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Thursday, February 09, 2006

Standard & Poor's: Outlook On Indonesia's Sovereign Rating Revised To Positive; Ratings Affirmed

SINGAPORE (Standard & Poor's) Feb. 9, 2006--Standard & Poor's Ratings Services said today it revised its outlook on the sovereign credit ratings for the Republic of Indonesia to positive from stable.

At the same time, Standard & Poor's affirmed its 'B+/B' foreign currency and 'BB/B' local currency sovereign credit rating.

"The outlook revision takes into account the more favorable policy setting that emerged in the wake of significant adjustments in fiscal and monetary policy stance, and the expectation that this will improve deficit and debt ratios further," said Standard & Poor's credit analyst Agost Benard.

Standard & Poor's believes these changes, including the fuel subsidy cuts and a more aggressive monetary policy, combined with a recent change in the government's economic team, will enable the administration to continue improving credit fundamentals of the sovereign, namely, reduce its debt burden and vulnerability to currency weakness. It also reflects the expectation of better policy coordination and implementation, such that future shocks will be tackled in a more timely and appropriate fashion.

Prospects for a more constructive policy environment received a further boost through President Susilo Bambang Yudhoyono's limited but well-targeted cabinet reshuffle in December 2005. Respected technocrats were appointed to the important roles of Economic Coordination Minister and Finance Minister.

These policy shifts helped restore investor confidence in the administration's commitment to responsible macroeconomic management, by demonstrating a capacity and willingness to undertake unpopular measures.

Indonesia's credit rating is supported by improved political and policy climate, continued macroeconomic stability, prudent fiscal management, declining debt and debt-servicing burden, and a favorable external liquidity position. External vulnerability, however, remains high, while structural impediments continue to hamper growth.

The ratings for the sovereign could improve with further progress in microeconomic reforms, together with continued adherence to tight fiscal policies to aid debt reduction and lower the attendant vulnerability posed by its large foreign debt. Demonstrated improvements in the government's administrative and implementation capacity would likewise boost its creditworthiness. Conversely, the positive outlook could come under review should there be slippage or withdrawal from fiscal consolidation and economic reforms, or if policy coordination failures between various parts of the government surface again and constrain timely and appropriate response to emerging macroeconomic challenges.

Primary Credit Analyst:
Agost Benard, Singapore
Secondary Credit Analyst:
Ping Chew, Singapore

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