S&P sees another tough year for Indonesia’s corporate sector

An Indonesian woman uses her cellphone near trade monitor in Indonesia Stock Exchange in Jakarta, Indonesia, 18 January 2016. The Jakarta Composite Index is expected to be under pressure on 18 January, Indonesia Stock Market Index decreased 49.95 points or 1.10 per cent to 4474.03 from 4523.98 in the previous trading session following the 14 January terrorist attack in Jakarta and the selloff continues in Asia. EPA

KUALA LUMPUR: Standard & Poor's Ratings Services, which has negative outlooks or CreditWatch placements with negative implications on eight Indonesian companies, expects another tough year for Indonesia's corporate sector 

The ratings agency said on Tuesday the negative outlook for the eight companies, highest since 2009, reflects the rising trend over the past six months, leaving the sector exposed to further rating downgrades in 2016.
 
S&P said this was about 30% of the companies it rated in Indonesia, compared with about 20% as of June 30, 2015, and less than 10% as of June 30, 2014. 

Out of the 10 companies that currently have a positive rating outlook, the outlooks on eight are linked to the positive outlook on the sovereign credit rating on Indonesia. The high share of negative rating outlooks indicates its expectation that unfavorable credit trends will persist for the next 12 months at least. 

S&P credit analyst Xavier Jean said: "Subdued consumer sentiment will continue to mute revenue growth and margin improvements for Indonesian companies, as refinancing requirements keep growing. 

"At the same time, companies will continue to spend and, in some cases, undertake shareholder-friendly initiatives despite tougher operating conditions. Therefore, liquidity and refinancing are becoming increasingly central to credit analysis compared with 12-18 months ago."

S&P said most of its negative rating actions on Indonesian companies until the first half of 2015 were because of more structural factors, including high capital investment and rising debt in persistently weak operating conditions. However, a growing number of negative rating actions taken since then have been related to companies' liquidity. 

Companies across sectors are feeling the pressure. Among the eight companies with a negative rating outlook, one is in the commodities sector, and the others operate in the retail, light manufacturing, media, and real estate sectors. 

The default of PT Trikomsel Oke Tbk. (unrated), a distributor and retailer of mobile phones operating in a consumer-driven sector, on its Financial obligations shows the effect that a tough operating environment, a depreciating currency, and a rapid debt build-up can have on credit quality. 

Even the real estate sector, which had held up relatively well until the first half of 2015, could see flat marketing sales for 2016 as developers may wait for more visibility on pricing conditions before launching new projects.

S&P’s economists anticipate Indonesia's GDP growth at 4.9% in 2016, marginally  higher than the 4.8% they project for 2015. The Indonesian administration has  taken several steps to stimulate economic growth and corporate investment, including streamlining regulations, proposals on a tax amnesty bill, and a push on infrastructure spending. But we believe the impact on the corporate sector will be mostly muted at first. 

The administration employed broadly similar measures in 2015, especially targeting higher spending or more rapid disbursement of the infrastructure budget, with mixed results for the corporate sector, except for construction companies and infrastructure operators. 

“Even if GDP growth indeed picks up toward the middle of 2016, we believe it could take six to nine months for this to result in improved consumer sentiment and higher revenue and margin growth for the corporate sector.

“We believe it is too early yet to call for a broader based pick-up in operating conditions. This is because competition across sectors remains fierce, selling and overhead costs continue to grow, and the depreciation in the Indonesian rupiah has often muted lower input prices. More generally, the regional macroeconomic environment, including growth in China and persisting currency volatility are less conducive to improved consumer confidence.

“However, we acknowledge that the operating environment seems to be bottoming out or at least stabilizing at lower levels for sectors such as auto after very poor trading updates in the second and third quarters of 2015. Lower raw material prices are also sometimes providing some relief to the tires, chemicals, food processing, and poultry sectors, despite the weakening rupiah” it said. 

Rated Indonesian companies are yet to materially adjust their capital spending to maintain liquidity and financial strength. We increasingly view this as a credit negative over the next 12 months in the context of still-subdued operating conditions, a cautious attitude by lenders toward companies with operations in emerging markets, and currency depreciation. We expect aggregate  capital spending to remain broadly stable in the light manufacturing, real estate, telecom, and power generation sectors in 2016.

Indonesian companies' debt maturities in 2016 are modest, with less than US$1 billion of rated notes maturing. But a dozen of rated issues worth about US$5.5 billion mature between 2017 and 2019. We note that refinancing large maturing U.S. dollar bonds could prove more complicated and pricey because investor sentiment toward companies operating in emerging markets has eroded.

"In the current uncertain funding environment, we believe companies with narrower business and funding profiles will need to have a credible refinancing strategy in place at least 18 months before the maturity of lumpy debts to have a comfortable buffer," Jean said. 

Diversifying funding sources could help limit the companies' reliance on the more confidence-sensitive U.S. dollar bond market, especially in the domestic bond market or through the domestic bank loan market. Both these markets will remain broadly open to better established companies in 2016, in our opinion. But they are a lot shallower than the more liquid U.S. dollar markets. 

Indonesian companies' financial policies could be another aspect to watch for in 2016. Diversified media conglomerate PT MNC Investama Tbk. or telecom tower operator PT Tower Bersama Infrastructure Tbk. have either proceeded with share buy-backs or articulated financial policies that are more shareholder-friendly than before. A host of other companies, state-controlled or private, are seeking, or have received, approval from shareholders to buy-back shares, given often battered equity prices. 

"Raising shareholder remunerations could rapidly erode companies' liquidity, especially if they need to refinance in the near-term or if they face a difficult operating environment," Jean added. 

The rupiah is another wildcard. 

“We expect more widespread signs of stress in the Indonesian corporate sector if the rupiah exceeded 15,000 for one U.S. dollar for three to six months. 

While we note that the rupiah, which is currently trading at around 13,900 for one U.S. dollar, has been somewhat more resilient than other emerging Asia peers since the beginning of 2016, the currency remains confidence sensitive,” he added.