The Indonesian corporate sector will likely be well placed in 2012 to weather potentially greater volatility or a weaker Indonesian rupiah, said Standard & Poor's in a report today.
The report, titled The Indonesian Corporate Sector Has The Strength To Weather A Potentially Weaker Rupiah This Year, is based on Standard & Poor's study of the 50 largest Indonesian corporations listed on the Indonesia Stock Exchange.
"The conditions today are unlike those during the Asian financial crisis, and, to a smaller extent, the 2008-2009 global financial crisis, when a rapidly declining rupiah hastened corporate defaults," said Standard & Poor's credit analyst Xavier Jean.
"Rising foreign direct investments and foreign exchange reserves accumulation would theoretically support the value of Indonesia 's rupiah. But the currency could become more volatile if global confidence and economic conditions deteriorate."
The use of foreign-currency debt in Indonesian companies is significantly lower than during the Asian crisis and the 2008-2009 global financial crisis.
"As Indonesia 's domestic capital markets deepen further in 2012, we expect domestic bonds and bank loans to become more widely available, reducing reliance on foreign funding," Jean said. Positive growth prospects in Indonesia in 2012 will also support companies' cash flows and provide an adequate cushion against potential rupiah weaknesses.
Different sectors will fare differently if the rupiah suddenly depreciates, according to the report. The airline, telecom, and heavy manufacturing sectors would be most exposed to a decline in the rupiah.
"If you sell your products in Indonesian rupiah but your expenses and debts are denominated in U.S. dollars, for example, a large and sudden weakness in local currency can rapidly squeeze your cash flows," Mr. Jean said.
Indonesian companies are still likely to be willing to take on foreign exchange risks in 2012.
"Are Indonesian corporations becoming more conservative? Declining foreign debt levels since 2007 seem to indicate so," Jean said.
"Still, low interest rates for U.S.-dollar funding and associated cost savings will remain attractive in 2012. This could undercut the improvements the corporate sector has made to reduce foreign-exchange risk."
Disclosure: No position at the stock mentioned above.
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