High interest rates may threaten firms

JAKARTA (JP): High domestic interest rates and tight liquidity caused by the currency crisis may seriously threaten the credit quality to Indonesian companies, Standard and Poor's rating agency says.

Its corporate ratings director Chris Legge said in a statement that the most serious threat to Indonesian firms was not their inflated currency borrowings but two other factors.

"Probably the most serious threat to credit quality for most companies is likely to come from either high domestic interest rates or scarce liquidity," Legge said in the October edition of Standard and Poor's monthly Asia Focus.

Some borrowers in the corporate sector have been exposed to the devaluation effect because of their foreign currency borrowings, although most firms with offshore loans had adequate foreign exchange revenue to lessen the devaluation effect, he said.

He said the key factor for Indonesian firms at the moment was to be in a strong enough position to cope with the recent rupiah devaluation.

The rupiah and other Southeast Asian currencies dropped sharply against the U.S. dollar, following the de facto devaluation of the Thai baht on July 2.

The rupiah suffered most in the region, collapsing about 35 percent against the greenback, followed by the Philippine Peso, 26 percent, and the Malaysian ringgit, 21 percent.

Standard and Poor's corporate ratings director for the Asia Pacific, Robert Richards, said the outlook for many corporations in the crisis-plagued Southeast Asian economies was generally positive, despite the currency depreciation and bankruptcies of some highly leveraged companies.

"The outlook for many corporates is still generally a stable one, and the prospects still seem good that they will be able to increasingly access the international capital markets," Richards said.

He said the current economic volatility in the region reflected the normal peaks and troughs that most economies experience, but was also symptomatic of the need to improve some of the physical and legal infrastructures in many markets to be more efficient in the use of capital.

This included eliminating bottlenecks that existed in some Asian economies because of inefficient or unreliable infrastructure services, such as transport or utilities, he said.

Governments must also improve the financial, legal and regulatory frameworks that are important to making sound commercial and credit decisions, he said.

This meant introducing better lending practices, information disclosure and more available objective company analyses, he said. (das)