Standard & Poor's Ratings Services today assigned its 'B+' rating to Indonesia's proposed US$1.25 billion global bonds. The bonds will be issued in two tranches--one tranche of at least US$750 million maturing in January 2016, and a second tranche of at least US$250 million maturing in October 2035.
The sovereign ratings on Indonesia are supported by the country's declining debt and debt-servicing burden, its track record of conservative fiscal management, and adequate external liquidity. The administration of President Susilo Bambang Yudhoyono has demonstrated its commitment to fiscal consolidation begun by previous governments.
"Although the government's belated response to the damaging effects of the fuel subsidy highlighted weaknesses in policy formulation and coordination, the average 126% fuel price rise on Oct. 1, 2005, sent a positive signal in
its robustness. Notably, the measure also had strong parliamentary support," said Standard & Poor's credit analyst Agost Benard.
The price rise should allow the government to cap its fuel subsidies for 2005 at Indonesian rupiah (Rp) 89.2 trillion (US$8.8 billion; 3.4% of GDP). This should enable the government to continue reducing its fiscal deficit to 0.9%-1.1% of GDP this year from 1.3% in 2004, and to register a primary surplus of about 1.2% of GDP. Ongoing primary fiscal surpluses enabled a steady fall in public sector indebtedness over the past four years. Gross public sector debt is expected to fall to a projected 61.0% of GDP by the end of 2005, from 94.6% in 2001.
By reducing consumption distortion and hence import demand, the lower subsidies will also ease pressure on the balance of payments, cutting the estimated monthly US$1 billion spent on oil imports before the price rise. Nevertheless, Indonesia's retail fuel prices on average remain about 45% below world prices. The deficit target therefore remains vulnerable to further rises in oil prices and interest rates, although these are not expected to reverse
Indonesia's medium-term progress toward an eventual balanced budget.
The ratings on Indonesia are also supported by adequate external liquidity, despite the fall in reserves this year after central bank intervention to support the rupiah, and debt repayments. Its foreign reserves were at US$30.2 billion as of September 2005, up from US$27 billion in 2001, and short-term debt was negligible. As a result, even with smaller current account surpluses, the ratio of gross financing requirement to reserves is forecast to remain a low 60% for 2005. This indicates its short-term liquidity position is strong compared with its peers. Standard & Poor's expects
Indonesia to maintain adequate external liquidity with ongoing current account surpluses, improved investment flows on the back of diminished political uncertainty, and reforms under the new administration.
The ratings on Indonesia are constrained by its still-high external leverage. Public sector net external debt was about 60% of current account receipts in 2004. Although this is lower than the median level in similarly rated countries, it presents a heavy amortization profile and remains a source of ongoing external vulnerability for the medium term.
The ratings are also limited by the country's below-potential economic growth, which averaged a relatively modest 4.1% in the past five years. Although growth accelerated in the first half of 2005 to 5.9% year on year, elevating Indonesia's economy to a higher growth path needs a sustained rise in its low investment ratio, which remains below 20% of GDP. This, in turn, hinges on the government's success in improving the investment climate and competitiveness by implementing broad microeconomic reforms, particularly in the judicial, legal, and labor market areas.
"Without such reforms, Indonesia's economy will continue to underperform, posing a challenge to social and political stability," said Mr. Benard. "Nevertheless, progress in these areas--the latest example being the timing
and implementation of fuel price rises--speaks to a pattern of incremental steps and slow implementation."