Publication date: 08-Apr-2011 00:08:37 EST

• Improving government debt ratios and growing foreign currency reserves are strengthening

Indonesia's credit fundamentals.

• We have raised our long-term foreign currency sovereign credit rating to 'BB+' from 'BB' and

affirmed the 'B' short-term rating.

• We also affirmed the 'BB+' long-term and 'B' short-term local currency ratings.
• The positive outlook reflects the prospect that the government's balance sheet and external

liquidity will strengthen if inflation eases and structural reforms boost real economic growth

prospects.

SINGAPORE (Standard & Poor's) April 8, 2011--Standard & Poor's Ratings Services said today it had

raised its long term foreign currency sovereign credit and debt ratings on the Republic of Indonesia

to 'BB+' from 'BB'. The outlook is positive. At the same time, Standard & Poor's affirmed the 'B’

short-term foreign currency rating. We also affirmed or maintained the following:

"The rating upgrade reflects continuing improvements in the government's balance

sheet and external liquidity, against a backdrop of a resilient economic performance and

cautious fiscal management," said Standard & Poor's credit analyst Agost Benard.

"Rating constraints include Indonesia's low per capita income, structural and

institutional impediments to higher economic growth, and relatively high inflation. In

addition, the country remains vulnerable to external shocks partly because the domestic

capital markets are shallow; but this risk has lessened."

Indonesia's steadily improving public balance sheet underpins the rating. Consistent primary fiscal

surpluses which exceed the debt stabilizing level are driving the falling debt ratios. This reflects the

large margin by which economic growth exceeds the real interest rate, as well as some privatization

proceeds and currency appreciation. With the additional effect of sustained high nominal GDP

growth, net general government debt has declined to 24% of GDP in 2010, which compares

favorably to most peers'. Similarly, as sustained balance of payment surpluses elevated foreign

exchange reserves to equal about six months of current account payments, Indonesia's external

liquidity risk now compares well to rated peers'.

The ratings on Indonesia remain constrained by the country's still-significant reliance on and

exposure to external funding,which is evidenced by a relatively high net external liability position of

about 100% of current account receipts. The low level of economic development is an additional

rating constraint. Per capita GDP doubled to US$3,037 in the six years to 2010, which is significantly

below the median for the 'BB' rating category. Infrastructure shortfalls, legal uncertainties,

corruption, and labor market rigidities remain key obstacles in achieving a higher growth path. "The

positive outlook reflects the likelihood of an upgrade if inflation is tamed while balance sheet

improvements continue, likely in combination with successful implementation of parts of the

administration's fiscal, administrative, and structural reform agenda," said Mr. Benard.

We may raise the ratings if inflation pressure diminishes, the external debt burden declines, the

sovereign's balance sheet improves, or reforms such as subsidy rationalization suggest that fiscal and

external vulnerabilities are further reduced. Conversely, a stalling of reforms or the absence of

timely and adequate policy responses to renewed fiscal or external pressures would result in the

rating stabilizing or weakening.

Standard & Poor's also affirmed or maintained the following:

• The 'BB+' long-term and 'B' short-term local currency sovereign credit ratings;
• The 'axBBB+/axA-2' ASEAN regional scale rating;
• The 'BBB-' transfer and convertibility risk assessment; and
• The recovery rating of '3' on Indonesia's senior unsecured foreign currency debt. This rating

signals our expectation of a meaningful recovery of 50%-70% in the event of a default.

Source : http://www.standardandpoors.com/prot/ratings/articles/en/us/?assetID=1245302343527