Bangkok--27 Jul--Standard & Poor's
Standard & Poor's Ratings Services said today it had raised the long-term foreign currency rating on the Republic of Indonesia to 'BB-' from 'B+', and the long-term local currency rating to 'BB+' from 'BB'. The short-term rating of 'B' was affirmed, and the outlook on the long-term rating is stable.
The upgrades reflect Indonesia's improving fiscal and external performance, resulting in declining debt burdens. Small, but persistent, central government primary surpluses and a falling interest burden, coupled with the rupiah's appreciation, are projected to lower central government debt to just under 50% of GDP this year, down from over 100% in 2000. The central government continues to prudently manage its fiscal position, and although the budget deficit target for 2006 has been upwardly revised, the country's progress toward an eventual balanced budget in the medium term remains on track. Similarly, current account surpluses, in conjunction with recent foreign direct investment (FDI) inflows, have halved the country's net external debt (of liquid assets) to an estimated 94% of current account receipts in 2006. Supporting these positive trends is an improvement in Indonesia's political environment resulting from a more robust democracy, and from the government's commitment to infrastructure development, tax, and subsidy rationalization, and financial sector reforms.
"While implementation remains a challenge, an encouraging development has been the speed at which difficult, but much-needed, reforms have been undertaken, especially since the new economic team was put in place in December 2005," said Standard & Poor's credit analyst Sani Hamid, of the Sovereign Ratings group. "Going forward, the relationship between the executive and the legislature will continue to evolve, with the key challenges being the administration's ability to build support for its reforms and secure timely parliamentary approval," he added.
The ratings on Indonesia continue to be constrained by a high external debt and a government debt burden that, while not out of line with peers, proved unmanageable in the past and contributed to the need for sovereign debt rescheduling in 1999—2002. In addition, the lack of transparency in the finances of public sector-related entities, and in coordinating policies between the fiscal and monetary authorities, remain issues that need to be resolved. The country could also bear the cleaning-up cost associated with removing nonperforming loans from state-owned banks, estimated at 3% of GDP.
Mr. Sani explained that other factors constraining Indonesia's creditworthiness are institutional and structural impediments, both of which restrict growth to levels that are insufficient to generate jobs at the pace needed to reduce poverty significantly. Competitiveness is hampered by infrastructure shortfalls, legal uncertainties, corruption, and labor market rigidities. The rate of economic expansion remains below potential, with a higher level of growth hinging largely on the success of the reform measures set out.
The stable outlook balances Indonesia's improved economic management and falling debt burdens against continuing vulnerability to adverse exchange rate movements, higher interest rates, and inflationary pressures. The outlook is also based on expectations that Indonesia's external liquidity will continue to strengthen through a combination of current account surpluses and improved investment flows, as investors take heart from ongoing economic reform under the new administration.
"A faster implementation of reforms on taxes, labor, infrastructure development, and the legal structure, coupled with improved public sector transparency, would favorably influence the rating outlook on Indonesia," Mr. Sani noted. "Conversely, the ratings could come under pressure if institutional weaknesses hinder policy coordination and impede timely response to political and external shocks, if reform efforts stall either at the legislative or implementation stage, or if the government draws back from its present fiscal consolidation path," he concluded.
Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com . All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com ; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.
Media Contact:
David Wargin, New York (1) 212-438-1579
[email protected]
Analyst Contacts:
Sani Hamid, Singapore (65) 6239-6346
Agost Benard, Singapore (65) 6239-6347