The slump in the value of Indonesia’s rupiah has revived bitter memories of the 1997-98 Asian financial crisis, when a currency collapse pushed companies with large US dollar borrowings into bankruptcy, tripping up the banking sector and sending the country spiralling into political and social turmoil.
With dollar interest rates kept low by the US Federal Reserve’s quantitative easing programme, companies in Indonesia and other emerging markets have loaded up on dollar debt over the past few years.
Fears over the Fed’s plans to start winding down its monetary stimulus have battered emerging market currencies from Brazil to Indonesia.
The rupiah has been the hardest hit of Asia's main currencies since the talk of Fed tapering surfaced in late May, down nearly 13 per cent against the dollar. That has driven the cost of servicing dollar loans sharply higher at a time when Indonesian companies are already facing rapidly rising wages and input costs.
But unlike in the prelude to the late 1990s crisis, companies and banks have been more restrained about how much they borrowed and for how long, and many without dollar revenues have put in place hedging strategies.
“The size and tenor of corporate debt looks quite safe at the moment because we have learnt a lot from the 1997-98 crisis,” says Wijayanto, managing director of the Paramadina Public Policy Institute, a Jakarta-based think tank, who like many Indonesians uses only one name.
Profit margins are likely to suffer at companies with large dollar debts and rupiah revenues, while weaker companies and banks inevitably remain exposed to further significant falls in the Indonesian currency.
Property groups will probably face the tightest squeeze, according to Fitch, the rating agency. Three of the most heavily exposed large developers are Alam Sutera, Jababeka and Lippo Karawaci, which borrowed in dollars to fund projects that will generate rupiah incomes.
Even so, they have currency hedges in place and were fortunate with their timing, closing key fund-raisings in the first half of the year when the cost of borrowing was lower. “These companies have a good maturity profile on their debt and while their profit margins will decrease they will still be very comfortable,” says Erlin Salim, a Jakarta-based analyst at Fitch.
As investors have grown skittish over the country’s economic vulnerabilities, despite a recent rally, Indonesian international corporate bonds have lost 7.2 per cent since mid-May, sending the average yield up to 8.23 per cent, from 6.33 per cent at the start of the year. The average yield for dollar-denominated emerging market corporate debt is 6.23 per cent.
Some companies are better placed than others to ride out the storm. Those with dollar revenues such as coal exporters Adaro Energy and Indika Energy have a ready source of foreign exchange to repay their debts.
Others facing a significant foreign currency mismatch such as Kalbe Farma, a pharmaceutical producer, and agri-food group Japfa Comfeed Indonesia, have market-leading positions in Indonesia and should be able to pass on some of these higher costs to customers over the next 12 months, says Ms Salim.
Some of the highly leveraged had already run into difficulties before the recent turbulence. Bakrieland Development, part of the business empire run by the influential Bakrie family, is facing legal action from a group of hedge funds who say the company has defaulted on a $155m bond.
In the banking sector, unhedged foreign currency exposure on average accounts for only 2 per cent of banks’ capital, according to Fitch. With capital adequacy ratios at about 18 per cent and gross non-performing loans at about 2 per cent, the sector looks resilient.
The chief executive of one local bank warns, though, that the relative strength of Indonesia’s “big four” lenders – Bank Mandiri, Bank Central Asia, Bank Negara Indonesia and Bank Rakyat Indonesia, which control more than 40 per cent of loans and deposits – could be masking weaknesses at some smaller banks.
With the outlook for the rupiah uncertain, Indonesian companies are not out of the woods quite yet, says Sarvesh Suri, country manager for the International Finance Corporation, the World Bank’s private sector lending arm.
But for now, investors’ greatest concern will be falling profit margins rather than a potential systemic corporate collapse.
Additional reporting by Robin Wigglesworth in London
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