Moody's warns of corporate foreign debt

JAKARTA. Rating agency Moody's has given a warning about Indonesian corporate debt, which relies heavily on foreign sources, while choosing not to downgrade the sovereign rating of the country.

Moody's kept the sovereign rating at Baa3 with a stable outlook as government and corporate debts were at 26,8% and 23,7% of gross domestic product ( GDP ), respectively. The level of government debt is moderate, as the average debt of other countries with the same rating is around 42%.

"However, almost half of the debt is denominated in foreign currencies, and overseas investors hold more than 38 percent of local government bonds," managing director Atsi Seth said in Jakarta on Wednesday.

Compared to 2010, Indonesian corporate debt to GDP has increased by 11,3 percentage points from 12,4% to 23,7%, and most of the additional debts were foreign currency denominated.

While the overall leverage remained modest and non-performing loans stand at around 3%, Atsi explained, the rising cost of servicing foreign currency-denominated corporate debt and weaker dollar income from commodities had contributed to defaults in recent years.

"Further weakening in the rupiah or slowing in growth could spur defaults and weigh on bank asset quality. For instance, telecommunications company Trikomsel defaulted on a Singapore dollar bond in 2015 as debt servicing requirements ballooned due to the rupiah depreciation," he said.

As for commodity based companies, Atsi continued, the risk of falling commodity prices which affect dollar income had reduced their natural hedge against foreign exchange volatility last year. Thus, coal miner Berau Coal Energy Tbk defaulted, after Bumi Resources Tbk registered a default in 2014. (Anton Hermansyah)

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