Non-Bank Corporations are expected to adhere to prudential principal in managing their external debts to foreign investors or companies. Learn more regarding such prudential principles
In less than ten years, the total amount of External Debt in private sector has tripled, from USD 50.6 billion at the end of 2005 to USD 156.2 billion at the end of August 2014, it is equal to 53.8% of Indonesia’s total External Debt. A study from Bank Indonesia shows that private External Debt is vulnerable to several risks, such as currency risk, liquidity risk, and over leverage risk. Currency risk is high because most of the private external debts are used to pay domestic business activitiesthat generate revenue in Rupiah but they have to pay back in a foreign currency.
The vulnerability of currency risk could be seen in early 2015, when Indonesia’s currency fall rapidly against US Dollar; made this situation as the worst since 1998 financial crisis. This condition makes a lot of private companies who have external debt in foreign currency had trouble paying the debts. It was because the companies generate revenues in Rupiah and they have to pay the debts in foreign currency. That condition causes the increasing burden of external debts and the declining capacity to pay it.
Therefore, the issuance of Bank Indonesia Regulation No. 16/21/PBI/2014 on the Implementation of Prudential Principles in Managing External Debt of the Non-Bank Corporation and renewed with Bank Indonesia Regulation No. 18/4/PBI/2016 dated 22 April 2016 (“BI Regulation”) aimed at risk mitigation posed by the private external debt, primarily for Non-Bank Corporations, which in recent years has been rapidly increased.
DEFINITION AND MANAGEMENT OF EXTERNAL DEBTS
The BI Regulation defines External Debt as Resident debt to Non-Residents in foreign currency and/or the Rupiah, including financing based on sharia principles. Subject under BI Regulation is all Non-Bank Corporations hold External Debt in Foreign Currency. However, the calculation of foreign currency liabilities also includes liabilities to Resident.
Implementation of Prudential Principles under BI Regulation includes the fulfillment of:
- Minimum Hedging Ratio,
- Minimum Liquidity Ratio, and
- Minimum Credit Rating.
The elaboration is as follows:
- Minimum Hedging Ratio
The minimum hedging ratio is set at 25% of:
- The negative balance between Foreign Currency Assets and Foreign Currency Liabilities with a maturity period up to three months ahead from the end of the quarter period.
Expressed mathematically as:
Hedging Ratio = [Foreign Currency Assets – Foreign Currency Liabilities up to 3 months] X 25%
- The negative balance between Foreign Currency Assets and Foreign Currency Liabilities with a maturity period more than three up to six months ahead from the end of the quarter period.
Expressed mathematically as:
Hedging Ratio = [Foreign Currency Assets – Foreign Currency Liabilities ≥ 3 until 6 months] X 25%
Foreign currency assets consist of cash, demand deposits, savings, term deposits, marketable securities as well as receivables originating from forward, swap and/or option transactions. Marketable securities are securities that can readily be sold/converted for cash, with an observable market price and includes in a category of securities that are calculated by fair value through profit or loss, available for sale, and hold to maturity with a residual maturity up to six months. Both debt instruments and equity instruments are included in Marketable securities.
Assets that are taken into account for off balance sheet are only forward, swap and/or option transactions conducted prior to reporting quarter. In other words, forward, swap and/or option transactions conducted within reporting quarter are not counted as Foreign Exchange Assets because those transactions are used to fulfill the minimum Hedging Ratio.
Foreign Currency Assets included in this Regulation is only liquid assets, while Receivables contained an uncertainty in its realization. Foreign Currency Liabilities are current liabilities denominated in a foreign currency that must be settled or paid, including liabilities originating from forward, swap and/or option transactions. In other words, Foreign Currency Liabilities towards Residents are also included in Foreign Currency Liabilities. If there is no negative balance, Non-Bank Corporations are not required to do hedging activity.
The Liquidity Ratio is a ratio between total Foreign Currency Assets and Foreign currency liabilities that will mature within three months after the end of the quarter.
Expressed mathematically as:
Minimum Liquidity Ratio = [Foreign Currency Liabilities mature less than 3 months/Foreign Currency Liability mature less than 3 months]X100%
Credit rating is an assessment conducted by a rating agency to illustrate financial conditions of credit worthiness of the corporation. Under this BI Regulation, Non-Bank Corporations who intend to do External Debt activities must fulfill Credit Rating of no less than equivalent to BB issued by an authorized Rating Agency. This obligation applies to External Debts signed or issued since January 1, 2016, but it is not applicable for refinancing External Debt and External Debts obtained from international institutions (bilateral/multilateral) related to finance infrastructure projects.
Non-Bank Corporations violating the obligation to fulfill prudential principles are subjected to administrative sanctions in the form of written warning. In addition, Bank Indonesia shall submit information regarding the imposition of administrative sanctions to relevant parties, including:
- The relevant international creditors;
- The Ministry of State Enterprises, for state-owned enterprises corporations;
- The Ministry of Finance, c.q. Directorate-General for Taxation;
- The Financial Services Authority (OJK); and
- The Indonesia Stock Exchange, for public corporation listed on the Indonesia Stock Exchange.
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