Dollar-Based Deals With Foreign Banks Are Too Costly
When 2016 drew to a close, Indonesia’s chief finance sector regulator, the Financial Services Authority (OJK), met in Bali with the private-sector finance arm of the World Bank, the International Finance Corporation (IFC), to come up with some shared new year’s resolutions for the national banking sector.
Like the Joko “Jokowi” Widodo government, which has set the challenge of bringing power to the people, at the top of the wish list of these major financial players was sustainable growth for Indonesia driven by sustainable power supplies.
The best way to do so, they agreed, is to provide a clear pathway that meets the country’s climate change pledges and that will build the Indonesian banking sector’s capability to provide the money required, because of course, lighting up every home comes at a cost.
Today, there is a real question of whether the price being paid is too high.
Currently, domestic banks are supplying little of the money required to build the Indonesian energy system. It comes instead from overseas banks, particularly Japanese, Korean and Chinese banks.
This is not necessarily in Indonesia’s best interests. Take the example of deals involving the Japanese export credit agency, the Japan Bank for International Cooperation (JBIC). The main objective of this state-owned export credit agency is to increase the sale of Japanese products abroad. It only provides finance when Japanese companies stand to benefit.
With energy systems, this is more likely than not to mean Indonesia purchasing the heavy equipment exported by Japanese companies to build carbon-intensive coal-fired power stations.
At the moment, the market is eyeing the pending financial close of two major coal power transactions: the 2,000 MW Tanjung Jati B (TJB) Units 5&6 and 1,000MW Cirebon 2 projects. Both have Japanese sponsors, Sumitomo Corporation in the case of TJB, and Marubeni Corporation and Chubu Electric in the case of Cirebon 2. Both have received funding commitments from JBIC and a host of Japanese commercial banks.
The debt, denominated in U.S. dollars, amounts to about US$3 billion for TJB, and $1.5 billion for Cirebon 2. So Indonesia is increasing its foreign debt to buy foreign products.
Private sector-led power projects borrow in U.S. dollars and import most equipment. Local banks have yet to acquire the ability to lend long-tenor U.S. dollar loans. That is a sting in the tail because these deals are made not in rupiah but in dollars. This matters because it leaves the country vulnerable to fluctuations in the dollar, meaning that when the value of the dollar goes up, Indonesia finds itself increasingly indebted.
And since foreign currency-denominated loans already support about 30 percent of Indonesia’s gross domestic product (as of mid-December, according to the economic research consultancy Capital Economics) more U.S. dollar debt is bad news.
According to media reports, state power utility PT Perusahaan Listrik Negara (PLN) bills its customers in rupiah, but it needs about $600 million in foreign currency every month to pay local coal miners and power producers and to service its loans.
The rupiah has come down by almost 7 percent against the dollar since the beginning of 2015, and this has become an increasingly worrisome trend with the election of Donald Trump as president of the U.S. His plans for tax cuts and “huge” infrastructure spending in the U.S. suggest that the dollar will appreciate.
The right course of action for Indonesian is to cut back on dollar-based foreign transactions and to build capacity for domestic banks to supply these loans.
To President Jokowi’s credit, steps are already being taken in the right direction. The Indonesian government is now requiring the use of the rupiah for domestic transactions. This has made dollar-denominated loans from abroad for power projects riskier, as there is a currency mismatch—loans in one currency, and revenue generated to repay the loan in another.
This measure will help reduce reliance on foreign currency, and, in time, will enable local banks to finance private power projects.
The government has also made the right move in reiterating its commitment to reduce greenhouse gas emissions by 29 percent and to increase the level of renewable sources in the energy mix by 23 percent by 2025.
This is of note because rather than pushing ahead with foreign-funded coal projects, Indonesia can make home-grown clean energy the core of the modern world class electricity system it wants to build.
Yulanda Chung is a Southeast Asia-based IEEFA energy finance consultant.
[The original version of this commentary first appeared as an op-ed in the Jakarta Post.]