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Credit FAQ: A Look At Why South And Southeast Asian Firms Are Standing Up To A Strong Dollar

South and Southeast Asian currencies are falling again. The Indonesian rupiah, Malaysian ringgit, Vietnamese dong, Philippine peso and Thai baht have depreciated by roughly 5% so far this year. Since early 2023, depreciations reach up to 10%.

S&P Global Ratings believes this will pinch, not puncture, credit quality for corporates in the region. This is because currency drops are less sharp than in previous cycles. Plus, leverage is not as high as during the Asian or global financial crises, and more companies hedge.

To be sure, the ongoing currency depreciations will compress margins and reduce coverage ratios for important sectors in the region.

We see more risks lying outside of the rated universe, especially in the airlines, unregulated merchant power generation, energy or raw material-intensive sectors selling in domestic markets, or at large domestic conglomerates. These firms are among the largest and more frequent borrowers in U.S. dollars.

Commodity producers and export-oriented firms in Indonesia, Malaysia, India, Vietnam, Thailand and the Philippines are likely to benefit marginally from the persistently strong dollar.

This is one of two reports published today. The other one focuses on currency effects on individual firms we rate in the region (see "Credit FAQ: How South And Southeast Asian Firms Will Fare As Currencies Depreciate," also published today on RatingsDirect).

Frequently Asked Questions

How have currency depreciations influenced corporate credit risk in South and Southeast Asia over the previous cycles?

Direct effects include higher reported leverage, reduced interest coverage, and margin compression for companies with a high share of expenses in foreign currency. This impact was most pronounced during the Asian financial crisis (1997-1998) due to the aggressive financial policies and widespread U.S. dollar leverage that prevailed then.

Direct effects were generally lesser in the subsequent periods of currency volatility, including during the global financial crisis (2008-2009), "taper tantrum" (2013-2014), and, in Indonesia, during the long-lasting currency depreciation of 2014/2015.

In our view the indirect effects on investor confidence and funding can be as damaging for credit. Capital providers, especially foreign creditors, took a risk-off attitude during most of the above-mentioned episodes.

Currency volatility has in the past weakened ratings if we felt companies faced more uncertain access to funding, reduced refinancing windows, and higher funding costs. It can also reduce the willingness to pay financial obligations, especially for issuers with lumpy U.S. dollar- or U.S. dollar-linked maturities.

When and under what circumstances have currency depreciations been most damaging to credit standing?

Downgrades and defaults due to depreciation are most common when:

  • They were sharp, unexpected and occurred over a short period of time;
  • Exchange rates stayed weak for long periods after the initial depreciation;
  • Corporate leverage had been on the rise, often the result of easy and cheap credit; and
  • They coincided with a growing reliance on short-term funding and high refinancing needs, especially in the U.S.-dollar bank loan or capital markets.

Those four conditions were met during the Asian and global financial crises (see table 1 and Appendix).

The credit impact of currency depreciations was lesser during the taper tantrum, when short-term refinancing needs were lower. They were also lesser during the major COVID waves. During the pandemic, rating transitions were linked to weaker operations and liquidity rather than currency depreciations.

The rupiah depreciation of 2014/2015 was not particularly sharp. Yet, it lasted more than 15 months and coincided with a wall of U.S. dollar bond maturities in 2016 and 2017, leading to a wave of downside rating actions in the Indonesian corporate sector (see table 1 next page).

