Indonesian stocks face risks from debt spike as rupiah weakens

Fund managers and foreign investors are bailing out of Indonesian stocks as worries grow that a perfect storm of a sliding rupiah, record levels of foreign debt and rising import costs could bring some businesses to their knees.
Making matters worse, the benefits of a falling rupiah to Indonesia's major agricultural and mineral exports have been eclipsed by a steep decline in commodity prices.
The biggest concern for investors is a tripling of private foreign debt since the 2007 financial crisis. The fear is that sustained currency weakness will start ramping up the debt burden and servicing costs, crunching corporate earnings in the process.
Moreover, the rupiah's 5 percent fall against the dollar this year on top of the 2 percent slide in 2014 means most offshore investors are sitting on losses on their original investments. That confluence of factors could trigger a wave of foreign capital outflows from the stock market where foreigners account for 40 percent of equity transactions.
Citing currency weakness, Edward Lubis, president director of Bahana TWC Investment which has 28 trillion rupiah ($2.15 billion) under management, said: "We are reducing our position on equity. We are on neutral now, and we are less optimistic than we were a month ago."
That pessimism is borne out by the Jakarta stock index, which though up 3.4 percent this year in rupiah terms, is still among the worst performers in the region in dollar terms.
The rupiah's decline has taken it to around 13,000 per dollar, hurting profits for foreigners in a market that is already trading expensively at 17 times earnings.
Norico Gaman, head of research at BNI Securities, estimates the bulk of foreign equities money came in at an average rate of 12,200 rupiah per dollar, meaning they are already sitting on currency losses of 6.5 percent.
The main worry, analysts say, is that the relentless rise of foreign debt could be the potential flash point for investors ploughing money into equities of Southeast Asia's biggest economy.
"Even if exports are helped by the weaker rupiah, it would not be enough support to the market," said Harry Su, head of research at Bahana Securities. "There are more factors that will drag the market down, such as foreign debt and import costs."