Indonesia Inc. Feels Sting as Rupiah Languishes; Companies Review Business Plans With Currency Near Four-Year Low

Updated September 29, 2013, 1:26 p.m. ET

Indonesia Inc. Feels Sting as Rupiah Languishes

Companies Review Business Plans With Currency Near Four-Year Low

BEN OTTO

JAKARTA, Indonesia—The rupiah currency has missed out on a rebound in emerging markets since the U.S. Federal Reserve decided this month to keep the pace of its bond buying steady—and that’s bad news for Indonesia’s corporate sector. Currencies from the Brazilian real to the Indian rupee have moved higher since the Fed surprised markets Sept. 18 by not reducing its $85-billion-a-month bond-buying stimulus attempts. The decision to stand pat pushed down U.S. Treasury yields and made emerging-market assets relatively more attractive.But the rupiah has remained under pressure, trading late Friday at 11,506 to the U.S. dollar, down 0.6% since the Fed announcement, while the Indian rupee, for instance, has gained 1.5%.

Traders and analysts say the rupiah’s persistent weakness reflects concerns about inflation, slowing growth and a record trade deficit that hit $2.3 billion in July, making the country reliant on capital inflows.

Efforts to stabilize the currency through two interest-rate increases in recent weeks have failed to turn things around. And the central bank’s efforts to prop up the currency through selling U.S. dollars aggressively, reducing foreign-exchange coverage to five months of imports, has intensified market jitters. “Indonesia now has the thinnest foreign-exchange reserve coverage” across Asia, said Koon How Heng, a foreign-exchange strategist at Credit Suisse.

The currency is languishing near a four-year low, exerting huge pressures on Indonesia Inc.

Bosowa Corp., with operations that include cement making and vehicle distribution, is typical of Indonesian companies that are hurting: It pays for machinery and other inputs in foreign currencies but sells its products in rupiah. “With the rupiah at 10,000 or weaker, all companies in our position are reviewing their expansion and business plans,” said Erwin Aksa, Bosowa’s chief executive.

The company is delaying plans to build new factories on Java island for at least six months because of the grim outlook, Mr. Aksa said.

Bosowa borrowed $310 million to fund a plant expansion in South Sulawesi. But higher import costs of machinery and parts have pushed the company to ask its bankers to increase the loan—something that would have been “automatic” a year ago but is still under review, Mr. Aksa said.

The Fed’s expansive monetary policies since 2009 benefited countries such as Indonesia. Policy makers kept monetary policy loose as capital flooded in, searching for higher returns as U.S. rates were heading toward zero.

China’s demand for Indonesia’s commodity exports also fueled growth, which has averaged more than 6% in recent years.

Anticipation the Fed will soon begin winding down its stimulus attempts, coupled with slower Chinese demand, has hit Indonesia hard. Growth is expected to fall below 6% this year for the first time since 2009.

The rupiah is down more than 16% since the start of 2013, making it one of the world’s worst-performing major currencies. The Indian rupee has lost 12% in the same period.

Indonesian companies and wealthy individuals could be deciding to hold more assets offshore in dollars—as is typical in times of nervousness—exacerbating pressure on the rupiah, analysts said.

Higher interest rates, an attempt by the central bank to choke off imports, reduce inflationary pressures and lure back short-term capital, have added further pressures.

Vera Eve Lim, chief financial officer for Bank Danamon, one of the country’s biggest private lenders, said her bank and others are “selectively tightening” credit.

Many importers have been attempting to pass higher costs to consumers. Mitra Adiperkasa, MAPI.JK -1.59% a retail company that runs local franchises of global brands such as Starbucks and Banana Republic, said it has raised prices by 10% at some stores, anticipating a rupiah level of 12,000 against the dollar. Likewise, Toyota Astra Motors, which sells vehicles in Indonesia from Toyota Motor Corp.7203.TO -2.17% of Japan, plans to adjust its prices to account for the weak currency.

Some businesses are less fortunate.

Thousands of small producers of soybean-based foods—a protein staple for many poor Indonesians—briefly shut down this month as they were unable to pass on soaring costs of imported soybeans to customers.

Airlines also have suffered because of the inflated costs of paying for imported jet fuel.

Citilink Indonesia, the budget arm of flagship carrier Garuda Indonesia,GIAA.JK 0.00% says the current rupiah level means it will add only eight new Airbus A320s to its fleet next year, instead of 10 as planned.

Garuda, which has raised ticket prices by 5%, said it could review plans to expand its fleet by more than 50% by 2016 if the rupiah depreciates further.

Lion Air, a budget carrier that recently ordered hundreds of planes from Boeing Co.BA -0.54% and the Airbus unit of European Aeronautic Defence & Space Co.,EAD.FR +0.91% is looking into diverting some of the new aircraft to subsidiaries in Thailand and Malaysia.

Few, if any, observers expect a meltdown in Indonesia akin to the Asian financial crisis of the late 1990s, when the rupiah lost more than 80% of its value against the U.S. dollar. On the whole, companies’ debt levels and exposure to foreign-currency borrowing are lower than back then.

There are some signs of stabilization. Foreigners, who were net sellers of local stocks in June through August, turned to net buyers this month. The yield on the benchmark 10-year rupiah government bond dropped below 8% last week after trading at just below 9% earlier this month. But that is still much higher than a yield of 5% earlier this year and there is a sense the easy-money era is over.

Finance Minister Chatib Basri said last week that the current rupiah level marks a return to average growth—before a temporary rise in commodity prices and the Fed’s quantitative easing sparked huge inflows to emerging markets. “We have to realize that the past four years have not been a normal situation,” he said. “Now we are back to normal.”