Table 1

Different currency cycles, different rating implications for SSEA corporates
Impact on domestic currencies
Sharp and rapid currency depreciation Protracted currency weakness post initial depreciation Elevated leverage High refinancing requirements Impact on the corporate sector
Asian financial crisis (1997-1998) Yes Yes Yes Yes Widespread wave of defaults and downgrades across sectors and geographies, including at large conglomerates and public borrowers.
These followed the sharp and long currency depreciations of the rupiah, baht, Philippine peso and ringgit (over 50% of their value against the USD and much more for the rupiah).
Pain was exacerbated by broad economic linkages to USD (borrowing, raw material imports, capital spending, rents), and high corporate leverage.
Global financial crisis (2008-2009) Yes Yes Yes Yes Sharp currency depreciation amid a decade of debt build-up post Asian financial crisis.
Sharp currency depreciation amid a decade of debt build-up post the AFC.
Credit downside compounded by much tightened funding availability, investor risk-off, and "willingness to pay" issues amid the sharp currency depreciation.
Taper tantrum (2013-2014) Yes No Yes No Relatively fewer rating actions during taper tantrum.
Despite an initial sharp currency depreciation, currencies reverted within a few months.
Balance sheets also somewhat less leveraged and profit momentum stronger post the GFC.
Longer debt maturity profiles in the USD bond markets (2015-2017 maturities) as companies often raised five-year tenors after the GFC.
Commodity downturn (2014-2015) No Yes Yes Yes Limited impact except in Indonesia, with six rating actions indirectly linked to the weakening currency. The rupiah hit its lowest since the AFC, leading to a risk-off investor mode amid near-term refinancing requirements.
In Malaysia, most affected rated firms had either modest leverage, solid liquidity or benefitted from the ringgit depreciation (commodity exporters).
COVID (2020-2022) Yes No Yes No Sharp currency depreciation but currencies reverted within a few months.
Widespread rating transitions across the region (over one-third of rated firms) but those were often due to weaker profits, higher leverage or draining liquidity rather than the direct impact of the currency depreciation.
USD--U.S. dollar. GFC--Global financial crisis. AFC--Asia financial crisis. SSEA--South and Southeast Asia. Source: S&P Global Ratings.
Is credit risk building in the SSEA corporate sector because of the current depreciation cycle?

Not yet in the rated space. Rated firms in South and Southeast Asia have been more resilient to currency depreciation than we would have expected. None of our rating actions over the past two years are directly or indirectly related to domestic currency weakness.

Defaults or debt restructurings since 2020 also took place because of COVID-induced operating disruptions, weak cash flows, high leverage, drained liquidity, refinancing risk or governance issues. Currency depreciations have not featured as a direct or indirect cause of restructurings at South and Southeast Asian rated firms, unlike during the Asian and global financial crises.

Resilience is better because:

Currency erosion is slower.  This limits the credit impact in two ways. First, it allows companies more time to pass-on higher U.S.-linked expenses to customers, curbing margin compression. Second, investor sentiment has also been subdued for over two years in emerging Asia for reasons beyond currency. The rupiah approaching 15,000 for one dollar in 2015 triggered a risk-off investor sentiment at that time. The rupiah has been trading above 15,000 for nearly two years now without major consequences. In other words, we believe companies, customers and investors are getting "used" to weaker domestic currencies.

Funding is somewhat less reliant on U.S.-dollar bonds.  A growing number of rated issuers have been refinancing lumpy U.S. dollar bonds with domestic bank loans and domestic bonds, or amortizing syndicated foreign currency bank loans. Those sources have historically been more resilient to currency depreciation compared with U.S.-dollar bonds, especially in Indonesia.

Dollar bonds now represent about two-thirds of total debt for Indonesia-based real estate developer Kawasan Industri Jababeka Tbk. PT--compared with nearly 100% in 2019. And they comprise half or less of total debt at manufacturing companies Japfa Comfeed Indonesia Tbk. PT, and Gajah Tunggal Tbk. PT. For Gajah Tunggal--that's down from nearly 100% in 2018.

Real estate developers including Bumi Serpong Damai Tbk. PT, Lippo Karawaci Tbk. PT and Alam Sutera Realty Tbk. PT have all refinanced part of outstanding U.S. dollar debt with domestic bank loans in Indonesian rupiah.

More hedging of U.S.-dollar liabilities compared with past depreciation cycles.  A growing number of companies are routinely hedging debt principal and/or interest expenses using options or, more rarely, cross-currency swaps. Most companies in Indonesia with exposure to currency mismatches are hedging beyond central bank regulations, implying conscious willingness to mitigate currency exposure. Larger Indian firms are also hedging foreign currency debt, even though they don't have any obligation to do so.

We still observe pockets of currency mismatches outside of rated entities. Such companies issue unrated U.S. dollar bonds, hybrid securities, bilateral or syndicated foreign currency bank loans.

These include airlines and firms in sectors such as cyclical transportation, unregulated merchant power, and energy- or raw material-intensive domestic manufacturing sectors. In Southeast Asia's airline sector alone for example, we estimate aggregate reported debt to be over US$30 billion, excluding massive U.S dollar-linked operating lease obligations.

Large regional conglomerates in Indonesia, the Philippines, Thailand and Vietnam could also be exposed. This group has been among the most active spender and borrower of dollar-linked instruments over the past decade, either by choice (lower cost) or necessity (size of domestic funding sources).

They often have more aggressive financial policies, capital spending or international M&A aspirations that require sizable dollar funding while maintaining revenues largely in domestic currency.

