/ ESG / Governance / Risk Management Policy
Risk Management Policy
Risk management is part of GCG and involves the identification and analysis of risks to the Company,
establishing appropriate risk and control limits, as well as overseeing compliance within the
Risk management is expected to protect the Company from significant risks that could hinder the achievement of its corporate objectives. Risk management is conducted by obtaining the latest information for the Board of Directors and the Company’s management so that they can anticipate and mitigate risks at the earliest possible phase. With reliable risk management practices, and qualified human resources, it is expected that the Company can map risks, minimize potential losses, increase the confidence of its stakeholders, and improve work efficiency and effectiveness. This, in turn, will ultimately result in better performance and competitiveness. Particularly, the Company does a thorough assessment on certain projects.
Types of Risk
A. Financial Risks
Risk management policies implemented by the Company and its subsidiaries were as follows:
1. Credit Risk
Credit risk is the risk of financial losses deriving mainly from trade receivables granted to tenants of rental office space should the tenants fail to meet their contractual liabilities to the Company and/or its Subsidiaries. Tenant credit risk is managed by a business unit, which is a part of the marketing and finance department, in accordance with the policies, procedures and controls of the Company relating to tenant credit risk management. Accounts receivable balances are monitored on a regular basis by the relevant business units.
2. Market Risk
Market risk is the risk that occurs due to changes in market prices due to foreign currency risk and interest rate risk. Although Indonesian economic growth was relatively stable, there is no assurance that the country’s monetary conditions will not fluctuate in association with any weakening in domestic economic indicators. As such, the Company and its Subsidiaries are continuing to monitor and analyze the market conditions.
3. Exchange Rate of Foreign Currency Risk
Foreign currency risk is the risk of the fair value or future cash flows of a financial instrument due to changes in the exchange rates of foreign currencies. This risk stems primarily from the Company’s business activities where the revenue and expenses incurred are in a different currency to the functional currency of the Company, and loans that are denominated in United States Dollars (USD). The Company closely monitors the fluctuations in the foreign currency exchange rates so as to take any necessary steps in a timely manner. Presently, the management does not consider it necessary to conduct forward transactions/foreign currency swaps for hedging purposes, although the opportunity to do so is always monitored.
4. Interest Rate Risk
Interest rate risk is the risk when the fair value or future cash flows of a financial instrument fluctuate due to changes in market interest rates. This risk is associated with loans of the Company with a floating interest rate. The Company closely monitors the fluctuations in market interest rates, and market expectations, so that it can take the most profitable steps for the Company in a timely manner. Currently, the management does not consider the need to conduct interest rate swaps as a means for hedging, although the opportunity to do so is monitored.
5. Liquidity Risk
Liquidity risk is the risk of the Company not being able to meet its liabilities when they are due. The management continually evaluates and monitors the Company’s cash inflows and outflows to ensure the availability of funds to meet payment needs of maturing liabilities. In general, the funding for the repayment of short-term liabilities and long-term maturities is derived from the renting of office space.
B. Business Risks
The Company and its subsidiaries are affected by business risks associated with either internal or external factors. All business risks may have a significant negative impact on the business performance, and/or financial performance of the Company and its subsidiaries.
1. Corporate Risk
Risk to the Parent Company
The Company relies on the activities and revenues of its Subsidiaries. A reduction in the performance of the Subsidiaries may affect the Company’s business prospects. There is no assurance that the Company’s Subsidiaries will continue to contribute income to the Company.
The property industry is one that can yield lucrative investments. However, a number of factors need to be considered to ensure success, including: market conditions, sources of funding, development strategy, marketing techniques, as well as prompt decision making that takes into account the cyclic nature of the property industry. In terms of investments in a property company, an unfavorable investment or unfavorable economy will have an impact on the Company’s operating revenue.
- Operational Risk
The Company strives to maintain the effectiveness of the systems, procedures and controls within the Company and its Subsidiaries, as these may affect its operations in terms of planning, development, marketing, finance and operational management. Lack of supervision of the operations of the Company’s Subsidiaries may result in losses being suffered by the Subsidiaries, which in turn are likely to affect the Company’s revenue.
2. Risks Related to the Subsidiaries
- Financing Risk
Building and developing properties require a very large capital investment. To meet this demand, the Company’s Subsidiaries may need to seek additional short- or long-term funding. There is no guarantee that the additional financing will be available for the Subsidiaries. Even if it is available, the financing might only be obtainable on unfavorable terms.
