Plunging Currencies Plague Asian Firms; Weak Currencies Make it More Costly to Pay Foreign Debt

September 2, 2013, 12:15 a.m. ET

Plunging Currencies Plague Asian Firms

Weak Currencies Make it More Costly to Pay Foreign Debt

SEAN MCLAIN IN NEW DELHI And I MADE SENTANA IN JAKARTA

Companies across Asia are facing a debt-repayment crunch as plunging local currencies make it more costly to repay foreign loans, a situation that is exacerbating stresses on the region’s economies. Asian companies took out sizable foreign loans in recent years as the U.S. Federal Reserve kept interest rates low and printed money. For firms in nations like India and Indonesia, rates on U.S.-denominated debt were more attractive than local borrowing costs.But the current exodus of capital from emerging markets, amid expectations the Fed will end its period of extraordinary monetary stimulus later this year, has changed that equation.

Foreign funds are pulling out of Asian bonds and other assets amid expectations U.S. rates will rise further. That is pushing currencies in Asia sharply lower and raising the cost of repaying U.S.-denominated borrowings.

The situation in India is particularly unnerving. Indian companies have a combined $100 billion of unhedged foreign debt, according to data from Indian ratings firm Crisil, an affiliate of Standard & Poor’s. A nearly 19% fall in the rupee since May has increased the cost of repaying those debts in local currency terms.

“The depreciation of the rupee is causing a lot of pain among some big Indian corporates,” said D.K. Joshi, an economist at Crisil. “Those who have not hedged their foreign debt will struggle to repay it.”

Reliance Communications532712.BY +0.97% one of the nation’s largest telecoms companies, has $3.83 billion in unhedged foreign debt, with around $200 million due to be repaid this year.

Nitin Soni, a director with Fitch Ratings in India, said Reliance will be able to repay the debt. But the company, which makes most of its revenues in rupees, will face sharply higher costs related to the loan, curtailing its business expansion, he said.

A Reliance executive said the company borrowed overseas to avoid paying 12% interest rates in India and didn’t hedge the loans as doing so would have been too expensive. The executive said Reliance has adequate overseas revenues to repay the debt.

Companies in Indonesia also are exposed. PT IndosatISAT.JK -1.21% one of the nation’s largest telecom firms, has almost $1 billion in offshore debt, which it took out to fund equipment purchases at a time when U.S. rates were much lower than Indonesia’s.

As foreign funds poured into Indonesian stocks and bonds, pushing up the value of the rupiah currency, these loans looked like a good bet.

But the rupiah has lost almost 12% against the U.S. dollar this year, increasing the cost of debt, only about a quarter of which is hedged.

“Obviously, the currency factor is a concern,” said Stefan Carlsson, Indosat’s chief financial officer. Indosat may book currency-related losses but will be able to repay its borrowings, he said.

Few observers expect a re-run of the 1997-98 Asian crisis, when companies and banks across the region folded as they were unable to repay foreign loans amid a currency crisis.

A higher portion of Asia’s corporate debt is in local currencies today than back then. HSBC estimates that Indonesia’s public and private external debt was 45% of gross domestic product in 2012, much lower than 90% before the Asian crisis.

Asia’s central banks also have much larger stockpiles of foreign reserves, which they can use to defend currencies.

Still, there are worrying signs of stress. Many Asian countries are running current-account deficits, meaning they import more than they export.

The deficits were financed by capital inflows into bonds, stocks and loans. As foreign capital flows back to developed economies, those countries with the largest deficits, like India and Indonesia, are getting punished by investors.

HSBC says the size of many Asian nations’ foreign reserves don’t look so ample relative to current-account deficits and short-term external debt. This ratio, known as foreign exchange cover, has deteriorated sharply for many countries.

Currencies of Asian countries that run current-account surpluses or smaller deficits haven’t been hit as hard. But Malaysia’s ringgit has come under increasing pressure in recent months as its current-account surplus shrinks.

Higher financing costs have hurt Malaysian companies looking to expand at the wrong time.

Tan Kay Yen, chief financial officer of Green Packet Bhd., a Malaysian Internet service provider, said the company took a five-year, $51 million loan last year to expand its 4G data network. Depreciation in the Malaysian ringgit increased borrowing costs by 5%, widening the firm’s net loss in the second quarter, he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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