The central bank of Indonesia has announced a rule requiring the country’s exporters to repatriate export proceeds.
In its Weekly Credit Outlook, Moody's Investors Service says the new regulation is credit negative for major coal and palm-oil exporters in Indonesia, the world’s top exporter of thermal coal and palm oil, potentially reducing their access to cross-border debt financing.
Affected issuers include thermal coal exporters Adaro (Ba1 stable), Bumi Resources (Ba3 stable), Indika (B1 positive), and Berau Coal Energy (B1 stable), and crude palm oil (CPO) exporters Golden-Agri Resources (Ba3 stable) and Bakrie Sumatera Plantations (Caa1 negative).
The rule affects approximately $30 billion in export revenue held offshore and will have a similar aim and effect as the January 2010 closing of a withholding-tax loophole for cross-border debt.1
Similar to the closure of the withholding-tax loophole, the Indonesian government’s aim with the latest regulation is to reduce evasion while also lowering the country’s reliance on foreign capital.
The rule will hit hardest Indonesia’s marginal, unlisted and unrated players, which are most likely to evade taxes, rather than its more prominent listed and rated issuers.
The central bank wants to repatriate earnings as a precautionary measure in line with national practices of other southeast and south Asian countries to control inflows and outflows of so-called “hot money” from portfolio investors and speculators, says Moody's.
However, like the closing of discrepancies in withholding taxes, the regulation will disadvantage foreign creditors and make them less willing to invest in Indonesian corporate debt.
Moving a debtor’s revenues from a safe haven such as Singaporean banks to Indonesia raises emerging-market risk if the Indonesian government was ever to declare a moratorium on foreign-currency coupon payments.
The rule also may alter the structure of priority in the use of export revenues, and thereby potentially subordinate foreign creditors. Such risks of structural subordination weaken the quality of an issuer’s credit by placing obstacles to accessing the operating cash flows of Indonesian debtors in the event of a default.
Like China, Indonesia has weak corporate governance with respect to protecting foreign creditors’ claims, and both countries have tried to prevent onshore operating entities from guaranteeing the foreign debt of their offshore, special-purpose vehicles used in raising funds.
The government wants this change to deepen its financial markets and provide a foreign-exchange buffer if sovereign debt woes elsewhere lead to a repeat of the global financial crisis. The regulation will redirect borrowing to less-efficient, more-expensive domestic institutions and put upward pressure on Indonesia’s currency. A stronger Indonesian rupiah will marginally hurt Indonesian exporters’ competitiveness against Australian coal or Malaysian CPO producers.
"Unless a financial crisis recurs and threatens the Indonesian currency, we do not expect the government to compound its recent regulation with additional rules requiring exporters to reduce their foreign debt," says Moodys. "Such a de jure limitation would reinforce the impending de facto limits on foreign-debt exposure and add to a currency mismatch between the issuers’ domestic debt and their export proceeds in US dollars. This removal of a natural currency hedge will become more problematic if the dollar continues to weaken against the Indonesian currency."
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