Original Sin Stores Up Pain as Asean Firms Face $45 Billion Bill

  • BofA says index tracking overseas borrowing risks will rise
  • Strategists see rupiah, ringgit weakening through next year

Southeast Asia’s penchant for overseas borrowing is storing up pain for years ahead with companies facing record bond repayments just as local currencies slump.

Thirty-eight percent of bonds sold by Indonesian, Malaysian, Philippine and Thai companies this year have been in foreign currencies, up from 27 percent in 2014, data compiled by Bloomberg show. Companies face $45 billion of bond repayments in greenbacks, euros or yen in the coming five years, breaking records set after the 1997 Asian Financial Crisis, when economists Barry Eichengreen and Ricardo Hausmann coined the term "original sin" to describe the dangers of overseas borrowing.

Strategists surveyed by Bloomberg see Indonesia’s rupiah dropping 4.3 percent by the end of next year and Malaysia’s ringgit losing 1.6 percent on higher U.S. interest rates, a Chinese economy that shows no signs of picking up and commodity-price weakness. Bank of America Merrill Lynch’s Original Sin index shows Indonesia’s vulnerability at the highest level in a decade, while Malaysia’s is riding at double the long-term average, after both governments turned to global debt markets to replenish reserves.

“We expect the Original Sin index to continue climbing in 2016, as global monetary conditions tighten and capital inflows recede," said Hak Bin Chua, an economist in Singapore at Bank of America. “Falling foreign-exchange reserves are also pressuring some governments and central banks to increase their foreign-currency borrowings."

Corporate issuers from the region’s four largest emerging-market economies raised $12.3 billion this year, adding to a record seven-year borrowing binge since the Federal Reserve started an era of near-zero interest rates. The borrowings are led by Malaysian companies which raised $6.6 billion in 2015, followed by Indonesian firms at $3.3 billion. The companies are scheduled to repay $5.6 billion in 2016, $10.3 billion in 2017, $7.8 billion in 2018, a record $12 billion in 2019 and $8.8 billion in 2020.

The ringgit and the rupiah are Asia’s worst-performing currencies this year with respective losses of 19 percent and 12 percent as slumping commodity prices hurt exports. The Philippine peso weakened 5.7 percent and Thailand’s baht declined 8.8 percent. While the international reserves of the Philippines and Thailand have mostly been steady this year, Malaysia’s slumped 19 percent to $94.6 billion and Indonesia’s shrank 10.4 percent to $100.2 billion.

“Both stand out in Asia-Pacific as having weaker external liquidity so they are potentially more exposed to the Fed’s interest-rate increase and being relatively commodity-dependent," said Andrew Colquhoun, Hong Kong-based head of Asia Pacific sovereigns at Fitch Ratings in Hong Kong. “I cast it as a ‘muddling through’ rather than kind of sailing through unscathed, as there is likely a price to be paid in growth."

Credit Ratings

Fitch has a stable outlook on those two nations as both are undertaking steps to support their credit profiles, with Malaysia raising its sales tax this year to improve finances and Indonesia keeping a tight monetary policy to slow demand for imports and narrow its current-account deficit, according to Colquhoun. Malaysia is assessed at A- by Fitch, one level above Thailand. Both Indonesia and the Philippines are rated at BBB-, the lowest investment grade.

The Original Sin index for Indonesia was 0.38 percent as of November, higher than the average of 0.2 over 2003-2013, according to Bank of America. That doesn’t take into account the $3.5 billion Indonesia raised from the sale of dollar-denominated bonds in early December, Bank of America’s Chua said. Malaysia is at 0.16, more than double the average in the decade through 2013.

Indonesia plans to raise global sovereign sales to 30 percent of the total in 2016 from 24 percent this year, while Malaysia’s government issued $1.5 billion of dollar notes this year after no offers in 2014.

‘More Manageable’

While the ringgit has depreciated more than the rupiah this year, Indonesia will find it “challenging" to face those foreign-currency debt payments amid a current-account shortfall, said Christian de Guzman, a senior analyst with Moody’s Investors Service in Singapore. Its export sector is more exposed to a slump in commodities and its companies have more “currency mismatches," he said.

Malaysia’s situation is “more manageable" as merchandise goods comprise 68 percent of exports and deeper local markets make refinancing easier, he said. Malaysia’s bond market stood at $245 billion in the third quarter compared with $115 billion for Indonesia, Asian Development Bank data show. The cost to insure sovereign debt against non-payment jumped 99 basis points this year to 205 for Malaysia and gained 99 to 256 for Indonesia.

Commodity Slump

In Indonesia, PT Berau Coal Energy is seeking restructuring after failing to repay its $450 million bonds in July in the nation’s largest default this year. PT Trikomsel Oke, a mobile-phone retailer, is calling for a debt standstill after failing to pay coupons on two Singapore dollar bonds.

A Bloomberg Commodity Index slid to its weakest level since 1999 on Monday, hurting the outlook for Indonesia, the world’s biggest palm oil grower and thermal coal exporter. A 34 percent drop in crude prices this year has already disrupted Malaysia, which derives about 22 percent of government revenue from oil-related sources.

“Part of the problem with Indonesia is their export sector is dependent on commodities," said Moody’s de Guzman. "It’s basically a lower-for-longer scenario that we are painting for commodity prices."

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