B

ank Indonesia (BI) may set rules to limit the exposure of local private companies to foreign debt due to global economic uncertainties, according to the central bank’s top official.

“It’s become increasingly urgent to think of prudent guidelines so that we do not have to limit borrowers. We need to build prudent guidelines so that companies that do not have revenue streams in foreign currencies do not borrow in [foreign currencies],” BI Governor Darmin Nasution said on Sunday.

“If firms export their output and earn in [foreign exchange], it wont be a problem to borrow in forex. If their revenue is in rupiah and their output is not for export, it’s crucial not to be too daring and borrow [in foreign currencies].”

Lower costs associated with a weaker US dollar have prompted many local companies to raise more dollar-denominated debts, either through bank loans or through global bond issuances.

However, Darmin said, the risk of foreign borrowing was currently elevated, especially for companies that lacked adequate foreign currency revenue streams given uncertainties in the world’s largest economies, including in the European Union and the US. “The global economy is so fragile.”

Indonesia’s economic resilience, despite the recent slowdown, has lured overseas creditors to offer debt to the nation’s private sector.

Deeming the issue “urgent”, Darmin said guidelines might be issued by the central bank or the government as a regulation or new policy.

“We need to find protection mechanisms for times of volatility. We don’t know what will happen in Europe. We don’t want firms borrowing in forex to have difficulties in paying out their maturing liabilities,” he added.

Despite a recent increase in locally held foreign debt, Darmin said all indicators still showed “safe” signs.

Indonesia’s debt-to-GDP (gross domestic product) ratio is currently about 26 percent, well below an average level of over 70 percent in Europe and the US. The nation’s outstanding external debt was US$214.5 billion as of April, $85.9 billion of which was owed by the private sector and $128.6 billion by government bond holders.

In the second quarter, private companies borrowed $6.3 billion in new debt, up from $4.4 billion in the first quarter. Total new foreign debt in the first half of 2011 reached $10.7 billion, up from $6 billion in the same period last year and up from $4 billion in the first half of 2009.

BI expressed its concerns in a recent meeting with Coordinating Economic Minister Hatta Rajasa and Finance Minister Agus Martowardojo, Darmin said.

Hatta and Agus have urged state-owned and private firms without good fundamentals to refrain from foreign borrowing, while not discussing any plans for regulations or ground rules.

“If there’s not a good mechanism, we suggest avoiding foreign borrowing because it is individually and nationally dangerous,” Agus said.

“We should closely watch companies’ debt management so that there will be no mismatch. We don’t want a repeat of the 1997-1998 Asian financial crisis,” Hatta said.

During the Asian financial crisis, the rupiah rapidly depreciated from about Rp 2,000 to over Rp 16,000 per dollar, leading to corporate debt defaults and straining the state budget, as government debt repayments were affected.