Indonesian Palm Oil, Homebuilders More Exposed to Coronavirus
16.04.2020 (Fitch Ratings) - Fitch Ratings-Jakarta/Singapore-16 April 2020: The coronavirus pandemic will exacerbate the challenges for Indonesian corporates such as crude palm oil (CPO) producers and homebuilders that were already facing pressure on their credit profiles in 2019, Fitch Ratings says. Fifty-five percent of Indonesian corporates operate in sectors that have 'Moderate' to 'High' exposure to the disruptions caused by the coronavirus outbreak, and have 'Low' or only 'Moderate' rating headroom at their current ratings, based on a review of Fitch's 51 publicly rated corporates in the country.
In addition, around 20% of Indonesian corporates have 'Moderate' to 'High' exposure to rupiah depreciation against the US dollar. Fitch believes the volatility in the exchange rate will exacerbate the impact on several consumer-related sectors such as retail property, non-food retail and automotive as consumers re-evaluate their spending decisions amid weaker purchasing power. Ministry of Manpower data show 2.8 million people are so far unemployed or furloughed as a result of the outbreak. The Ministry of Finance also announced recently that festive allowances will be lower for civil servants this year, which may negate the effect of the Idul Fitri holidays being moved to the end of the year from June 2020.
Commodity-related sectors such as CPO have 'High' sector exposure due to weakening commodity prices that began in February 2020 following the coronavirus outbreak. The impact of the pandemic on the homebuilding sector will also be unprecedented in terms of weakening domestic demand. These prompted Fitch's recent revision of the Indonesian homebuilding and CPO sectors' outlook to negative from stable. We will continue to monitor each sector's exposure due to the rapid changes in the economy and the decline in activity.
Most issuers under these sectors had 'Low' rating headroom as they approached 2020 due to weak CPO prices since 2019. Sustained low CPO prices in 2020 will intensify the pressure on CPO producers' rating headroom. Similarly, continued weak pre-sales, combined with weaker cash collection from customers, will further erode homebuilders' credit profiles following soft demand in 2019.
Indonesian corporates that have 'Moderate' to 'High' exposure to rupiah depreciation against the US dollar are generally exposed through their raw-material imports due to the country's low manufacturing and production base, especially for electronics and automobiles. They are also exposed to currency risks due to the structural features of the domestic debt market. Homebuilders have to rely heavily on offshore bonds due to a smaller domestic bond market with higher coupon rates and collateral requirements.
The coronavirus pandemic is a significant challenge for rated Indonesian corporates. The speed of recovery and companies' ability to recoup lost revenue and manage liquidity will be critical in our assessment of the need for rating action. Ratings will be driven by our expectations of the issuers' profiles by end-2021, rather than at the trough of the crisis, assuming sufficient liquidity. This is in line with our rating-through-the-cycle approach. Still, liquidity issues in the shorter term can be a driver of rating action for weaker issuers.