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Jakarta rocked by 'junk bond' rating

Source
Sydney Morning Herald - January 2, 1998

Louise Williams, Jakarta – Indonesia's embattled economy has suffered a further blow with the downgrading of the Government's foreign currency debt to "junk bond" status by the leading United States ratings agency Standard and Poor's.

The agency warned of the growing political risk in falling incomes and rising unemployment.

The rating follows a similar downgrading last week by its rival US credit assessor Moody's Investors Service, and suggests that investors holding the country's bonds face a significant risk that the Government will default.

"Falling real incomes and rising unemployment will test the Soeharto Government's political commitment to fiscal restraint and high interest rates required to stabilise the economy, particularly as the March 1998 presidential elections approach," Standard and Poor's said.

It also pointed to "pervasive linkages" between the political and business elite as one of the possible barriers to vital reforms demanded under the $US38 billion International Monetary Fund rescue package.

It warned of the growing social cost of worsening prospects for the economy, expected to reverse from the past two decades' 7 per cent annual growth to a contraction of 1 to 3 per cent. The Indonesian Chamber of Commerce this week said a million people had already lost their jobs.

The "junk" ratings are significant because most US investment funds are prohibited from holding any bonds below investment grade, and other lenders will demand higher interest rates to offset the risk.

Ratings below investment grade were also announced last week for South Korea and Thailand.

Both rating agencies have now downgraded a number of major Indonesian corporations over fears that they will default on short-term debts.

Standard and Poor's lowered the creditworthiness of one the country's biggest state banks, Bank Negara Indonesia, the toll-road company controlled by Mr Soeharto's daughter Siti Hardyanti "Tutut" Rukmana, the giant clove cigarette manufacturer Sampoerna, and the telecommunications company PT Satelit Palapa Indonesia.

Following its downgrading of government debt, the agency has also placed an alert on debt issued by the US-owned mining company Freeport-McMoran, whose main asset is a massive copper and gold mine in Irian Jaya.

Earlier, Moody's put the country's second-biggest private bank, Bank Danamon, under review for a possible downgrade, as well as downgrading three power projects funded by the state-owned electricity company PLN.

The re-ratings have pushed the rupiah to new lows against the US dollar and left Jakarta scrambling for new tactics to halt the alarming slide.

The rupiah has fallen more than 60 per cent since mid-1997, drastically increasing the rupiah cost of repayments on Indonesia's total foreign debt of $US117.3 billion.

Much of the private sector's $US65 billion debt is short term, meaning some of the country's largest conglomerates face serious difficulties as payments come due in the next few months.

Mr Soeharto has reaffirmed that the Government can meet its external debt repayment commitments due this year, put at $US6 billion. He has also appealed to Indonesian business people to bring US dollar funds being held offshore back into the country.

On Wednesday, the Government announced the merger of four state banks and said foreign investors could take shares in local banks. The merger of Bapindo, Exim, Bank Bumi Daya and Bank Dagang Negara was seen as positive by commentators.

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