Jennifer Chen, Singapore – Ratings agency Standard & Poor's said on Tuesday Indonesia's long-term sovereign ratings are still at risk of a downgrade to "selective default" despite recent positive economic and political developments.

Indonesia's ratings hinge on whether Paris Club creditors will demand equal treatment for private lenders in rescheduling the country's huge debt burden at crucial talks next month, Takahira Ogawa, director of sovereign ratings at S&P in Singapore, told Reuters.

The agency has said previously that it would downgrade Indonesia to selective default if the Paris Club insisted that private lenders shoulder some of the burden of rescheduling.

A downgrade to selective default would make it more difficult for the country to attract foreign capital and would force up the cost of borrowing.

S&P cut Indonesia's long-term sovereign debt rating to CCC from CCC-Plus in November, citing the same concerns about private lenders being asked to share the burden of restructuring.

Rescheduling total not an issue

Ogawa said Indonesian Finance Minister Boediono's comments on Monday that the country would seek to reschedule less than $5.5 billion in debt, scaling back from expectations of some $6 billion, made little difference to the ratings outlook. "I don't know where he got that figure from, and whether he has in mind that the Paris Club will ask private lenders to share the burden," Ogawa said.

Boediono did not say on Monday how the new figure was calculated. He has been lobbying foreign creditors over the need for Indonesia to reschedule the debt, part of the country's total $140 billion in foreign obligations.

The Paris Club is due to meet next month with Jakarta to discuss rescheduling of interest and principal payments due in 2002 and 2003.

The market has been debating whether private lenders will be asked to share the pain of restructuring. Commercial loans, such as $500 million in yankee bonds due in 2006, make up a sizable portion of the country's formidable debt burden.

Separately, Jakarta is seen trying to tackle endemic corruption with two high-profile cases. The parliamentary speaker and leader of the former ruling Golkar Party Akbar Tandjung is on trial for graft and former president Suharto's favourite son, Hutomo "Tommy" Mandala Putra is charged with murdering a judge who convicted him for corruption.

Who is in charge?

Ogawa also noted a dispute between the central bank and finance ministry over the servicing of 144.5 trillion rupiah ($14.9 billion) in government bonds, which could have a serious impact on budget deficit figures for 2001 and beyond. The bonds were issued by the government to repay the central bank for loans made to debt-laden private bankers in the 1990s.

But the government is worried it will not be able to get repayment from the bankers and has refused to pay 7.8 trillion rupiah in interest on bonds due in 2001 until the central bank can verify that the banker loans were properly made.

The dispute has raised concerns among analysts that the burden could be placed on the central bank, and jeopardise its financial position and its yankee bonds.

S&P's Ogawa said this was another unfortunate example of the government's confused way of dealing with the economy. "It is not quite clear to me who is in charge of economic policy," he said.

BCA a good sign

Ogawa said the sale of Bank Central Asia (BCA) – the country's largest retail bank – to US investment firm Farallon was a step in the right direction for Indonesia.

Neverthless, he had reservations over the sale process and whether future assets sales would be successful. "The distance of this step might not be big. It's not a great leap forward because the process is still unclear and there are a lot of questions that remain," said Ogawa.

Farallon won the bid for 51 percent of BCA earlier this month, surprising many in the market who had expected long-running favourite Standard Chartered Bank to win. Jakarta has said it awarded Farallon the deal because it had fewer conditions than StanChart, though market talk still persists as to whether a hedge fund can successfully run a bank.