State lender Bank Negara Indonesia (BNI) has agreed to provide a hedging facility for Garuda Indonesia to assist the national flag carrier in mitigating risks from the fluctuation of the rupiah exchange rate against foreign currencies.

Under a newly signed agreement, BNI will provide a cross currency swap (CCS) facility, worth Rp 500 billion (US$ 41.35 million), for a period of three years to the airline, BNI treasury and financial institutions director Suwoko Singoastro said on Wednesday.

The swap facility will enable Garuda to match its US dollar-denominated revenue stream to its rupiah-denominated working capital loans with the same amount that it acquired from the Indonesian Export Financing Agency (LPEI) in April.

Suwoko said that the CCS facility would be the first hedging facility provided by a state lender to another state-owned enterprise (SOE).

'€œThis is a follow-up to a ministerial decree issued by the SOE [State Owned-Enterprises] Ministry and a hedging regulation introduced by BI [Bank Indonesia]. Both have called on SOEs to carry out hedging transactions to minimize risks caused by FX [foreign exchange] volatility,'€ he said during an event attended by the two firms on Wednesday.

As previously reported, the ministerial decree was issued last September to allow SOEs, especially those with high FX exposure, to undertake hedging measures to protect themselves from major FX losses on the back of economic slump.

BI then followed suit by rolling out a similar rule a month later.

Hedging basically sets certain values for the rupiah against foreign currencies. It will reduce uncertainty in FX volatility and unwelcome surges in future payments.

However, despite the two regulations, SOEs remain reluctant to use the available hedging tools out of fear that possible losses from the practice would be considered detrimental to state finances and would even lead to lawsuits.

To overcome the reluctance, the government has decided to form a joint team to lay out an even stronger legal basis for the companies. According to Finance Minister Chatib Basri, the team will comprise representatives of various state agencies, including the Finance Ministry, BI and the Supreme Audit Agency (BPK).

Meanwhile, BNI treasury head Bimo Notowidigdo said that the bank began offering hedging facilities to its customers in late 2012. He declined to provide details on the amount of hedging transactions managed by BNI so far, but said that a large chunk of them were derived from cross currency swaps.

Separately, Garuda finance director Handrito Hardjono said that the company required around Rp 2.5 trillion-worth of FX every month to finance its operations. '€œMost of the FX is used to meet our needs in fuel,'€ he said, adding that it had carried out hedging transactions with other banks before.

However, according to Handrito, Garuda has not determined whether or not it will require its subsidiaries, including low-budget carrier Citilink, to conduct the same transactions to mitigate similar risks. '€œThe need is there, but we'€™ll see,'€ he said.

The rupiah depreciation against foreign currencies partly contributed to Garuda'€™s net loss of $163.89 million in the first quarter of this year.

During the three-month period, the airline suffered $27.6 million in FX losses.

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