- The Risk Associated with the Availability of Land
In the property development sector, there is competition to acquire strategic sites in certain high growth areas where the availability of land is very limited. This can lead to an increase in the prices of land, which may affect the realization of the development plans of a Subsidiary. If the acquisition is not realized, the development plan may be affected, potentially putting at risk the Subsidiary’s future operating revenue.
- The Risk of Fluctuations in Foreign Exchange Rates
All revenue and expense of the Subsidiaries are in Rupiah. If a portion of a Subsidiary’s liabilities are in US Dollars, the Company faces a foreign exchange risk. This is because the weakening of the Rupiah against foreign currencies may negatively affect the Company’s ability to meet its obligations.
- Interest Rate Risk
The Company’s Subsidiaries are affected by the risk associated with any changes in the interest rates on their liabilities. Any fluctuation in loan interest rates affects the amount of financing needed by the Subsidiaries to build and develop their property projects. The Subsidiaries cannot control the rise of interest rates and the policies imposed by creditor banks. The interest rates set by the creditors might entail an escalation in incurred costs to the extent that it will have a bearing on the operational activities and financial performance of both the Company and its Subsidiaries. To reduce the impact of risks related to interest rate fluctuations, the Company and its Subsidiaries have adopted a deferred payment method or have entered into fixed interest loans.
3. The Risks Associated with the Company’s Properties
- Risk Associated with Macroeconomic Conditions
The property sector, directly and indirectly, affects, and is affected by, the macroeconomic conditions. Slower economic growth could result in a decline in investment and business activities, leading to a reduced demand for office space, apartments and hotels. Weakening macroeconomic conditions can also result in weaker purchasing power, which, in turn, can result in lower demand for the Company’s properties.
- Property Development Risk
Development of properties such as offices, apartments and hotels involves land acquisition, financing, licensing, planning, and eventually construction. The Company must have the ability to identify and develop the properties with a variety of new innovations in a timely and cost-efficient
manner. The Company’s office, apartment and hotel developments also depend on collaboration with third parties. Any obstacles and/or delays in development of the properties will have a negative impact on the Company’s reputation, which, in turn, will reduce the Company’s revenue.
- Competition Risk
In recent years, the property industry in Indonesia, particularly the development of offices and apartments in major cities, has become increasingly competitive. The competition is not only between local property developers, as foreign developers are now also entering the market. Increasing competition may spur increased costs of land acquisition and an excess supply of office space/apartments, and lead to a slowdown in getting approvals for new property developments from the authorities. All this could adversely affect the Company’s business performance.
- Risk of Legal Uncertainty
When developing property, the Company and its Subsidiaries constantly strive to obtain the required building title called “Hak Guna Bangunan (HGB)”. Nevertheless, the lack of certainty in law enforcement and the various land right laws in Indonesia may raise the risk of disputes over land.
- Risk Associated with Public Lawsuits and Government Requirements
When developing property, the Company and its Subsidiaries must meet all the requirements laid down by the government, especially those relating to limiting negative impact of development on the communities and the environment. If the Company and its Subsidiaries do not comply with these requirements, they will face the risk of a possible revocation of the permit to develop the property as well as the risk of a lawsuit lodged by local residents. This can affect the course of the Company’s operational activities as the failure to achieve project realization may hamper the achievement of the Company’s targets.
- Interest Rate Risk
Fluctuations in interest rates can adversely impact the amount of interest and installments to be paid by apartment buyers. Rising loan interest rates may also dissuade people from buying an apartment. This, in turn, could negatively affect the financial performance of the Company and its Subsidiaries.
4. Risks Related to Investments in Company Shares
The capital market in Indonesia may be less liquid and fluctuate more. Indonesia also has different reporting standards from developed countries. Under these circumstances, and with the Company’s shares being relatively less liquid, the Company cannot ensure that its shareholders will be able to sell their shares at a specified price, or at a desired time.
Risk Management Strategy
To deal with the financial risks, the Company has adopted a system of capital risk management. The Company’s capital risk management aims to ensure that it maintains sound capital ratios to support its business and maximize returns for the shareholders. The Company manages its capital structure in line with economic conditions. To manage its capital structure, the Company makes decisions about dividend payments to the shareholders, return capital for the shareholders, or issuance of new shares.
Evaluation of the Risk Management Effectiveness
The Company strives to conduct comprehensive risk assessments. The internal control system of each function plays a pivotal role in risk management. The Internal Audit Unit is another part to assess and evaluate the effectiveness of the Company’s risk management.