JAKARTA. The Indonesian central bank officially introduced on Thursday the much-anticipated regulation on foreign debts, which also includes a requirement to hedge part of offshore borrowings to reduce risks to domestic financial stability.
Bank Indonesia (BI) Governor Agus Martowardojo announced the measure in front of about 100 CEOs of local companies invited to his office to get firsthand information about the new regulation.
Local companies had to be prudent in borrowing dollars or they risked entrapping the country in a 1997-1998-type financial crisis, Agus told the CEOs. He warned them over a “storm” likely to engulf the global economy next year, ahead of tighter liquidity in the global economy.
“So far we only find prudent management in the banking sector but, sorry to say, we don’t find the same discipline in corporations,” the BI governor told the executives. “We don’t want a repeat of what happened in the 1997-1998 period.”
The new regulation stipulates that all Indonesian companies planning to borrow dollars must have a specific health level in three indicators: liquidity strength, hedging ratio and credit rating level.
The rule will come into effect in January 2015, when companies will be required to hedge at least 20 percent of their short-term dollar debts and to have a liquidity ratio of 50 percent. The requirements will become stricter in 2016, when the hedging ratio will be increased to 25 percent, while the liquidity ratio will be higher at 70 percent.
In addition, beginning 2016, all companies wanting to borrow dollars must have a minimum rating of BB from international rating agencies. The rating rule, however, exempts companies that borrow dollars for infrastructure projects.
If companies do not comply with the rules, BI will write a reprimand letter that will be distributed to their overseas creditors, the Financial Services Authority (OJK), the Indonesian Stock Exchange (IDX), the Finance Ministry’s taxation office and the State-Owned Enterprises Ministry.
“The letter will be a heavy deterrent effect for non-compliant companies, as it could taint their reputation among creditors,” said Juda Agung, BI executive director for monetary policy.
Juda explained that if a firm had been labeled as failing to maintain prudence, it would find it more difficult when requesting new dollar loans or rolling over existing debts, thus limiting its ability to expand its business.
“This rule will apply to all companies, even small-sized ones, which could still pose a risk of default due to the potential of overleverage or currency mismatch,” the BI executive noted.
The Indonesian private sector’s foreign debts had been on an upward trajectory, rising from US$50.6 billion in 2005 to $156.2 billion by the end of August, according to BI data.
This issue has already come to the attention of international stakeholders. In April, rating agency Standard & Poor’s (S&P) warned that private sector debts in Indonesia were already “much larger” than those of its similarly rated peers.
Hasnul Suhaimi, the president director of PT XL Axiata, argued that the new regulation was a good policy to maintain prudence in local firms and the private sector was ready to adjust to BI’s new rule.
Total dollar debts in the publicly listed telecommunications firm stood at $1.6 billion from its total debts of around Rp 30 trillion ($2.5 billion), according to Hasnul.
“This is a very good policy because we, in the private sector, are frequently busy with micro-level business management and overlook macroeconomic development,” he said. “We’re ready to adjust to the new rule.” (Satria Sambijantoro)
