a result of the increasingly unstable political situation. The agency observed that social unrest
in the capital city and elsewhere in the country, sparked by economic decline and rising
prices, had put the viability of Suharto’s government into question. In November Duff &
Phelps issued a special report stating that, without strong new government leadership and a
properly implemented bank recapitalisation plan, Indonesia was unlikely to emerge from its
economic and political crisis.
In March 1999 Standard & Poor’s reduced its long-term foreign currency sovereign cred-
it rating for Indonesia from ‘CCC+’ to ‘SD’ (selective default), reflecting its distressed
rescheduling of US$210 million principal on a US$350 million commercial loan disbursed in
1994 by a syndicate of 70 banks led by Bank of Tokyo Mitsubishi. The ‘SD’ rating is applied
when a country has selectively defaulted on an issue or class of obligations, but continues to
make timely payments on its other obligations. Bank Indonesia said that there was no default,
only a rescheduling that met all the conditions required by the Paris Club, a group of gov-
ernment creditors that rescheduled debt to developing countries, loosely based around the
Group of 10. After further review of the rescheduling Standard & Poor’s restored Indonesia’s
foreign currency rating to ‘CCC+’.
In June 1999 Indonesia conducted its freest and most peaceful general election in four
decades. At the same time Standard & Poor’s observed that Indonesia was undergoing the
worst banking crisis since the 1970s and might have to spend as much as US$87 billion to
revive the sector. It estimated that nonperforming loans would reach 75–85 per cent by the
end of 1999, and that the cost of recapitalising the system and paying out creditors of dis-
tressed banks would be about 82 per cent of GDP. In comparison, the agency estimated the
likely cost of banking recovery at 35 per cent of GDP in Thailand, 29 per cent in South Korea
and 22 per cent in Malaysia. The agency noted that one of the reasons for the severity of the
crisis was the economy’s over-reliance on the domestic banking system as a result of the
underdeveloped local equity and debt markets.
In reaffirming its ‘CCC’ rating for Indonesia in September 1999, Duff & Phelps pointed
to the need for resumed multilateral loans from institutions such as the IMF, the World Bank
and the Asian Development Bank, which would depend partly on the government’s willing-
ness to allow UN peacekeepers into East Timor and satisfactory resolution of a corruption
investigation regarding Bank Bali. In October, Standard & Poor’s declared that, while it was
encouraged by the election of Abdurrahman Wahid as Indonesia’s fourth president, it also
noted that the government’s debt had grown to 110 per cent of GDP, from just 26 per cent
three years before, and that the end of a current Paris Club consolidation period could lead to
a spike in debt service requirements. It also pointed to the need for another round of Paris
Club debt restructuring.
In November 1999 the IMF agreed in principle to resume lending after the Indonesian
legislature published the findings of an international audit team investigating the Bank Bali
corruption scandal. Moody’s vice president and senior analyst Stephen Hess remarked that
Indonesia was critically reliant on external finance and that anything that could help to restart
private sector capital flows would be good for the country’s external liquidity.^2
In April 2000 Standard & Poor’s once again downgraded Indonesia’s long-term foreign
currency rating to ‘SD’ because it was effectively in default on US$850 million of foreign-
currency-denominated commercial bank loans. The loans would be restructured on terms that
were disadvantageous to creditors, reflecting Indonesia’s commitment to seek debt relief from
the private sector similar to that sought by a Paris Club of 19 bilateral creditor governments.
PAITON 1, INDONESIA