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Finance minister warns Indonesian companies of default risk

Jakarta Globe - October 2, 2019

Jakarta – Finance Minister Sri Mulyani Indrawati has called on Indonesian companies to exercise caution and be wary of the risk of default amid potential for a global economic slowdown.

A slowdown would force companies to change their revenue assumptions and business plans, as they may no longer be profitable.

"They must increase caution, because corporate activities may not generate revenue streams as expected," Sri Mulyani said on Tuesday, as quoted by Antara.

Her call came after global credit ratings agency Moody's Investors Service warned that a risk of default by companies may plague banks in Indonesia and the rest of the Asia-Pacific region.

Failure by companies to repay their loans would have dire consequences for the country's banking system, which in the 1998 and 2008 financial crises had to rely on government bailouts to stay afloat.

"In 2019-20... corporates' earnings and debt repayment capacity could weaken as a consequence of growing trade and geopolitical tensions that weigh increasingly on the global economy and supply chains amid already slowing growth," Moody's wrote in the report.

The agency singled out companies in India and Indonesia as most prone to the impact of earning shocks, which in turn, would reduce their ability to repay their debts to banks.

"While the ratio of corporate debt to [gross domestic product] is relatively lower in India and Indonesia, the distribution of debt is skewed toward highly leveraged corporate borrowers with low-interest coverage ratios, and this has resulted in high loan default rates that have plagued Indian banks since 2011 and large stocks of restructured loans in Indonesia," Moody's wrote.

Sri Mulyani said the Ministry of Finance would continue to monitor state-owned enterprises to prevent default.

The minister said the risk of default may also expose the state budget, which has been used to support various state-owned enterprises in carrying out Indonesia's infrastructure development.

"We continue to make observations and keep in touch with the Ministry of State-Owned Enterprises in this regard," she said.

Sri Mulyani said the assessment by Moody's was an early warning, which corporate decisionmakers should consider, to increase their awareness of changes in economic conditions.

Source: https://jakartaglobe.id/context/finance-minister-warns-indonesian-companies-of-default-risk