Thomson cuts Indonesia's rating to B-

Thomson cuts Indonesia's rating to B-

HONG KONG (Agencies): U.S.-based credit agency Thomson BankWatch cut the country and bank ratings for Indonesia yesterday, citing the government's unwillingness to reform the economy and continued deterioration in the banking sector.

The agency lowered Indonesia's sovereign risk rating to B- from B+. It also cut the short-term local currency rating of seven Indonesian banks to LC-3 from LC-2. They are Bank Bumi Daya, Bank Dagang Negara, Bank Ekspor-Impor Indonesia, Bank Negara Indonesia, Bank Tabungan Negara, Bank Pembangunan Indonesia and Bank Rakyat Indonesia.

Betty Starkey, director of sovereign risk at Thomson, said the delay in financing from the International Monetary Fund, 'coupled with the continued drawdown of foreign exchange reserves, has exacerbated the country's solvency and liquidity problems.'

The agency criticized Indonesia for 'backpedaling' from the IMF program which eventually led to the delay in a disbursement of funds.

Starkey also warned hyperinflation and a severe downturn in economic growth 'threaten to fuel more widespread social and political turmoil in the months ahead.'

Starkey at Thomson held out little hope for future reforms, 'particularly in light of President Soeharto's recent cabinet selections for his seventh term of office.'

'The new policymakers do not provide much confidence that economic management and overall governance will improve anytime soon,' Starkey said. 'The prospects of the government delivering quickly on the kind of reforms sought by the IMF remain dim.'

Thomson also noted 'systemic risks' are intensifying at Indonesian banks, with non-performing loans rising rapidly in the wake of continued currency depreciation.

An overall lack of confidence has drained bank deposits, forcing the government to issue a blanket guarantee of all bank obligations, a move that puts the country's fiscal position in an even more precarious situation, the agency said.

Moreover, most of the currency drained out of the deposits has been U.S. dollars, raising concerns over the entire financial sector's total U.S. dollar deposit position, Thomson said.

In New York, the U.S. ratings agency Fitch IBCA on Monday said it had downgraded Indonesia's long-term foreign currency rating, citing the country's "deteriorating" political situation and disagreement with the IMF.

Fitch also pointed to President Soeharto's weekend selection of a cabinet, which it said was made up of "loyalists," as reinforcing "the perception that the regime remains in denial."

It said Indonesia's long-term foreign currency rating had been downgraded to B-minus from B-plus while the long-term local currency was lowered to BB-plus from BBB-minus.

The short-term foreign currency rating was maintained at B.

"President Soeharto's re-election for a seventh five-year term will do little to dispel the gloom surrounding Indonesia's political and economic outlook," according to the agency.

"Mr. Soeharto is clearly opposed to implementing policies that would harm the interests of those closest to him."

It warned that "the deteriorating economic and financial situation raises grave concerns about Indonesia's capacity to service its external debt" and said that unless the government reached an agreement "very soon" with the International Monetary Fund it government could default.

The IMF has said Indonesia has not sufficiently implemented reforms it agreed to in exchange for US$43 billion in international financial assistance.

As a result, it has postponed until April the disbursement of a second installment -- worth three billion dollars -- in aid to Jakarta.

Fitch said that compliance with the IMF would release as much as $12 billion for Indonesia this year, providing much-needed liquidity.