It’s no secret that Indonesian corporates have developed a habit of looking abroad for their funding needs, and have piled on foreign currency debt as a result.
Since 2005, private external debt increased from $50.6bn to $156.2bn at the end of August 2014, or 53.8% of the total external debt in Indonesia, according to Bank Indonesia.
But overseas debt markets may no longer be the best option, as an improving US economic outlook has sent the dollar skyrocketing against the Indonesian rupiah. The figures are stark. During the last 12 months the rupiah has depreciated roughly 12% against the US dollar.
As repaying foreign debt becomes costlier for Indonesian companies and the dollar continues its upward move, it’s about time Indonesia made some changes at home to bring its corporates back to the much more affordable — and safer — rupiah market.
Driving demand
But with the Indonesian corporate bond market already limited to only a few issuers and constrained by a small investor pool, it is little wonder that Indonesian names have chosen to do their fundraising abroad.
If Indonesia is serious about reducing its foreign currency liabilities, it needs to take action to improve the rupiah bond market.
One of its first actions must be to improve liquidity. The corporate rupiah market is not very liquid as there are only a handful of investor groups — mainly banks, state-owned-enterprise pension funds and private company pension funds. And while there are no official figures, analysts put foreign ownership of corporate bonds at a measly 10%.
To boost investor confidence and eventually draw more foreign investors, Indonesia needs to reform its hostile insolvency and bankruptcy policies.
The Bakrie Telecom debt restructuring is a prime example of how unfriendly the system is to investors. At the end of last year Bakrie said that investors in its dollar bond could not could vote on the restructuring plan as they were not considered direct creditors due to the bonds’ issuance via an offshore special purpose vehicle. This argument was upheld by the courts.
With very little investor protection, it’s no wonder foreign investment in corporate rupiah bond space is weak — even though there no limits on foreign investment in Indonesia’s corporate bond market.
The domestic market also suffers from a lack of bond issuance by lower rated corporates, an unfortunate side effect of rules placed on pension funds. State owned pension funds are limited to investing in names with local ratings of A- or above. Broadening the investment remit of these funds would bring new names into the bond market.
Some market participants are starting to predict a pushback of the first US rate rise to next year. So there is no better time than now for Bank Indonesia to take steps to improve the local bond market. Many analysts are predicting that when rates do rise, global markets are likely to suffer a second taper tantrum. Indonesia, with its double deficits, is likely to bear the brunt of the fallout again.
Bank Indonesia would be better off taking a few pre-emptive measures now than face cleaning up a bigger mess later.