What sectors or geographies are most at risk?

To answer this, we ranked sector exposure to depreciations in two categories:

  • Currency mismatch in operations (generally based on the share of U.S. dollar-linked expenses compared with the revenue currency); and
  • Currency mismatch in the balance sheet (the share of foreign currency debt in the funding mix).

Operational exposure

The transportation cyclical, airlines, unregulated merchant power, and raw-material or energy-intensive manufacturing are the most exposed to operating headwinds and margin compression from the currency depreciation.

  • Over half of the cash expenses at airlines is generally denominated in U.S. dollars, including aircraft leases, fuel and landing charges.
  • Dollar-linked fuel often accounts for over 75% of the cash cost base of non-renewable power producers. Those that don't benefit from timely pass-through contracts or regulations (typically unregulated merchant power generators) are likely to continue experiencing lower margins.
  • Dollar-linked expenses also typically account for one-quarter to three-quarters of costs in raw material or energy-intensive manufacturing such as cement and building products, tires and some metal intensive capital goods, competitive sectors where sales are domestic and passing through higher costs may not be possible.

Operations of real estate developers, retailers and construction companies typically have little to no exposure to currency depreciation given minimal U.S. dollar-linked expenses (moderate exposure to U.S. dollar denominated capital spending for telecom operators).

The impact is neutral to net positive for upstream commodity producers such as mining, agribusiness or oil and gas. That's because revenues are generally in or linked to the dollar while labor, selling and administrative expenses are in the local currency.

Balance sheet exposure

Beyond sectors, currency mismatches in balance sheets in South and Southeast Asia are also a function of country and company characteristics, namely: (1) company funding and hedging policies; and (2) the depth of domestic funding sources.

Country-wise, we see more funding currency mismatch in the Indonesian, Philippine and Vietnamese corporate sectors.  Domestic capital markets are shallow in these three countries, with domestic corporate bonds outstanding representing less than 10% of GDP. In Vietnam, the larger and better-capitalized banks also favor bigger-ticket lending to state-owned sectors, so large private firms there need often rely on foreign currency funding.

Domestic banks are larger and well-capitalized in Indonesia and the Philippines. But even larger banks have limitations on loan sizes they can extend in domestic and foreign currencies, because of foreign exchange availability, regulations, or counterparty concentration risk. That has led larger growth-oriented firms in asset-intensive sectors to diversify funding sources and geographies beyond their home turf.

That trend is apparent for most large, diversified groups in the Philippines, Vietnam and Indonesia; and in sectors requiring eight- or nine-digit U.S. dollar loans, such as the transportation cyclical, airlines, capital-intensive manufacturing, power, infrastructure and real estate development sectors.

Foreign currency funding mismatch is less widespread in Malaysia, Thailand and India.  Malaysia and Thailand have among the deepest corporate domestic capital markets in Southeast Asia (nearly 30%% of GDP for Thailand and about 55% of GDP for Malaysia). That's 3x to 4x that of Indonesia, Philippines and Vietnam. Their domestic banking system is well established, with large and well-capitalized banks. In these two countries, commodity and energy-focused firms also dominate foreign currency borrowing and often have a natural hedge from their U.S. dollar-linked revenues.

In India, large-ticket fund raising in rupee has become easier over the past decade. Well-established Indian firms can now raise funds exceeding US$500 million-equivalent in rupee either through private placements or domestic bank loans. Before that, they often relied on foreign currency capital markets.

Activity in India's local bond market is also picking up. Domestic bond investors have been more open to bonds rated by domestic credit rating agencies in the 'A' category rather than only to 'AAA' and 'AA'-rated credits. The pricing differential with U.S. denominated funding is also favorable to domestic fund-raising given the current liquidity and interest rate environment. Hedging costs can also add several hundred basis points to interest rates.

Editor's note: This article is a companion piece to another FAQ published today, May 24, 2024, titled, " ." The companion ranks 73 publicly rated corporate and infrastructure issuers in South and Southeast Asia in four categories according to their exposure to operating and balance sheet currency mismatch.

See Appendix 1 on next page


Digital design: Evy Cheung

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Xavier Jean, Singapore + 65 6239 6346;
Secondary Contacts:Mary Anne Low, Singapore + (65) 6239 6378;
Neel Gopalakrishnan, Singapore + 65-6239-6385;
Minh Hoang, Singapore + 65 6216 1130;
Simon Wong, Singapore (65) 6239-6336;
Shawn Park, Singapore + 65 6216 1047;

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