An onshore dollar liquidity crunch has sent Indonesian corporates offshore for US dollar funding. Foreign banks interested in gaining exposure to the rapidly growing market are happy to oblige but mostly to the larger, better known corporates. Less well known names are also funding in rupiah and swapping into dollars.
“[US dollar] pricing in Indonesia is quite unique right now in that you have very good names, very good credit profiles, cash flow, but they can't really borrow in the market because of the scarcity,” said a senior loans banker in Singapore. “The mid caps still command high pricing because the foreign banks don't know them as well and for the local banks who know them the dollar cost of funds has just shot through the roof, so when you look at those margins... because of the dollar scarcity, they're borrowing in rupiah.”
The pricing differential between rupiah borrowing and borrowing dollars offshore is about 1% and 1.5%, and onshore dollar borrowing costs an extra 1% to 1.5% more than that because of the scarcity, said the banker.
“I don’t think it's prohibitive, I think it's still affordable,” said a Hong Kong-based loans banker about borrowing dollars onshore. “There's a differential of up to 1% in some cases I think; lower for better known names of around 50 basis points.”
The reason for the lack of dollars onshore is that banks that take deposits in dollars have not been lending those dollars out. The strength of the dollar against the rupiah has encouraged them to hold dollars and the margins they make on dollar lending are not as high as on rupiah lending, making the latter more lucrative.
“Local banks, while still taking on dollar deposits, have not been very active in the dollar loan market here,” said a Jakarta-based loans banker. “I think they’re starting to get around to that but liquidity available for dollar funding onshore will still be less than the demand that is required so I think that's the reason why the rated companies have gone offshore.”
However, going offshore to borrow in US dollars is not an option open to all credits.
“Mid caps, I don’t see a lot of them going offshore,” he said. “The ones that have been leading are the ones that are publicly listed or part of a larger group – they can actually raise funding offshore.”
“What we have seen for mid caps more recently is to go and access the rupiah market, we've seen a few more actions in the rupiah market and not just for working capital but some of them go through the shorter end as well,” said the banker. “So we'd expect a lot more activity on that side because of the differential but also because it's becoming more economically viable to raise the funding in local currency.”
While local banks are reluctant to lend in US dollars, borrowers are still able to source funding in rupiah.
“Interest rates have come down because of actions taken by Bank Indonesia but there’s also more liquidity in local currency than in dollars onshore and I think the bigger banks, particularly the local banks are more active on the local currency side,” he said. “We've seen some people funding in rupiah and swapping it into US dollars as and when the swap points are favourable for them.”
Additional pressure on liquidity is coming from foreign fund managers who have taken dollars out of Indonesia and rebalanced them to gain exposure to the growing economic recovery in the US, according to the Jakarta based banker.
And the ongoing weakness in the rupiah against the dollar has also made the carry trade less attractive, encouraging those with dollars to hold onto them and those seeking funding to do so in rupiah. On August 31 last year one US dollar was buying IDR8,527 but as Asiamoney PLUS went to press it was worth IDR9,197 - a deterioration in the rupiah of almost 8%.