RI firms better placed to weather rupiah volatility: S&P

Top rating agency Standard & Poor’s (S&P) sees potential for greater volatility or a weaker rupiah this year, but says Indonesia’s corporate sector is better placed than in previous crises to weather such shocks.

Indonesian companies’ use of foreign-currency debt is “significantly lower” than during the 1997 Asian financial crisis and 2008 global financial crisis, when a rapidly declining rupiah hastened corporate defaults, according to S&P’s latest report, titled “The Indonesian Corporate Sector Has the Strength to Weather a Potentially Weaker Rupiah This Year”.

“Rising foreign direct investments and an accumulation of foreign exchange reserves would theoretically support the value of Indonesia’s rupiah,” S&P’s credit analyst Xavier Jean said in a press statement distributed on Tuesday after the report’s release.

“But the currency could become more volatile if global confidence and economic conditions deteriorate,” he added, citing airlines, telecommunications, and heavy manufacturing as the sectors most vulnerable to a weakening rupiah.

The rupiah has appreciated more than 1 percent so far this year, being at Rp 8,943 per US dollar on Tuesday at 4:34 p.m. Jakarta time, Bloomberg data showed.

Lower costs associated with a weaker US dollar have encouraged many local companies to raise more dollar-denominated debts, either through bank loans or global bond issuances. But there are concerns that the recent eurozone debt crisis could pressure the rupiah to weaken as investors dump risky assets and shift to safer instruments like the US dollar.

Bank Indonesia (BI) Governor Darmin Nasution and Finance Minister Agus Martowardojo have called for private and state-owned companies to minimize global bond issuances, especially if their businesses do not involve transactions in foreign currencies, fearing that a high exposure to foreign debts could create mismatch.

 “If you sell your products in the Indonesian rupiah but your expenses and debts are denominated in US dollars, for example, a large and sudden weakness in local currency can rapidly squeeze your cash flow,” Jean said.

US dollar-denominated notes are a new favorite for companies seeking funding as recent upgrades from Fitch Ratings and Moody’s Investors Service to investment grade — not yet from S&P — are expected to lower borrowing costs across the board.

Coal mining giant PT Berau Coal Energy Tbk. (BRAU), the nation’s fourth-largest lender by assets, PT Bank Negara Indonesia Tbk. (BBNI) and state-owned cement maker PT Semen Gresik Tbk. (SMGR) are among the firms expressing interest in launching US dollar-denominated bonds, respectively worth up to US$500 million.

“We are careful with the dollar now; for preemptive purposes, we should at least own dollars at a low price,” BNI president director Gatot Suwondo said.

The S&P’s report, which is based on the agency’s study of Indonesia’s 50 top companies listed on the Indonesia Stock Exchange (IDX), also found that Indonesian companies were still likely to be willing to take on foreign-exchange risks in 2012, though to a lesser degree compared to several years ago.

“Declining debt levels since 2007 seem to indicate [a more conservative stance in foreign currency debts],” Jean said.