S&P downgrades RI ratings, outlook remains negative

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)