Photo by Moody's Rating Agency

JAKARTA (TheInsiderStories) – Moody’s Investors Service says that Indonesia’s (Baa2 stable) broadly sound economic fundamentals and strengthened policy framework are containing credit risks associated with the Rupiah’s recent decline, but additional currency weakness would have economy-wide credit-negative effects, especially given the government and corporate sector’s reliance on external funding.

“In recent years, policymakers have established a track record of credible monetary policy focused on price stability, and implemented hedging rules that reduce companies’ exposure to currency fluctuations. But the rapid decline in Indonesia’s reserves highlights the finite nature of buffers,” says Joy Rankothge, a Moody’s Vice President and Senior Analyst.

“While the rupiah’s decline to date has a limited credit impact, further currency declines could have economy-wide credit-negative effects. Additional depreciation in the rupiah would push up debt and debt-servicing costs, exacerbate external vulnerability, and add to inflationary pressures. Weaker corporate credit profiles and bank
asset quality could also dampen investment and economic growth,” says Rankothge.

The rupiah has depreciated by more than 9% since February, albeit by less than some other currencies. The currency depreciation has inflated Indonesia’s import bill, which is also being pushed up by capital and raw materials imports for government-led infrastructure projects and higher oil prices.

During the first half of 2018, Indonesia’s current account deficit increased to 2.6% of GDP, from 1.4% in January-June 2017.
In addition, foreign reserves have been under pressure due to central bank intervention to support the rupiah, shrinking to $111.7 billion in August 2018 from a recent peak of $125.1 billion in January.

While reserves still adequately cover Indonesia’s external payment needs, the drawdown has been rapid. Relatively moderate exposure to foreign currency corporate debt, very strong capital buffers, and
macroprudential rules contain the credit impact of the weaker Rupiah on banks.

But more rate hikes could weigh on corporate debt servicing capacity and bank asset quality. Moody’s notes that four rated companies are vulnerable to further rupiah depreciation, while there would be limited credit-negative effect for others.

Lippo Karawaci Tbk (P.T.), Alam Sutera Realty Tbk (P.T.), MNC Investama Tbk (P.T.) and Gajah Tunggal Tbk (P.T.) are most vulnerable to rupiah weakness as their debt is largely denominated in dollars, while their cash flow is in rupiah. Most other rated companies have risk mitigants that would limit the credit impact of continued rupiah depreciation.

Additional currency weakness would likely challenge some rated infrastructure companies, although dollar revenues would contain the credit impact for most.

Perusahaan Listrik Negara (P.T.)’s debt is mostly denominated in dollars, whereas its revenue is largely in Rupiah. In case of need, Moody’s expects that Indonesia’s government would support the company.

Elsewhere, Moody’s analysis suggests that power projects will generally be resilient to the decline in the Rupiah, although this will depend on their tariff and cost structures.

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