Bank Indonesia Concerned about Local Companies' Unhedged Foreign Debt
Although Indonesia’s debt-to-GDP ratio is currently still at a safe level at roughly 32.8 percent, the country’s central bank (Bank Indonesia) expressed its concern about the high debt service ratio (DSR) and debt-to-export ratio. The DSR is the ratio of debt service payments (principal and interest) of a country to its export earnings. Generally, a healthy ratio is somewhere in the range of 0 and 20 percent. However, Indonesia’s DSR has risen from 20 percent in 2007 to 50 percent in 2014.
Meanwhile, the debt-to-export ratio grew from 35 percent in 2007 to 128.8 percent in the second quarter of 2014.
Bank Indonesia announced it will implement a new policy approach in order to lower these ratios to a safer level. The main objective of this new policy is to discourage local companies to engage in foreign-currency denominated loans. Particularly local companies in the energy, manufacturing and property sectors have taken up foreign loans (for example, for the construction of power plants or car manufacturing) which have burdened the aforementioned ratios. Moreover, it increases the risk of currency mismatch in case of rupiah depreciation and overleveraged local companies. Regarding currency mismatch, a recent Bank Indonesia survey showed that only 12 companies (from the 100 most indebted Indonesian companies) have hedged its debt, while 12 others have a natural hedge as their export revenue is generated in US dollars. This implies that among the top 100 of most indebted Indonesian companies, 76 have unhedged debt and are thus vulnerable to currency shocks. Bank Indonesia also detected that there has been an increase in over leveraged companies in the period 2011 to 2013.
According to the latest data provided by Bank Indonesia, Indonesia’s external debt in April 2014 stood at USD $276.6 billion (up 7.6 percent from April 2013), consisting of public sector external debt at USD$ 131.0 billion and private sector external debt at USD $145.6 billion.
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