The central bank of Indonesia recently issued new regulations (Bank Indonesia Regulation No. 16/21/PBI/2014 and External Circular No. 16/24/DKEM) that aim to safeguard Indonesia’s financial fundamentals. These new regulations, which are an improvement of Bank Indonesia Regulation No. 16/20/PBI/2014 dated Oct. 28 2014, force Indonesian non-bank corporations to apply prudent fiscal management regarding foreign-denominated debt. Bank Indonesia felt these rules are needed as privately-held foreign debt rises continuously.
In recent months, the central bank of Indonesia (Bank Indonesia) has repeatedly emphasized that ever-increasing privately-held external (foreign) debt forms a threat to Indonesia’s macroeconomic stability particularly as the global economy is currently characterized by uncertainty and high volatility (global liquidity is expected to tighten due to the end of the US Federal Reserve’s accommodative monetary policy), while economic growth of Indonesia’s important trading partners is slowing (China, Japan and India). These conditions can jeopardize external debt payment capacity of Indonesian companies.
Indonesia’s privately-held foreign debt rose three-fold between end-2005 and 2014, surpassing public sector external in 2012. According to the latest data, Indonesia’s total outstanding external debt stood at USD $294.5 billion in October 2014, of which USD $161.3 billion (54.8 percent of total foreign debt) is privately-held debt. Research conducted by Bank Indonesia signaled that this privately-held external debt is vulnerable to three risks i.e. currency risk, liquidity risk and overleverage risk. The new regulations will make it easier for Bank Indonesia to monitor non-bank corporations’ foreign debt and makes it possible to use sanctions to punish these corporations in case they do not apply prudent financial management.
The new regulations will force non-bank corporations to conduct prudent financial management through hedging, a minimum liquidity ratio, and credit ratings.
Bank Indonesia mentioned the most important changes on its website:
I. Adjustment to the coverage of components of foreign exchange assets and liabilities is among others made by considering:
• debt to eligible non-residents and residents meeting certain requirements as foreign exchange assets;
• inventory as foreign exchange asset for export-oriented corporations;
• trade credit as foreign exchange liability.
II. Adjustment to the provision for fulfillment of hedging liability is among others made through:
• determination of the threshold of negative difference between foreign exchange asset and liability which must be hedged;
• exemption for hedging liability for export-oriented corporations with financial statement in US dollar;
• determination of mandatory Hedging implementation with domestic banks as of 1 January 2017.
III. Adjustment to the provision for fulfillment of credit rating liability is among others made by:
• extending the validity of credit rating to two years;
• introducing to non-bank corporations to use parent company’s credit rating for the external debt of parent companies or external debt secured by parent companies;
• expanding the exemption for credit rating liability for external debt related to infrastructure projects and external debt secured by multilateral (bilateral/multilateral) institutions.