Standard & Poor's Global Ratings highlighted on Tuesday a deterioration in the balance sheets at Indonesian state-owned enterprises (SOEs) involved in a government-led infrastructure push in Southeast Asia's biggest economy.
SOEs, especially those working in power and construction, have extensively borrowed in order to match the government development plans, causing their balance sheets to become "substantially weakened," Xavier Jean, an analysts with S&P told reporters on Tuesday.
The leveraging level of 20 listed and rated SOEs has increased to around an average of 5 times debt-to-EBITDA, jumping from 1 times in 2011.
"This is a trend that we are keeping a close eye on because we think it's going to persist, and going to accentuate in 2018 and to the run up to the 2019 election," Jean said.
Infrastructure development is a core part of President Joko Widodo's economic agenda and is aimed at slashing high logistics costs, which are often blamed for creating bottlenecks in the economy.
S&P upgraded Indonesia's sovereign rating to investment grade in May, years after Fitch and Moody's, on the back of structural improvements and reduced risks to the country's fiscal position.
The government estimates a total of $450 billion in infrastructure investment is needed between 2014 to 2019, which can only be partially funded by the government.
Taking up most of the projects, SOEs had to borrow to fill the working capital needs, such as for salaries, while projects are often delayed or take times to generate revenue, Jean said.
Meanwhile, the government's push to develop infrastructure in less populated areas also raised concerns over future income, he added.
"It is not very clear to us today if a lot of the investments that are made by these companies outside of Java, outside of the heavily populated centers, will be profitable projects or not," Jean said.
If companies continue to raise investments at the current pace, they could be forced to stop all investment in five years to control their finances, renegotiate their debt or ask for recapitalization by the government, Jean added.
The debt that these companies take would also affect ratings of Indonesia's sovereign debt and the banking system from which they borrow, said Kim Eng Tan, S&P's senior director for sovereign ratings, although he added that at this point it would not negatively affect government finance.
Last month, the government was forced to suspend and conduct a safety assessment on all elevated infrastructure construction after a string of accidents, which raised questions about the safety of a government drive to upgrade its infrastructure.