Muhammad Al Azhari – The country's chief economic minister and a top banking official are apparently at odds about the risks that private sector debt, which is due to roll over this year, will pose to developing countries' currencies, and ultimately, their foreign exchange reserves.
Speaking about her trip to the preliminary Group of 20 countries meeting of finance ministers over the weekend, Finance Minister Sri Mulyani Indrawati said many speakers at the meeting were worried that corporations in emerging countries, including Indonesia, would likely face difficulties rolling over their debt this year as international lenders were likely to refuse to extend their loans due to tight liquidity issues.
Corporate-debt rollover risk was one point that was discussed under the wider topic of pressures on countries capital accounts – the net result of public and private international investment flowing in and out of a country. A country's capital account includes foreign direct investment, portfolio investment – such as changes in holdings of stocks and bonds – and other investments, such as changes in holdings in loans, bank accounts and currencies.
"Banks in the United States and Europe are currently sick, they are likely unable to give new lending, so when there is maturing debt, they will want it to be repaid" instead of rolling the debt over the coming years, Sri Mulyani said, adding that this condition has made it difficult for firms to extend their debt or issue new debt papers.
Indonesia's total corporate debt set to mature this year stood at $17.4 billion, Made Sukada, a director at the directorate of economics research and monetary policy at Bank Indonesia, the central bank, said in February.
If corporate outflows were not replaced with new money, this would likely cause a further depreciation in developing countries' currencies, Sri Mulyani said. Local industries could also be begging the government to bail them out, which would put pressure further on the country's financial coffers.
To defend either collapse in the currency, developing countries' central banks would have to dig further into their foreign exchange reserves.
However, BI deputy governor Hartadi Sarwono disagreed that foreign banks would be unwilling to lend to Indonesian companies. "The possibility of rolling over foreign loans in the private sector remains high, because from the total foreign loans, about 31 percent are from parent companies and affiliates," Hartadi told the Jakarta Globe. "Meanwhile, 57 percent of the firms that borrow the money from offshore are also foreign firms, or joint companies.
"From our previous experience, this did not cause any pressure on the foreign exchange reserves," Hartadi said, adding that the outflow of dollars from the payment of foreign corporate debts could be neutralized by inflows from the government or the private sector. "So this did not cause the deficit in our balance of payments to widen."
The country's foreign reserves fell to $51.6 billion at end-2008 from $57.1 billion at the end of the third quarter as Bank Indonesia defended the rupiah, which fell under pressure from extreme capital outflows, central bank data showed last week.
Sri Mulyani also said that US Treasury Secretary Timothy Geithner made a strong commitment that the United States would reinvigorate its banking sector.