Indonesia corporates relatively shielded from the FED

After years of complacency, emerging markets seem to have finally gotten scared of the FED. Indonesia is no exception, as could not be otherwise having been one of the countries most affected by the FED tapering back in 2013. In fact, Indonesian 10-year sovereign yield s have surged 151 bps from 6.32% at end-2017 to 7.83 % as of 3 r d August. Furthermore, the Indonesian Rupiah (IDR) is among the worst performing currencies in e merging Asia, with a year-to-date depreciation of 6.17%. As a response to capital outflows, Bank Indonesia (BI) has resorted to 100 basis points of rate hikes so far. While the situation may look worrisome, we argue that the problem should not be overestimated. First and foremost, Indonesia’s fundamentals are better today than back in 2013 during the tapering scare. Not only is th e fiscal situation more benign (which offers more space to absorb shocks), the current account deficit is also narrower at -2% of GDP . Second, Indonesia is not very leveraged (total debt t o GDP is among the lowest in Asia ) and the share of foreign currency denominated debt to total public debt, while still relevant, has declined. Third, excessive rupiah weakness usually does not sustain if the central bank s hows decisive action and allows market forces to dictate the bottom, which is shown in recent moves made by the BI. Beyond the small macroeconomic imbalances, Indonesian firms are in a relatively good financial health, at least on average. S ome conclusions are drawn from our report on the financial health of ASEAN corporates below . For debt , Indonesian corporates are generally less leveraged than their global peers and also on a deleveraging trend. More specifically, total liabilities-to- common equity decreased from 144% in 2015 to 132% in 2017, which is much lower than the average of their global peers (182%). On the revenue side, the operating income of Indonesian corporates has been growing at the quickest pace among ASEAN peers. In that regard, even though the repayment ability of Indonesian corporates is not as good as that of other corporates in ASEAN, they have experienced the most relevant improvement in the last two years. Another positi ve is Indonesian corporates have increased return on capital both comparing to ASEAN and global average. Overall, the sectors with the most improvement are energy (lower leverage, higher repayment ability and better income) and consumer (higher capex and ROC). Another important sector, namely materials and metals, has also improved but the leverage has remained flat. All in all, although the overall situation for emerging market financing has clearly worsened, Indonesia should not be the most obvious target as in 2013. Not only are its macroeconomic fundamentals better but also its corporates financial health.