Moody's warns of rupiah depreciation and its impact on Indonesian developers' USD debt
On June 9, Moody's Investors Service warned that Indonesia is facing a heightened risk of rupiah depreciation due to rising foreign capital outflows – a credit negative for rated Indonesian developers as most of their debt is in US dollars. Most developers' financial hedges have reduced, leaving them particularly vulnerable to a weakening rupiah, according to a new report by Moody's Investors Service.
The rupiah has held relatively stable over the past 12-18 months. In recent days though, foreign capital outflow resulting from elevated global financial market uncertainty is signaling a rising risk of currency depreciation, although the situation is nowhere are serious as it was during the Asian Financial Crisis, Global Financial Crisis or 2015, when the US dollar strengthened. The US dollar is expected to strengthen further as the US Federal Reserve raises the US Federal Funds Rate further this year, and drains US dollar liquidity via quantitative tightening.
"This presents a risk for Indonesian property developers, because the principal amounts and interest expense of their US dollar debt will increase in rupiah terms, thereby weakening their ability to service these obligations. More than two-thirds of their aggregated debt is denominated in US dollars, while their revenue is earned in rupiah," says Rachel Chua, a Moody's Vice President and Senior Analyst.
The effect of rupiah depreciation will be more severe for developers today than two years ago because the unhedged portion of their US dollar borrowings has increased. Among the six Moody's-rated developers, two have unwound all or almost all their hedges, while one maintains an unhedged US dollar debt profile. In addition, rated developers' hedges do not fully protect them. If the rupiah breaches 17,000 against the US dollar, the hedges would protect only around 38% of their aggregated US dollar debt, down from 47% two years ago.
"That said, most developers will have sufficient liquidity to cover the higher interest expense driven by a weaker rupiah, except for Agung Podomoro Land Tbk (P.T.) (Caa1 negative). Many have increased their cash holdings, strengthened operating cash flows, or reduced their interest costs following debt exchanges over the past couple of years," Moody's says.
Among Singapore entities with rupiah exposure are Lippo Mall Indonesia Retail Trust and First REIT.