Economy Issue : When Indonesia's Good Times End. Indonesia's economy is now growing as it slowest pace in almost three years.
IN THE late 1990s Indonesia’s banking sector collapsed after the rupiah lost about 85% of its value against the dollar, leading to a spate of loan defaults by borrowers unable to service their foreign debts. The rupiah’s recent decline—the currency has dropped by 14% against the dollar since the start of the year—and a big current-account deficit have revived uncomfortable memories of that period.
In real terms GDP expanded at an annual rate of 5.8% in the second quarter, down from a recent high of 6.8%. Since May Bank Indonesia, the central bank, has lifted its main interest rate by 125 basis points to 7%, the highest since June 2009, in an effort to reverse the rupiah’s slide.
When the currency was stable it made sense for firms to borrow in dollars even if their revenues were in rupiah, says Ivan Tan of Standard & Poor’s, a ratings agency. Slower growth, currency depreciation and higher interest rates will “start to stretch” companies’ ability to repay their debts.
Firms with dollar revenues, which are naturally hedged against exchange-rate risk, may not be as safe as they once were. Many of Indonesia’s biggest exporters are in the natural-resources sector, selling things like palm oil, rubber or minerals. International prices for such commodities have tumbled recently as growth has slowed in China and other large importing countries.
This is not the 1990s again, however. Indonesia’s banks have high capital ratios—an average of 16.9% in May for the country’s commercial lenders. Credit growth has raced along at an annual rate of about 20% in recent years, but this has been financed mostly by deposits rather than flightier wholesale borrowing. Non-performing loans are equivalent to only 2% of total lending.
Corporate balance-sheets are widely accepted to be stronger than they were during the Asian crisis. Stricter regulation means that lenders are better at managing their own exposure to exchange-rate risk, too. Fitch, another ratings agency, notes that banks’ net open positions (the difference between the foreign assets and foreign liabilities on their balance-sheets) average only 2% of their capital, well within the 20% maximum permitted at the end of each business day.
Even so, change is coming to the industry. Indonesia’s banks have been among the world’s most profitable in recent years. As the economy slows, and banks put aside more provisions for bad loans, the years of effortlessly high returns are ending.
In real terms GDP expanded at an annual rate of 5.8% in the second quarter, down from a recent high of 6.8%. Since May Bank Indonesia, the central bank, has lifted its main interest rate by 125 basis points to 7%, the highest since June 2009, in an effort to reverse the rupiah’s slide.
When the currency was stable it made sense for firms to borrow in dollars even if their revenues were in rupiah, says Ivan Tan of Standard & Poor’s, a ratings agency. Slower growth, currency depreciation and higher interest rates will “start to stretch” companies’ ability to repay their debts.
Firms with dollar revenues, which are naturally hedged against exchange-rate risk, may not be as safe as they once were. Many of Indonesia’s biggest exporters are in the natural-resources sector, selling things like palm oil, rubber or minerals. International prices for such commodities have tumbled recently as growth has slowed in China and other large importing countries.
This is not the 1990s again, however. Indonesia’s banks have high capital ratios—an average of 16.9% in May for the country’s commercial lenders. Credit growth has raced along at an annual rate of about 20% in recent years, but this has been financed mostly by deposits rather than flightier wholesale borrowing. Non-performing loans are equivalent to only 2% of total lending.
Corporate balance-sheets are widely accepted to be stronger than they were during the Asian crisis. Stricter regulation means that lenders are better at managing their own exposure to exchange-rate risk, too. Fitch, another ratings agency, notes that banks’ net open positions (the difference between the foreign assets and foreign liabilities on their balance-sheets) average only 2% of their capital, well within the 20% maximum permitted at the end of each business day.
Even so, change is coming to the industry. Indonesia’s banks have been among the world’s most profitable in recent years. As the economy slows, and banks put aside more provisions for bad loans, the years of effortlessly high returns are ending.
(article source : The Economist - http://www.economist.com )
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world finance
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