​Bank Indonesia requires Corporate Borrowers of External Debt to enhance Risk Management - Bank Sentral Republik Indonesia
Navigate Up
Sign In
July 11, 2020

No. 16/80/DKom

Jakarta, 30th October 2014. Bank Indonesia socialised a regulation concerning Prudential Principles for the Management of Non-Bank Corporate External Debt to corporate borrowers of foreign loans. In front of the corporate debtors in attendance, the Governor of Bank Indonesia, Agus D.W. Martowardojo, confirmed that the regulation was issued to enable non-bank corporations to mitigate risk emerging from external debt activity, thereby contributing optimally to the national economy without triggering macroeconomic instability. The regulation aims to prohibit, impede or restrict external debt activity but foster enhanced corporate risk management of such debt, in particular currency risk, liquidity risk and overleverage risk. The corporate sector shall still be permitted to seek external debt but only when adhering to prudential principles.

The amount of private external debt has continued to spiral, even surpassing that of the government. Over the past decade, total private sector external debt has increased three-fold from US$50.6 billion at the end of 2005 to US$156.2 billion at the end of August this year, accounting for 53.8% of total external debt in Indonesia. A Bank Indonesia review shows that private external debt is vulnerable to a number of risks, primarily currency risk, liquidity risk and overleverage risk. Currency risk is high because the majority of private external debt is utilised to finance domestic-oriented companies that generate earnings in rupiah but repay their external debt in a foreign currency. Vulnerability to currency risk is also increasing due to a lack of hedging instruments in the non-bank corporate sector. Liquidity risk is also escalating as the value and share of short-term private external debt increases. Meanwhile, a mounting debt-to-income ratio is indicative of an increase in overleverage risk.

Risk inherent with private external debt is intensifying because the economic outlook is replete with uncertainty. Global liquidity is projected to tighten, with higher interest rates on the horizon as advanced countries taper off accommodative monetary policy, especially in the United States. Simultaneously, the economies of emerging market countries, as leading trade partners of Indonesia, are projected to continue moderating and export commodity prices on the international market remain low. Such conditions have the potential to exacerbate the repayment burden of external debt and therefore undermine repayment capacity.

To confront the aforementioned risks, Bank Indonesia requires non-bank corporations holding external debt to fulfil three requirements, namely a minimum hedging ratio in order to mitigate currency risk, a minimum forex liquidity ratio to mitigate liquidity risk and a minimum credit rating to mitigate overleverage risk. The three requirements, however, are not applicable to trade debt. In brief, the provisions of the regulation are as follows:

  1. For the period from 1st January 2015 to 31st December 2015, non-bank corporations holding external debt shall be required to hedge their foreign exchange against the rupiah with a ratio of 20%. Thereafter, from 1st January 2016 the ratio shall increase to 25%. The ratio shall be applicable to the negative balance between foreign currency assets and foreign currency liabilities with a maturity period of up to three months and those that shall mature between three and six months.
  2. For the period from 1st January – 31st December 2015, non-bank corporations holding external debt shall be required to provide foreign currency assets totalling a minimum of 50% of the value of foreign currency liabilities with a maturity period of up to three months. Thereafter, from 1st January 2016 the liquidity ratio shall be increased to 70%.
  3. Non-bank corporations engaged in external debt activities shall be required to have a credit rating of no less than BB or equivalent as issued by an authorised Rating Agency. The credit rating shall be in the form of a valid rating of the corporation and/or security pursuant to the type and maturity period of the loan. This requirement shall be effective for external debt signed or issued after 1st January 2016, but not applicable to refinancing or bilateral/multilateral external debt used to finance infrastructure projects.


Bank Indonesia will also issue a regulation concerning reporting procedures for flows of foreign exchange as well as reporting the application of prudential principles for the management of non-bank corporate external debt along with the rules of implementation.

Jakarta, 30th October 2014
Department of Communication

Tirta Segara
Executive Director

 

Note:

  • Foreign currency assets are current assets denominated in a foreign currency consisting of cash, demand deposits, savings, term deposits, marketable securities as well as receivables originating from forward, swap and/or option transactions.
  • Foreign currency liabilities are current liabilities denominated in a foreign currency that must be settled, including liabilities originating from forward, swap and/or option transactions.
Tags:  

Survey

Is this article give you useful information?
Rate this article:
Comment:
Show Left Panel