Grieser said that although some Indonesian companies are exposed to these volatility risks, they contain good cash reserves or hedges that form a buffer to offset the foreign exchange risks in 2015. The US Federal Reserve will raise its key interest rate later this year (possibly in the second half of 2015) and this is expected to result in significant capital outflows from emerging markets such as Indonesia (Southeast Asia’s largest economy), particularly as the country still has to cope with a wide current account deficit (approximately 3 percent of the country’s gross domestic product in 2014).

This year so far, the Indonesian rupiah exchange rate depreciated 1.39 percent to IDR 12,613 per US dollar (based on the Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR).

| Source: Bank Indonesia

According to Moody’s, those Indonesian companies that are vulnerable to weak rupiah performance include cable TV provider MNC Sky Vision, investment firm MNC Investama, textile firm Sri Rejeki Isman, and tire manufacturer Gajah Tunggal Pratama as over 80 percent of these companies’ debt (as well as significant costs) are foreign currency-denominated, while most - if not all - of their revenues are rupiah-denominated. Industries that are assessed highly sensitive to currency volatility are Indonesia’s aviation and manufacturing industries as expenditures in these businesses are largely in US dollar, while revenues are mostly in rupiah, and hence companies are at the risk of posting large foreign exchange losses.

The central bank of Indonesia (Bank Indonesia) recently started to push for enhanced prudent policy in terms of foreign debt, particularly regarding private sector foreign debt, as Indonesia’s privately-held foreign debt grew three-fold between end-2005 and 2014 (private foreign debt surpassed public sector foreign debt in 2012). According to the latest data from Bank Indonesia, Indonesia’s total outstanding external debt reached USD $294.4 billion in November 2014, of which USD $160.5 billion (54.5 percent of total foreign debt) was privately-held debt. In late 2014, Bank Indonesia conducted had conducted research that signalled that the country’s privately-held external debt is vulnerable to three risks i.e. currency risk, liquidity risk and overleverage risk. Bank Indonesia official Arief Mahmud said during the Indonesia Investment Summit in January 2015 that the sharp growth of private sector foreign debt is a logical consequence of the domestic higher interest rate environment in Indonesia since 2013, thus making the private sector turn abroad to obtain new funds. Between June 2013 and November 2014, Bank Indonesia gradually raised its key interest rate (BI rate) from 5.75 percent to 7.75 percent in a move to combat inflation (which had accelerated sharply after two subsidized fuel price hikes), curb the current account deficit, and support the rupiah exchange rate. Ahead of looming higher US interest rates, Bank Indonesia is expected to raise its BI rate again in an attempt to limit capital outflows.

Indonesia's Foreign Debt - 2014:

2014     Public Debt
    Private Debt      Total Debt
January     $127.9 billion     $141.4 billion     $269.3 billion
February     $129.0 billion     $143.1 billion     $272.1 billion
March     $130.5 billion     $146.0 billion     $276.5 billion
April     $131.0 billion     $145.6 billion     $276.6 billion
May     $132.2 billion     $151.5 billion     $283.7 billion
June     $131.7 billion     $153.2 billion     $284.9 billion
July     $134.2 billion     $156.4 billion     $290.6 billion
August     $134.2 billion     $156.2 billion     $290.4 billion
September     $132.9 billion     $159.3 billion     $292.3 billion
October     $133.2 billion     $161.3 billion     $294.5 billion
November     $133.9 billion     $160.5 billion     $294.4 billion

Source: Bank Indonesia