Bangkok--11 Jun--Moody's Moody's Investors Service will assign a Ba3 rating with a stable outlook to the Republic of Indonesia's forthcoming US dollar-denominated global bond. The Ba3 government bond rating reflects levels of general government debt and total external debt that are relatively high in comparison respectively to fiscal revenues and current account receipts. However, overall levels of indebtedness are on a marked downward trend. This reduction in the government's debt-to-GDP ratio has been helped by the implementation of cautious fiscal policies and a stronger Rupiah. External resiliency is also improving due to rising foreign exchange reserves that are underpinned in turn by current account surpluses and growing FDI inflows. At the same time, risks arising from a high proportion of foreign currency denominated government debt are limited by its predominantly concessional structure and long duration. On the other hand, the rating incorporates weaknesses in Indonesia's legal and regulatory system, and which heighten business costs and investor uncertainty, and may also be hindering the emergence of a higher growth rate. The stable outlook reflects Moody's view that reasonable policy management and prospects for gradual structural reforms will offset the challenges that the Indonesian authorities will continue to face over the next 12-18 months. This view was validated recently by the authorities' policy response to the intensifying nature of the global oil price shock. Against the backdrop of rising global crude oil prices and a system of domestic fuel price subsidies which still limit the pass-through of world market prices, Indonesia's fiscal position has come under increasing strain. As a result, its budgeted fiscal deficit has been adjusted modestly upwards to 2.1% of GDP. However, the structural composition of the deficit is improving and fiscal credibility remains fairly strong. Moreover, the upward revision in the government's deficit remains consistent with the stable-to-improving trends in its debt ratios. The budgetary improvements are underpinned by: (1) further reductions in government oil price subsidies; (2) higher crude price assumptions in the budget, and which are closer to international benchmarks; and (3) more accurate expenditure projections in line with declining oil output. The government's modifications of budget assumptions and fuel price subsidies were scrutinized in parliamentary deliberations. They will be accompanied by cash transfers that may reduce the realization of projected fiscal savings, but should assist the poorest sections of society in coping with the financial burden of higher fuel prices. As a result, socio-political stability will likely be maintained. Inflationary pressures will rise on account of the greater pass-through of higher oil prices. However, better implementation of fuel price increases (and cash transfers) coupled with expected monetary tightening and a supportive balance of payments should limit the second-round inflationary effects. The financing of Indonesia's higher budget deficit for FY08 relies predominantly on domestic sources. This debt management strategy complements the government's cautious fiscal stance and policy adjustments, and is broadly consistent with maintaining stability in the size, tenor and currency composition of its overall debt ratios. For more information please contact: Singapore Aninda S. Mitra Vice President - Senior Analyst Sovereign Risk Unit Moody's Singapore Pte Ltd. JOURNALISTS: (852) 2916-1150 SUBSCRIBERS: (65) 6398-8308 Singapore Thomas J. Byrne Senior Vice President - Regional Credit Officer Sovereign Risk Unit Moody's Singapore Pte Ltd. JOURNALISTS: (852) 2916-1150 SUBSCRIBERS: (65) 6398-8308