S&P warns of oil price impacts on Indonesia

The Jakarta Post, Jakarta

The current high oil prices have the potential to adversely affect the country's national budget, but are likely to have only a slight effect on inflation, Standard & Poor's (S&P) Ratings Services said on Monday.

In its latest analysis on the country's economy as posted on its website, S&P said high oil prices had led to concerns over their potential budgetary impact, given that the Indonesian system of fuel subsidies meant that a rise in oil prices entailed higher subsidy spending.

According to World Bank estimates, however, the effect would actually be positive at a given level of production, with the rise in revenue exceeding the increase in subsidy spending, S&P said.

"The key question therefore is whether production can be sustained at current levels, as underinvestment over the past few years has left Indonesia's oil industry with deteriorating production capacity.

"If the country remains a net oil importer as it did in February and March this year, the budget deficit target of 1.2 percent of GDP for 2004 could be jeopardized," it said.

The report added that the recent slide in the rupiah despite the favorable economic fundamentals demonstrated Indonesia's continued vulnerability to adverse external developments.

"The move was triggered by capital outflows based on expectations of a rising interest rate differential between local and global rates, and is likely to have only a slight inflationary effect," it said.

On May 12, S&P revised its outlook on the country's long-term ratings to positive, reflecting continuing progress in macroeconomic stability, as evidenced by a stable exchange rate, falling inflation, and lower interest rates.

"Credit fundamentals in Indonesia have been improving steadily, if not dramatically, for the past few years," it said in its May 12 press release.

According to the S&P analysis, the country's continuing ability to meet its external debt obligations remains dependent on confidence in the government and economy. Successful recent legislative elections prove that the country's democracy is maturing and indicate that the country's first-ever direct presidential elections later this year have every chance of being conducted peacefully.

"The potential for faster economic growth, however, remains contingent on a broad range of reforms, particularly in the judicial, legal and labor sectors. If there is only slow improvement in these issues, it would adversely affect the country's growth potential," S&P warned.

S&P now rates the country's foreign currency at B/positive/B, while its local currency is rated at B+/Positive/B.