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.