INDONESIA’S central bank yesterday ordered private firms to hedge more of their foreign debt to limit the risks of offshore borrowings and reduce pressure on the rupiah in Southeast Asia’s biggest economy.
Bank Indonesia (BI) issued the regulations, effective January 1, as a proactive move ahead of an expected increase in United States interest rates next year.
“We’re facing risks and a crisis could come sooner than we thought,” central bank governor Agus Martowardojo told company executives.
The central bank said companies would be required to hedge 20 per cent of their external debt due within three to six months that has not been covered by their current foreign-exchange assets.
In the three months prior to their debt reaching maturity, firms must maintain that level of hedging, said Juda Agung, executive director of the department of economic and monetary policy at Bank Indonesia (BI).
The hedging requirement will rise to 25 per cent in 2016.
BI is also requiring private firms to have liquidity ratios of 50 per cent next year and 70 per cent in 2016 three months prior to maturity.
In addition, beginning from 2016, firms borrowing from abroad must have a credit rating of at least “BB”.
However, companies with loans meant for infrastructure or refinancing old loans would be exempt from this requirement on minimum credit rating, BI said.
The central bank’s announcement came within hours of the US Federal Reserve formally ending its massive bond-buying programme.
US interest rates are expected to start rising some time next year, and this could cause outflows from emerging markets such as Indonesia.
Agus said capital outflow “generally happens if we’re perceived as reactive instead of proactive. We must be seen as proactive, that we know our problems and we know what to do”.
Offshore borrowing by Indonesia’s private sector, amounting to US$156.2 billion (RM513 billion) at end-August, accounted for more than half of the country’s total foreign debt. The private total has almost doubled since 2010.
The rupiah has been one of Asia’s most volatile currencies this year, raising the risk of currency mismatch for firms that borrow in foreign currencies and get their income in rupiah.
The growth in Indonesia’s broad private debt over the past decade has been slower than in some other regional countries such as South Korea and Thailand.
Still, BI is worried about the debt-service ratio, given export receipts cover just around half the interest and principal payments on the country’s foreign debt each quarter. Reuters