S&P downgrades Indonesia's rating
The Jakarta Post, Jakarta
In a widely expected move, rating agency Standard and Poor's cut Indonesia's sovereign foreign currency credit rating to selective default, but the government said the drop would have little impact on investor confidence.
Coordinating Minister for the Economy Dorodjatun Kuntjoro- Jakti said that S&P's action was technical and temporary.
"We expect the upgrade will take place as soon as the London Club meeting is completed," he said in a statement.
The London Club groups together Indonesia's private lenders, with whom the government would meet to discuss the rescheduling of debts worth around US$340 million.
Tuesday's rating drop marked the third fall to selective default as a consequence of the three Paris Club deals since 1998.
Indonesia's long term foreign currency rating prior to its drop was CCC, and C for its short-term rating.
S&P's decision to lower the rating to selective default (SD) followed the government's plan to hold talks with the London Club.
Indonesia recently won the rescheduling of $5.4 billion in debts to official creditors at the Paris Club, which in return demanded equal treatment of debts to private lenders.
S&P had warned that seeking comparable treatment with private lenders at the London Club would hurt Indonesia's country rating.
A downgrade could stall foreign investment inflow, as the perceived higher risk jerks up the cost of borrowing to invest in Indonesia.
But Dorodjatun was upbeat the downgrade was only temporary and that it would not affect international confidence in Indonesia.
He said foreign confidence had been on the rise thanks to consistent progress on economic reform policies.
This is most visible in the local stock market, where an influx of foreign capital has helped the index gain more than 35 percent since early this year.
Under the International Monetary Fund (IMF)'s tight reform targets, the government has been pushing through reform policies although many have progressed slowly.
Among the key achievements were last year's signing of a new lending agreement with the IMF, the sale of Bank Central Asia (BCA), and the debt rescheduling deal with the Paris Club.
"There should be no doubt, we will continue these reforms," Dorodjatun said.
Standard Chartered Bank economist Fauzi Ichsan told The Jakarta Post that S&P's downgrade would have a minor impact on the economy.
He said most analysts had expected the move, with S&P giving a warning earlier this year.
Bank Mandiri chief economist Martin Panggabean agreed, adding that rival rating agency Moody's had maintained Indonesia's country risk rating in spite of the upcoming London Club talks.
The rupiah closed Tuesday trading lower at 9,400 against the U.S. dollar from 9,255 on Monday.
On the stock market, however the index rose 1.4 percent to end Tuesday's trading at 543.06 points.