Last modified: 2018-07-07
Abstract
Indonesia’s external debt has been rising in the past decade, with 10.03% growth rate year on year. At first the debt was dominated by public debt, but the private debt ratio started increasing in 2012, and it has reached 49% of the total external debt by the end of 2017. (Indonesian Ministry of Finance, 2017)
Indonesian corporations have been borrowing large sums of money from foreign investors. This act of borrowing might improve their productivity, but in other hand it might result on debt value expansion, due to the exchange rate depreciation trend in Indonesia.
The large amount of private debt, in one hand, might improve the borrowing firms’ performance and increase their profit. This is caused by two main causes: firstly, it is expected from a company to produce more when it has more capital. Second, according to the Mundell-Fleming model, the depreciation trend increases the company’s competitiveness towards foreign competitors, especially for exporter companies. This is known as competitiveness effect (Bleakley & Cowan, 2002).
On the other side, it also might expose said corporations to the latent risk of depreciation. The nominal value of external debt would inflate when depreciation happens. This is known as balance-sheet effect (Krugman, 1999). When depreciation occurs and the amount of debt gets too big, there is risk that the owing company might not be able to repay it. This phenomenon is called currency mismatch, and it is very dangerous since it might cause bankruptcy to the company, and even economic contraction and major unemployment when it happens to a big number of companies at the same time.
This paper intends to study the relationship between external debt and other factors that affects corporate performance. The main objective of this study is to find out which between the balance-sheet and competitiveness effect is more dominant in Indonesian corporations and calculate the threshold to which extent external debt is allowed, so that the currency mismatch could be avoided and the best policy that maximizes the company’s profit could be made.
The Central Bank of Indonesia have been analyzing this problem traditionally using multivariate statistics method, namely panel data regression (Central Bank of Indonesia, 2011). The results didn’t give satisfactory accuracy since the data was a combination of time series and cross-section data.
This paper employs Support Vector Regression, a machine-learning method, to study the relationship between factors that might affect corporate performance, and compares the results with that of the conventional panel data regression method. The study was done using data from annual financial statements of 189 firms in Indonesia during 2011-2017.
It is shown that the machine-learning approach discussed in this study gave better accuracy than the previously employed panel data regression method. Both methods generally showed that balance-sheet effect is more dominant in Indonesian corporations, and it is recommended for companies to minimize their foreign debts and imported purchases, and if possible, export more of their products.