firm commitment to economic reform, and a government mandated to take on vested interests, uncertainties over Indonesia's political and economic future will continue to fuel capital flight and drain scarce foreign exchange reserves, S&P said.

Indonesian financial assets barely reacted to the news that broke late Wednesday in the U.S. trading session, but analysts saw the S&P move as justified, even if the markets had already priced in a high degree of Indonesian risk.

"It's an appropriate action, given that Indonesia needs to make some moves relating to banking-sector reform, interest-rate policy, and working out a solution for their corporate debt," said Amy Falls, head of emerging markets research at Morgan Stanley Dean Witter.