Bank Indonesia rules that came into effect in January require corporates to hedge 20% of their net foreign liabilities that mature at the end of each quarter or in the next 3-6 months.
This will increase to 25% in 2016. Companies can choose between hedging onshore or offshore, and export-oriented corporations with financial statements in dollars are exempted from hedging liability.
Additionally, companies are now required to maintain a minimum liquidity ratio of 50% in foreign currency assets, this will also increase to 70% in 2016.
A third rule that will come into effect in 2016, would bar companies with ratings below BB by an international rating agency from accessing external debt, unless the money will be used for infrastructure projects.
Firms will also have to file a compliance-based activities report every three months updating Bank Indonesia with their latest dollar assets and liabilities. Those with a net gap of more than $100,000 between their dollar liabilities and assets must then file a report to the central bank about their foreign-debt management plan.
Borrowers have been quick to respond by issuing less foreign debt. Indonesia's private sector external debt growth slowed to 13.6% on the year in January against 14.2% in December 2014, according to figures released by Bank Indonesia on March 18. The private sector external debt position at the end of January 2015 was mainly concentrated in financial, manufacturing, mining, and electricity, gas and water supply sectors, the central bank said.
This has led certain market participants to cry foul. They say corporates are being discouraged from accessing foreign debt markets, which are crucial to the country’s growth. The minimum rating rule has also come under fire, as this will make it almost impossible for the country’s high yield corporate issuers to reach the foreign debt market.
Uncertainties loom
But the better-safe-than-sorry approach Bank Indonesia has taken is the right one. The last thing the country needs is a ballooning of unhedged short term dollar liabilities that could put its currency under severe pressure, in a less dramatic repeat of its 1998 currency crisis.
Several economic uncertainties are already buffeting the rupiah. The currency hit a 17 year low against the dollar earlier in March, as markets started to price in a rate hike by the Federal Reserve sometime in the next two quarters.
And although the country’s current account balance has benefitted from a decline in oil prices, its higher reliance on commodity prices and already steep levels of foreign currency corporate debt means its external financing position is weaker than neighbours such as Thailand and the Philippines.
This was outlined in a Moody’s report from March 23 that placed Indonesia’s external vulnerability index highest among the three. Indonesia’s external vulnerability index stood at 61.3% compared with 15.7% for Philippines and 44.6% for Thailand.
And as the taper tantrum of 2013 showed, Indonesia is vulnerable to a sudden change of investor sentiment.
It is in this context that the country’s central bank is encouraging its corporates to be more prudent with their foreign borrowing. Rather than criticised, the bank should be applauded. It has recognised where it is weak and taken steps to protect the country and its corporations. The cost of hedging offshore debt may be high, but the cost of not doing so could be far higher.