Bakrie, an Indonesian conglomerate, is assessing the likely consequences of the

Question

Bakrie, an Indonesian conglomerate, is assessing the likely consequences of the rupiah's steady decline on its different businesses. These businesses include a telecommunications company that is building a network (using mostly imported equipment) throughout Jakarta to offer wireless service to its residents, a company that sells pipe to the Western firms exploiting Indonesia's oil and gas fields, and a big agricultural business (54% of its revenues are in dollars, compared with 40% of its costs) that owns rubber and palm plantations feeding a large refining and distribution operation Assess the likely impact of the rupiah's depreciation on Bakrie's three different businesses Which of Bakrie's businesses will be most hurt by the rupiah's fall? Will any of these businesses actually benefit from rupiah depreciation? a. b.

Explanation / Answer

a. The likely impact of the rupiah’s depreciation on Bakrie’s three different businesses is following –

Telecommunications Business: Telecommunications Company that is building a network by using mostly imported equipment throughout Jakarta to offer wireless service to its residents has its equipment costs in foreign currency. After devaluation of rupiah the costs of equipment will increase for the company as it has to pay more rupiah for same amount of foreign currency. But the revenue of the company is coming mostly from domestic operations as it offers wireless service to its residents therefore it will be in rupiah which is devalued. Therefore net effect of rupiah devaluation on the telecommunications business will be negative.

Pipe business: The pipe business that sells pipe to the Western firms exploiting Indonesia's oil and gas fields will likely have positive impact on its business from rupiah devaluation as it has its revenue in foreign currency and its costs are mainly in rupiah.

Agricultural business: The agricultural business that owns rubber and palm plantations feeding a large refining and distribution operation have 54% of its revenues is in dollars, compared with 40% of its costs. The company has its major revenue in foreign currency and also significant portion of its costs are in foreign currency but less than its revenue therefore to some extent it will balanced and also it will have net recipient in foreign currency. Therefore it will benefit from rupiah devaluation.

b. The telecommunications business will be most hurt by the rupiah's fall because the revenue of the company is coming mostly from domestic operations and its equipment costs in foreign currency.

Yes, the Pipe business and Agricultural business will benefit from the rupiah's depreciation because major parts of their revenue are in foreign currency.

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