S&P downgrades RI ratings, outlook remains negative

JAKARTA (JP): Standard & Poor announced on Monday the downgrading of Indonesia's long-term local and foreign currency ratings, from B to B- and from B- to CCC+ respectively, amid continuing uncertainties in the country's political and economic situation.

The United States-based rating agency also affirmed Indonesia's C rating in short-term sovereign credit and unsecured debt.

"The outlook on the long-term sovereign ratings remains negative, " S & P said in a statement.

The rating agency said the downgrading reflects the lack of fiscal adjustment, heavy public debt and the uncertainty in budget financing.

"Political instability, institutional weakness and the specter of geographic disintegration are reducing policy coordination, straining official creditor relationships and unsettling the financial market, while the House of Representatives and the executive have tested the limits of their authority in the new political framework. Additionally, the judiciary and police remain weak and law and order fragile," the rating agency said.

These factors and the vacillating monetary policy, according to S & P, might lead to another extended period of high nominal domestic interest rates, which would in turn increase the primary budget surplus requirement, further testing the government's fiscal resolve.

S & P said the government's heavy debts, including those to the International Monetary Fund (IMF) and bank recapitalization bonds, estimated to peak at about 90 percent of GDP at the end of 2001, could rise further depending on the exchange rate and other variables.

It said the public sector's net external debt, expected to peak at about 60 percent of current account receipts at the end of 2001, generates an onerous amortization profile with over US$8 billion due each year in the period between 2001 and 2005.

Uncertainty in budget financing continue as policy disruptions have prompted key multilateral and bilateral creditors to cut back on new and existing loan commitments, widening the financial gap, the agency added.

"With the determined implementation of upcoming budget revisions, Indonesia could reverse such a process and secure further Paris Club loans rescheduling them for next year; with weak implementation, it could relapse into an inflationary spiral," the agency said.

S & P said that the first scenario could include further, isolated syndicated loan defaults; the second could include a general sovereign default.

It said that the negative outlook reflects expectations that policy disruption will persist at least until current preliminary proceedings to impeach President Abdurrahman Wahid have run their course.

Additionally, political commitment to primary budget surpluses of between 3 percent and 4 percent of GDP -- at the consolidated general government level -- and divestment proceeds of between 2 percent and 3 percent of GDP, will be central to Indonesia's sovereign debt-management strategy and credit standing, the agency said.

"Indonesia's capacity to deliver such fiscal results is doubtful," it concluded. (hen)