Assessing Corporate Vulnerabilities in Indonesia: A Bottom-Up Default Analysis

IMF Working Papers, April 26, 2017

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Uses a Bottom-Up Default Analysis (BuDA) approach to project corporate probabilities of default (PDs) under different macroeconomic scenarios.
Focuses on how adverse macroeconomic conditions could realize corporate sector vulnerabilities and pose major risks to the economy.
Highlights that a protracted recession combined with currency depreciation could erode buffers on corporate balance sheets, increasing PDs to the high levels observed during the Global Financial Crisis.
Notes that this outcome is characterized as a low-probability scenario but underscores the importance of monitoring and contingency planning.

Scenario of a protracted recession plus ensuing currency depreciation:
- Could erode corporate balance-sheet buffers.
- Could push up corporate sector probabilities of default (PDs) to the high levels observed during the Global Financial Crisis.
Emphasis on the BuDA framework’s ability to simulate PDs under alternative macroeconomic scenarios.

Closely monitor corporate vulnerabilities across the corporate sector.
Strengthen contingency plans to address the risk that PDs could rise significantly under adverse macroeconomic conditions.
Consider corporate FX exposure, hedging practices, rollover needs, and heightened debt risk in risk assessment and supervision.

Subject: Corporate sector, Currencies, Economic sectors, External debt, Financial regulation and supervision, Foreign exchange, Hedging, Money
Keywords: bottom-up default analysis, BuDA framework, Corporate sector, corporates manage currency risk, Currencies, default probability, default risk, FX debt, Global, hazard rate models, Hedging, heightened debt risk, Indonesia, interest rate, rollover Needs, scenario analysis, simulation, WP