Moody's Report: Indonesian Banks Can Weather Currency Volatility
In a new report US-based rating agency Moody's Investors Service says that Indonesian banks are strong enough to cope with ongoing currency volatility and sluggish economic growth. Although sharp rupiah depreciation does imply risks, "Indonesian banks seem manageable", Moody's Vice President and Senior Credit Officer Srikanth Vadlamani said, "as over 70 percent of local banks' debt constitutes related-party debt, implying minimal risks to the domestic banking system".
So far this year, the Indonesian rupiah has depreciated 9.5 percent against the US dollar on the back of looming higher US interest rates (triggering capital outflows from emerging markets, including Indonesia) and Indonesia's slowing economy as well as the still high current account deficit (expected slightly above 2 percent of gross domestic product at the year-end).
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank IndonesiaSevere rupiah depreciation is a major concern for local companies' foreign debt positions. Based on the latest data from the central bank, Indonesia’s total foreign debt stood at USD $303.7 billion in July 2015, consisting of USD $134.5 billion public sector foreign debt and USD $169.2 billion private sector foreign debt. Private sector foreign debt is a concern as there are still hundreds of local companies that need to comply with Bank Indonesia's hedging requirements. About a quarter of private sector external debt comprises of short-term debt. Meanwhile, Indonesia’s private sector foreign debt grew rapidly over the past decade. It rose three-fold between end-2005 and 2014 (and doubled over the past five years), surpassing the level of public sector external debt in 2012.
Moody's said that while debt in sectors with a natural hedge (such as mining) or debt owed by state-controlled entities (backed by the government) is relatively safe, (private sector) debt outside these categories is vulnerable and could lead to a deterioration in local banks' corporate loan quality. However, Moody's believes that local Indonesian banks, including the small-sized ones, are strong enough to weather such risks due to their strong buffers.
The report also noted that in case Indonesia's small-sized lenders face severe financial turmoil, the country's Deposit Insurance Agency (LPS) - equipped with about USD $3.7 billion of reserves for bank resolutions - is well capitalized to support the domestic banking system.
Indonesia's Foreign Debt - 2015:
| 2015 | Public Debt |
Private Debt | Total Debt |
| January | $135.7 billion | $162.9 billion | $298.6 billion |
| February | $134.8 billion | $164.1 billion | $298.9 billion |
| March | $132.8 billion | $165.3 billion | $298.1 billion |
| April | $132.9 billion | $167.2 billion | $300.1 billion |
| May | $133.5 billion | $168.7 billion | $302.3 billion |
| June | $134.6 billion | $169.7 billion | $304.3 billion |
| July | $134.5 billion | $169.2 billion | $303.7 billion |
Indonesia's Foreign Debt - 2014:
| 2014 | Public Debt |
Private Debt | Total Debt |
| January | $127.9 billion | $141.4 billion | $269.3 billion |
| February | $129.0 billion | $143.1 billion | $272.1 billion |
| March | $130.5 billion | $146.0 billion | $276.5 billion |
| April | $131.0 billion | $145.6 billion | $276.6 billion |
| May | $132.2 billion | $151.5 billion | $283.7 billion |
| June | $131.7 billion | $153.2 billion | $284.9 billion |
| July | $134.2 billion | $156.4 billion | $290.6 billion |
| August | $134.2 billion | $156.2 billion | $290.4 billion |
| September | $132.9 billion | $159.3 billion | $292.3 billion |
| October | $133.2 billion | $161.3 billion | $294.5 billion |
| November | $133.9 billion | $160.5 billion | $294.4 billion |
| December | $129.7 billion | $162.8 billion | $292.6 billion |
Source: Bank Indonesia