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.