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Tuesday, February 14, 2006

Fitch downgrades ratings outlook for Indonesia

The government's plans to offer its second batch of local bonds of the year Tuesday, and some global bonds next month, received a bit of a knock Monday with global credit rating agency Fitch Ratings downgrading its rating outlook for Indonesia.

Albeit disappointed, the government downplayed the decision as a mere glitch after Standard and Poor's recently upgraded its rating outlook, with Moody's Investment Services also expected to upgrade its outlook sometime soon.

Fitch revised downwards its outlook on Indonesia's foreign-currency and local-currency credit ratings, both of which are currently at "BB-" -- three notches below investment grade -- to "stable" from "positive".

S&P currently rates Indonesia at "B+", and Moody's at "B2", both with a positive outlook. Higher credit ratings and outlooks mean lower risk premiums on an issuer's debts, thus helping to lower borrowing costs.

"The revision reflects concerns over risks to the external balance sheet that need to be addressed with greater urgency and importance," associate director of Fitch's sovereign ratings team, Ai Ling Ngiam, said in a release.

"The reversal towards a weakening in the current account balance position coincides with a period of heavy public sector amortization payments."
Indonesia recorded a current account deficit of US$2 million during last year's second and third quarters, compared to $2.24 billion and $2.77 billion, respectively, in 2004, the latest figures from the central bank show.

Bank Indonesia, however, has estimated that in line with its preliminary calculations, the balance would likely rise to $1.97 billion by the fourth quarter.
Indonesia's foreign exchange reserves as of Jan. 30 rose to $35.07 billion, from $34.72 billion a month earlier. The government plans to pay Rp 63.5 trillion (some 6.9 billion) in foreign debt installments this year.

The agency also downgraded its ratings outlook on nine local lenders, citing more challenging operating conditions in the near term, particularly higher interest rates, which would likely have an impact on the asset quality and profitability of the banks.

Government officials took Fitch's latest review in their stride.
Minister of Finance Sri Mulyani Indrawati questioned why the agencies still gave Indonesia lower ratings than certain other countries when its macroeconomic indicators were better.

"This has made us avoid higher-cost bond issuance as a source of financing, and forced us to focus on bilateral foreign loans, even though these are sometimes politically sensitive," she said during a hearing with the House of Representative.

Bank Indonesia Governor Burhanuddin Abdullah also questioned why Fitch was worried about Indonesia's external balance sheet.

"I think our current account is going to be in surplus for 2006, but a very small surplus, because the importation of oil is falling, he said in an interview with Dow Jones, adding that foreign exchange reserves had also risen and "the trend is still increasing."

Local markets also took little notice of Fitch's revision, with the Jakarta Stock Exchange Composite Index closing slightly down by 0.06 percent at 1,252.40 and the rupiah ending the day flat at Rp 9,230 against the U.S. dollar.

Urip Hudiono,
The Jakarta Post, Jakarta

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