Asifma warns on Indonesia’s hedging rules

Author: Ashley Lee | Published: 3 Dec 2014
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Bank Indonesia released rules requiring the country's corporates to hedge their external commercial borrowings in late October. But more clarity is needed, according to Asia Securities Industry and Financial Markets Association’s (Asifma) Vijay Chander.

The October 30 regulations require companies to hold a certain amount of capital before their external commercial borrowings come due. They also restrict access to external commercial borrowings to companies rated above BB-.

Most have had mixed reactions to these rules. They demonstrate that Indonesia is conscious of the risks of foreign currency borrowing – particularly amid a low-interest environment driven by quantitative easing programmes in the US, Japan and possibly the EU – but they may also limit borrowing from SMEs.

Industry groups are now considering their next steps. "These are potentially live issues for which we’ll be working with our members – in this case, through the Credit Markets Committee," said Vijay Chander, executive director of fixed income Asifma.


  • Indonesia’s October 30 hedging rules have prompted mixed reactions;
  • It’s unclear how Bank Indonesia will supervise and enforce its new liquidity requirement or account for volatile market exchange rates;
  • Blanket restrictions on companies rated below BB accessing external commercial borrowings may challenge restructurings;
  • The restrictions may also hinder the growth of the private debt market, which is usually used by unrated corporates

Liquidity rules

According to the regulations, non-bank corporates holding external debt must hedge 20% of their foreign exchange against the rupiah beginning on January 1 2015 – in less than a month. On January 1 2016 that ratio will then increase to 25%. That will apply to foreign currency assets and liabilities with maturities of up to three months and those that will mature between three to six months.

The rules are stricter for debt that will mature within three months. Throughout the 2015 calendar year, non-bank corporates holding external debt must provide foreign currency assets that total 50% of the value of foreign currency liabilities maturing within three months. And from January 1 2016 that ratio will increase to 70%.

That will obviously pose challenges for corporates. But it may also be difficult for Bank Indonesia to supervise and enforce, especially given exchange rate fluctuations.

"It’s unclear how this will be monitored and reported, as well as what tools Bank Indonesia will have to track it," said Chander. "Based on market exchange rates, exposure can start varying, and that’s a concern as well."

Blanket restriction on ratings below BB

By far the most critical issue that Asifma is focused on is the blanket restriction on borrowings by companies rated below BB. "At one level it’s laudable because it enforces some discipline around external commercial borrowings, but I don’t know that imposing this requirement is the best way to go about that," said Chander.

While there is an argument that Indonesia is hoping to develop its local currency market, local currency debt markets in many countries have limited liquidity. And sources have also been concerned about different standards between local and foreign ratings agencies.

"These are potentially live issues for which we’ll be working with our members"

There are exemptions that allow companies to refinance their external commercial borrowings on better terms than where they borrowed at but those aren’t defined.

It’s unclear whether this will affect restructuring of Indonesian high-yield bonds. There have been a number of heavily-scrutinised defaults in the past few months – particularly by companies owned by the Bakrie family – and it’s unclear whether issuers will be able to refinance their external commercial borrowings on worse terms.

Private debt market

Chander noted that there is a large private debt market that traditionally relied on funding from a mix of banks – primarily boutique investment banks, private equity houses and hedge funds. "That entire market could be adversely impacted by this ruling," he said.

Right now the private debt market isn’t necessarily active because commodity prices are low and precious metals miners aren’t accessing the market.

"But for the most part, they’re unrated and won’t be able to access the capital markets in the future," he added.

See also

Indonesia’s new hedging rules explained

Indonesia and India regulators limit HY supply

Indonesia HY covenant trends explained