Indonesia’s Subsidy Switch Swat
Indonesian shares continued their double-digit upswing despite President Jokowi’s fuel subsidy savings transfer to other big social spending and the rupiah slide toward 13,000/ dollar raising offshore corporate debt servicing doubts. However an external sovereign bond was well-received and the long battered hydrocarbons industry may be poised for reconsideration with a makeover of state-owned Pertamina in the works. The government will cap the budget deficit at 2 percent of GDP as new education, health and infrastructure programs are rolled out, and the current account gap should improve with lower oil imports and ramped up domestic capacity. Energy producers have been prominent in overseas borrowing and officials recently ordered better hedging and collateralization procedures as the $125 billion sum now tops international reserves and only one-fifth of rated companies had booked currency protection according to S&P. Dollar loans have also been taken onshore and may be 5 percent of private debt, and defaulters’ workout record has been checkered since the Asian financial crisis, with the 2013 Bumi Resources saga a case study in bad faith negotiations as UK anchor creditors were shunted. In local bonds non-residents also continue to chop exposure with currency risk and market interference from the central bank’s positions and guidelines. Malaysia has endured similar exodus with $4 billion in monthly outflows as oil exports swoon in tandem with a combined 135 percent of GDP level of corporate and household debt. External borrowing there likewise is greater than reserves and despite subsidy elimination public debt/GDP is over 50 percent. The current account may soon turn to deficit as government-linked companies have been instructed to pare outward investment. A development board credit facility is reportedly under renegotiation after terms proved too onerous and the merger between the two main Islamic banking leaders has hit the skids with the darker economic outlook.
South Korea’s corporate and household debts at respective 100 percent and 80 percent of GDP by BIS statistics also raise flags. The ten leading chaebol account for most of the former as the central bank and financial services regulator urge restructuring of the latter at 1.5 times annual income as a stability priority. The president’s first budget contained provisions for refinancing but further relief may be forthcoming in a combination of voluntary and compulsory schemes under discussion. Stocks continue to sag with governance and earnings woes at the major conglomerates and lingering won-yen disparity as the latest Abenomics QE round quashes the Japanese unit. The Korean central bank has intervened for “smoothing” purposes, but geopolitics has taken its own toll as Northern blustering and an alleged cyber-attack have offset overtures toward resuming dialogue. Japanese retail and institutional investors remain net sellers of foreign bonds and have shunned Asian paper in Uridashi issuance, which came to a $15 billion total again in 2014, dominated by the Brazilian real, Mexican peso and Turkish lira in the EM space in a partial switch from heavy South African rand and Russian ruble.
