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Private sector warned over
rising foreign borrowing

Finance Minister Agus Martowardojo has warned private companies to properly manage their foreign debts, which have increased substantially.

“The debt-service ratio of the private sector’s foreign debts has grown significantly large. The ratio has reached around 30 percent of export earnings,” Agus said as quoted by Antara during the Annual
Report Awards (ARA) event in Jakarta on Tuesday night.

The private sector’s debt-service ratio is far above that of the government’s, which decreased to 24 percent in 2012 from around 90 percent at the beginning of 2000.

Agus said that the ideal debt-service ratio should be below 30 percent of export earnings.

“Private sector companies must maintain prudential principles. They should not borrow large amounts in foreign currencies if most of their income is in rupiah,” Agus said.

Previously, the Asian Development Bank (ADB) had warned emerging East Asian bond markets, including traders in Indonesia, to brace for further shocks and volatility as investment flows to the region had surged to almost US$6 trillion.

Corporate bonds alone reached $2 trillion, or 15.2 percent higher than a year ago, while government debt securities of $3 trillion are 5.5 percent higher.

The report said the corporate sector had outpaced growth in government bond markets as falling yields and tighter bank lending pushed companies to tap the capital markets.

The ADB said bond yields in China, Indonesia and Vietnam picked up in July and August after falling in the first six months of the year, signaling higher market risk sentiment among investors.

A highly volatile market situation might trigger massive capital outflows from the region, which could in turn jeopardize the country’s financial markets leading to a sharp drop in the rupiah.

Should the rupiah sharply depreciate against the US dollar, then private companies that have high amounts of debt in dollars but do not have dollar-based income will face trouble in paying their debt obligations.

Indonesia suffered a massive crisis in 1998 triggered by the private sector’s inability to pay its foreign debts due to the combination of growing private loans from abroad and a weakening rupiah.

The latest data from the Finance Ministry’s debt management office shows that private sector foreign debt levels have grown to a worrying extent as they are now almost on the same scale as the government’s foreign debt.

In December 2011, the government’s foreign-debt level reached $118.64 billion while that of the private sector was at $106.73 billion.

As of April 2012, the government’s foreign debts were recorded at $121.51 billion while the private sector had foreign debts of $113.48 billion.

The data also shows that while the government debt has been fluctuating, the private sector’s foreign debts consistently increase on a monthly basis.

The Finance Ministry’s debt management office interim head Robert Pakpahan said that the private sector’s foreign debts consisted of debts owed by banks and by non-bank institutions.

Robert said that banks’ foreign debt stood at $19.60 billion while non-bank private companies’ foreign debt had reached $ 93.87 billion as of April 2012.

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