Jakarta – Moody's Investors Service said Friday it had upgraded the debt and deposit ratings of eight Indonesian banks, reflecting improvements in their financial fundamentals and in Indonesia's external position. The deposit ratings of the eight banks were raised to Caa1, according to a Moody's statement received here.

The banks affected were Bank Mandiri, Bank Negara Indonesia, Bank Rakyat Indonesia, Bank Tabungan Negara, Bank Danamon Indonesia, Bank International Indonesia, Bank Pan Indonesia and Bank Bali.

The long-term debt ratings of Bank Mandiri, Bank Negara Indonesia and Bank Danamon Indonesia were upgraded to B3 and the long-term debt rating of Bank Tabungan Negara was upgraded to Caa1, it said.

Moody's also upgraded the financial strength rating for Bank Danamon Indonesia to E-plus from E, and said it had placed under review for possible upgrade the financial strength ratings of Bank Rakyat Indonesia and Bank Pan Indonesia.

The outlooks for the ratings of Bank Tabungan Negara and Bank Bali were changed to positive, it added. The upgrades of the debt and deposit ratings "reflect improvements in Indonesia's external position, the predictability of banks' access to foreign currency liquidity in a timely manner," and in the fundamental financial position of the banks themselves, it said.

But Moody's made it clear in the statement that the Indonesian banking system, which nearly collapsed in the 1997 financial crisis, was far from out of the woods. "Moody's cautions that the potential for further political and social instability continues to depress confidence levels, with ramifications for foreign currency liquidity, and that this continues to constrain bank ratings," it said.

Moody's also noted that the restructuring of Indonesia's banking sector had formed a key element of the government's measures to restore economic stability. The government, it said, had guaranteed all bank obligations and, in cooperation with the IMF and World Bank, engaged in a bank restructuring and recapitalisation program equivalent to some 60 percent of GDP.

"Efforts to tighten bank regulation and supervision have also met with some success. However, the banks' operating environment remains poor," it said. "Reform of the legal system has made little progress. Consequently the pace of corporate debt restructuring has been very slow, lowering likely recovery rates," it said.

The statement added that the deterioration of banks' asset quality has continued, and that the economic recovery is still fragile. "Furthermore, the extreme expense of the government's bank recapitalisation program remains a political issue, raising the possibility that cost-reduction measures could be introduced that will burden newly recapitalised banks," it said.