One positive aspect that the agency noted was that, by agreeing to a generous rescheduling of
about US$5.8 billion of principal on bilateral debt coming due between April 2000 and March
2002, Indonesia had strengthened external finances and reduced the likelihood that its sover-
eign debt would have to be restructured annually.
In August 2000 David Beers, Standard & Poor’s Managing Director for Sovereign Ratings,
said that Indonesia’s political turmoil, weak currency and lagging reform made its sovereign
debt the weakest credit story in Asia.^3 The country also was suffering from uncertainties regard-
ing legal reform, the quality of bank lending and the sale of assets by the government-run
Indonesia Bank Restructuring Agency. However, he also noted the completion of a debt restruc-
turing agreement with Indonesia’s commercial creditors, which could lead to an upgrade from
the ‘SD’ long-term foreign currency rating. The agency raised that rating to ‘B-’ in November,
based on a reduction of general government debt to 65 per cent of GDP, increasing revenues as
a result of high world oil prices and sustained government budget surpluses.
In March 2001 Moody’s removed the positive outlook on its ‘B3’ rating and Standard
& Poor’s put its ‘B-’ rating for Indonesia on a negative outlook, citing President Wahid’s fal-
tering grip on power and interethnic violence across the archipelago. The IMF was delaying
a US$400 million tranche of loans to the country because of the government’s failure to push
key economic reforms through the legislature. However, it seemed unlikely that the ratings
would fall again to the ‘SD’ level because the country had US$29 billion in foreign
exchange reserves.
Project developments
In October 1997 Standard & Poor’s lowered its rating on Paiton Energy Funding’s senior
secured bonds due 2014 from ‘BBB’ to ‘BBB-’, in line with a similar downgrade of its rat-
ing on Indonesia’s long-term foreign currency obligations, because a 32 per cent decline in
the rupiah’s value over the past four months and resulting weakness in the financial sector had
increased repayment risk for lenders to Indonesian IPPs. The agency noted that dollar-denom-
inated debt financed about 73 per cent of Paiton Energy’s financing costs. While electricity
tariffs were payable in rupiahs, PLN was required to pay the rupiah equivalent of the agreed
dollar-based tariff. PLN also assumed convertibility risk by agreeing to remit electricity pay-
ments in dollars if the sponsors could not secure their own foreign exchange contracts. Thus,
at least in theory, the project sponsors and lenders were hedged for devaluation of the rupiah.
However, the fundamental problem affecting PLN was that, as a result of recent depreciation
of the rupiah, the cost to PLN of electricity from dollar-financed IPPs had become 40 per cent
higher than originally anticipated in local-currency terms. Also, as new IPPs came on line
over the next few years PLN’s hard-currency needs would increase while Indonesia’s reserves
were declining.
Later in October 1997 Standard & Poor’s began to investigate reports that PLN was seek-
ing to reopen the negotiation of PPAs for projects such as Paiton Energy. The agency’s orig-
inal assessment of offtaker creditworthiness was based partly on the government’s general
support for PLN and a letter of support from the MOF. When a team from Standard & Poor’s
visited Jakarta in November, the MOF was not willing to affirm its support arrangements for
the IPPs and PLN. Based on the potential weakening of government support and the reopen-
ing of PPA negotiations, the agency put its ‘BBB-’ rating for Paiton Energy and its ratings for
two other IPPs on CreditWatch. Later in the year it downgraded the ratings to ‘B’.
POWER PLANT