MANAGING FOREIGN EXCHANGE DEBT OF PRIVATE SECTOR

Recently, there is a polemic over sharp increase of foreign debt of private sectors. There is concern that if private sector’s foreign debt (foreign exchanged debt) is not well managed, in the medium and long terms, it will become a time bomb to the national economy.

One of the reasons blamed for increase in portion of private sector’s foreign exchanged debt owed to foreign creditors is high cost of domestic debt. Private business operators who wish to borrow credit facility from the banks are facing high interest rate reaching 10-12%. High bank interest rate is blamed as a problem, so business operators expand their business using foreign loan.

If they borrow money from overseas banks or financial institutions, the interest rate is low or at 1-3%. It is unsurprising if from time to time, foreign debt of private sector continues to increase and is now recorded at USD 123.27 billion.

It is difficult to avoid private sector’s debt as cost of foreign debt is cheaper. This is the cause of increase of private sector’s foreign debt.

Formerly, the Finance Ministry had concern over private debt ratio that has reached 30%. Private debt in November 2012 reaches USD 123.27 billion. Private debt is higher than government’s debt which is at USD 120.64 billion.

Finance Minister, Agus Martowardojo, planned to bring this matter to the Coordination Forum on Financial System Stability (FKSSK) at the end of December this year. Moreover, foreign private corporations who have holding companies abroad receive many financing offers through their holding companies. The government is expected to re-evaluate this so that private sector’s foreign debt will be shifted to domestic debt.

It is logical if many people expect the government to immediately control private sector’s foreign exchange debt so it will not become a big problem in the future. Maybe, it will be more tolerable if ratio of foreign exchange debt to Indonesia’s GDP is only up to 30%. Ratio of government’s debt to GDP currently reaches 23%, and this ratio is considered very satisfactory, controllable, and safe.

Debt ratio below 30% is intended to maintain monetary stability. Because currently, export is slowing down. While, acceleration is experienced by import due to high consumption and lack in availability. If maturity profile of private sector’s foreign exchanged debt occurs within the same or nearby period so a huge amount of foreign exchange is needed, it is potential to threaten the Rupiah currency. This is because private debtors seek as much foreign exchange as possible to repay their foreign debts.

The 1997 monetary crisis in Indonesia was due accumulation of private foreign exchange debt maturing at the same time, while availability of foreign exchange in the domestic money market was limited. As a consequence, Rupiah exchange rate dropped drastically reaching Rp 17,000 per USD.

Private sector may borrow money from foreign creditors under certain conditions. Firstly, demand in the domestic market is already limited. Secondly, foreign exchange loan should be applied to support business activities, and not for consumptive uses. Thirdly, debtor’s business activities are more export-oriented rather than domestic market-oriented. Therefore, there is a natural hedging where source of fund is derived from foreign exchange and payment as well as from overseas foreign exchange from export activities.

Fourthly, maximum limit of overseas foreign exchange borrowing which is related to company’s actual ability, domestic and global economic prospect, and ability to produce profit from business activities. With the above-mentioned considerations, it can be conclude that private sector’s foreign exchange debt is not prohibited, but should be managed properly by private sectors or by government trough Bank Indonesia and the Finance Ministry.

So far, the ones recorded at the central or stated-owned banks are government’s debts through ministries/institutions and state-owned enterprises. After the monetary crisis, the government formed a Foreign Debt Policy Control Team (TPKULN) whose main task is to record government’s debts in detail consisting of value, maturity date, tenor, currency, and foreign creditor institution.

With such a recording, the government can coordinate with Bank Indonesia in preparing foreign exchange demand in sufficient amount when government’s foreign exchange debt is approaching its maturity date. Because its was well-planned, it did not cause weakening of Rupiah exchange rate drastically so that monetary stability is well maintained.

In the future, every request for foreign exchange debt by private companies must be reported and registered to the authority without exception. Government and Bank Indonesia are the authorities having full right to manage and control foreign exchange debt traffic within the government or private corporations.

The government and the central bank must also continually encourage private business operators to seek financing from the domestic market. Financial instrument, like bonds, must continually be developed as the main channel for private business operators in acquiring cheap fund domestically. There must also be other financial instruments created so that deepening of domestic financial market can be created.

Consequently, with an increasing variety of domestic financial instruments, it will encourage private business operators to seek domestic sources of fund and encourage exporters to deposit their funds in the form of “trustee” in domestic bank. Unwillingness of owner of fund derived from export to deposit foreign exchange revenue from export in local banks is because local banks did not provide attractive financial benefit.

With the issuance of trustee services, it is expected that exporters will deposit their export proceed in the trustee managed by some large banks who receive mandate from Bank Indonesia to manage trustee services.

Ultimately, domestic US Dollar demand will be sufficient so that stability of Rupiah exchange rate can be better maintained. Price of foreign exchange fund in the domestic financial market is also lower so that business operators need not seek funding from overseas creditor. (E)

Business News - December 28, 2012