Sarah Davison, Hong Kong – Concern is mounting that Indonesian corporations will soon hit a debt wall despite Thursday's rate cut, worsening the outlook for the nation once credited with Southeast Asia's most credible currency policy.
'It's hard to get good information but I think there is a generalised expectation that there is going to be a fair amount of pain in the corporate sector in Indonesia," said Lynn Exton, fixed income analyst at Merrill Lynch.
Indonesia is grabbing more and more attention as a potential debt crisis candidate from among the victims of Southeast Asia's financial markets meltdown.
And, following in Thailand's footsteps, Indonesia's debt crisis was seen as being private, not public, in nature.
Indonesia's vulnerability to Southeast Asia's economic meltdown is ironic given its initial immunity from currency contagion ignited by sudden devaluations in Thailand and the Philippines in early July.
For days, the Indonesian rupiah remained steady, with the central bank widening its trading band and carefully avoiding the havoc spreading through the region. But soon rates were rising and the rupiah falling as the crisis spread throughout Southeast Asia and beyond.
High interest rates to support the rupiah caught Indonesian corporates by surprise, forcing them to hedge foreign denominated liabilities after years of inaction thanks to the government's policy of steady rupiah depreciation.
Indonesia won further recognition for sound economic management on Thursday, when it lifted restrictions on foreign investment in its stock market and cut interest rates to counter persistent market uncertainty.
But the country still remains among the region's most vulnerable to an economic meltdown because its unhedged, foreign denominated debt position is so huge.
Specific information is hard to come by in a region renowned for poor disclosure, but the Indonesian corporates are believed to have borrowed far more in foreign denominated currency than those in the Philippines and Malaysia.
In an odd twist of events, foreign investors appear to feel reasonably confident about the Philippines, once the sick man of Asia but now something of a safe haven thanks to its experience with debt restructuring.
Malaysia does not seem to have that much foreign denominated debt outstanding, said Exton.
And the situation in Thailand, recognised as the most vulnerable Southeast Asian economy and the catalyst for the currency havoc now roiling the entire region, has become much clearer after the International Monetary Fund's involvement.
'I would say Indonesia is in much worse shape because the corporate sector there has probably been generally unhedged in terms of FX (foreign exchange) exposure, and probably has been quite hit by the combination of the devaluation of the currency and very tight liquidity in the financial sector," said Exton.
Timing has now become the issue, with some foreign analysts worrying about another external shock that could send corporates waiting for rates to drop helter-skelter into bankruptcy.
'I think it'll happen soon," said Eric Nickerson, currency analyst at Bank of America. "The worrying thing is the extent to which markets remain volatile, people will not hedge...which means it'll linger. Any other shock to the system, maybe an external one (such as a U.S. rate increase), and they'll get whammoed again."