Financial Update: Foreign Debt of Indonesia Continues to Rise
Total foreign outstanding debt of Indonesia continues to grow at a robust pace. Based on data from the country’s central bank, total external debt rose 11.2 percent year-on-year to USD $292 billion at the end of September 2014 as private Indonesian companies have been eager to seek lower interest rates abroad. Privately-held foreign debt was up 14 percent y/y to USD $159.3 billion at end-September. Central Bank official Tirta Segara said that private sector debt is concentrated in the financial, manufacturing and mining sectors.
Public sector debt of Indonesia grew less robustly at the pace of 7.8 percent y/y to USD $132.9 billion.
The central bank stated that the current level of foreign debt of Indonesia is still safe. However, the rising trend needs to be monitored carefully and the institutions advises local companies to use prudent principles when it comes to foreign debt.
Indonesia’s central bank (Bank Indonesia) announced that the ratio of external debt to gross domestic product (GDP) grew from 34 percent in the second quarter of 2014 to 34.68 percent in September 2014. Meanwhile, the debt service ratio¹ (DSR) increased from 44.29 percent in the previous quarter to 46.16 percent in September 2014. Bank Indonesia further added that the country’s external debt is dominated by long-term external debt (83.3 percent of total external debt).
In late October 2014, Bank Indonesia announced to force non-bank corporations (that hold external foreign-denominated debt) to hedge these foreign holdings against the Indonesian rupiah with a ratio of 20 percent in the period 1 January 2015 to 31 December 2015. This measure is implemented to curtail risks originating from increased foreign private sector debt. For example, when foreign denominated debt is used by domestic-oriented companies (generate rupiah-denominated profit), then these companies are highly vulnerable to currency fluctuations and volatility. Particularly ahead of looming higher US interest rates (which are expected to lead to capital outflows from emerging economies including Indonesia) the rupiah may experience a depreciating trend against the US dollar.
Starting from late May 2013 - when the US Federal Reserve for the first time hinted at an end of the quantitative easing program - the rupiah has shown sharp depreciation against the US dollar:
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia