S&P raises Indonesia's rating, boosts sentiment
S&P raises Indonesia's rating, boosts sentiment
Tom Wright, Dow Jones, Jakarta
Foreign investor sentiment toward Indonesia got a further boost Monday from a decision by Standard & Poor's to upgrade the country's credit rating by one notch.
Although widely expected, the move nevertheless represents a vote of confidence in the government's bid to cut its public debt, and comes at a time when the country is looking to end its reliance on the International Monetary Fund and to tap the international debt market for the first time since the 1997-98 Asian crisis.
S&P moved Indonesia's foreign currency rating to B-minus with a stable outlook from CCC-plus. It cited the country's success in reducing public debt, which means Indonesia will be able to repay its borrowings coming due from next year rather than relying on the IMF and foreign creditors for rescheduling. The upgrade brings the rating into line with Moody's B3 grade.
The rupiah strengthened to a 32-month high of Rp 8,435 per U.S. dollar on the upgrade news.
S&P's move reflects a broader optimism toward Indonesia in recent weeks, which has helped push the rupiah and stocks higher.
The stock market is up 25 percent since mid-March.
Still, risks remain that Indonesia's government will come under pressure during next year's presidential elections to reverse some of its expenditure curbing measures, which could hurt its ratings, S&P said. Huge corruption in the bureaucracy and legal system heightens these concerns.
"The confidence which the government is enjoying is still relatively volatile," Takahira Ogawa, sovereign ratings head for S&P in Singapore, told Dow Jones Newswires. S&P is unlikely to raise its rating again in the next year, he added.
Nevertheless, political stability under President Megawati Soekarnoputri - who came to power in July 2001 - has allowed the government to push through economic reforms aimed at reducing debt. Total public borrowing is now about US$130 billion, below the annual gross domestic product for the first time since the 1997-98 regional crisis due to a number of fiscal belt-tightening measures, including cutting expensive government subsidies on fuel and utilities.
Improved confidence has helped boost the rupiah and bring down inflation, allowing the central bank to cut rates. Bank Indonesia deputy governor Miranda Goeltom said on Monday the benchmark one- month Bank Indonesia SBI notes could fall to 10.50 percent by the end of this year, from 10.91 percent currently.
Lower rates, in turn, are helping reduce the amount of money the government spends yearly on keeping its banking sector afloat. The government issued $40 billion in bonds after the crisis to recapitalize commercial banks' balance sheets, and many of these bonds pay interest linked to SBI rates.
"The currency is still rallying, and with every reduction in interest rates, fiscal consolidation becomes slightly easier," Deutsche Bank said in a research note after the upgrade.
The ratings agency also upped its credit ratings of a number of top Indonesian banks to reflect the improved operating environment since the crisis. The credit rating on Bank Mandiri, Bank Negara Indonesia, and Bank Danamon Indonesia moved to B from B-minus.
Given its improving finances, Indonesia has said it won't ask the IMF to extend its current $5 billion lending program when it runs out at the end of this year. Without an IMF program, official foreign creditors - known as the Paris Club of lenders - have said they won't agree to restructure debt coming due from next year.
S&P said it believed Indonesia would be able to repay the $6.5 billion in loan principle due between 2004 and 2008 if it continues to carefully manage its finances.
Indonesia's finance ministry said this month it is mulling issuing global bonds to help refinance some of that debt, possibly in early 2004. Issuing local bonds and asking for larger contributions from multilateral lenders such as the World Bank are other alternatives to meeting the country's funding needs.