The Supreme Audit Agency (BPK) has declared that any loss from currency hedging will not be counted as a state loss, thus, providing legal leeway for state-run firms to utilize the mechanism to safeguard against the fluctuation of the rupiah.

BPK chairman Rizal Djalil said on Wednesday that he would soon forward the standard operating procedure for the hedging mechanism, which covers hedging issues from the required underlying assets to clearer definition of state losses, to President Susilo Bambang Yudhoyono.

'€œHedging will no longer be a risk for state-run firms and other government institutions, as long as the mechanism is used transparently and accountably,'€ Rizal told a press briefing in his Jakarta office.

The step-by-step procedure '€” jointly formulated by the BPK, Bank Indonesia (BI), the Finance Ministry, the National Police and the Attorney General'€™s Office (AGO) '€” is expected to provide legal protection to state-run firms, many of which remain reluctant to use hedging mechanisms due to fear of legal repercussions.

In a hedging mechanism, a firm has to pay premium fees in compensation for protection against risks associated with foreign exchange (forex) movements.

For state-run firms, however, the complexity of the hedging process and the lack of legal basis to use such a mechanism has raised fears that any premium fees paid would be recorded as state losses, leading to legal trouble.

The reluctance among state-run firms to perform hedging hit their balance sheets hard last year, when the rupiah depreciated 26 percent against the US dollar to become Asia'€™s worst-performing currency.

Last year, state-run electricity firm PT PLN suffered losses of Rp 30.9 trillion (US$2.58 billion), overturning the Rp 3.2 trillion profit reaped by the company a year earlier, while flag carrier PT Garuda Indonesia saw a 90 percent decline in annual net profits despite reporting higher passenger numbers.

'€œI'€™m certain that many state-run firms will no longer fear hedging, as our new SOP [standard operating procedure] could soon be used as a benchmark, with no more different interpretations of the issue,'€ Finance Minister Chatib Basri said.

Chatib also noted that a more developed hedging mechanism could help ease the pressure on the rupiah, as state-run firms could manage their dollar needs in advance, instead of entering the market at the same time through the spot market.

At the moment, state-run firms PT PLN and PT Pertamina are the nation'€™s two biggest dollar buyers in the local market, due to their huge need for greenbacks for oil imports.

 BI Governor Agus Martowardojo noted that many local banks
already had the necessary soft infrastructure to provide hedging services from simple derivative transactions such as forward and options, to more sophisticated ones such as cross-currency swaps or interest rate swaps.

'€œThe banks are in fact ready, but the state-run firms are still hesitant [to use the hedging services],'€ Agus said.

He also encouraged local firms to utilize the hedging mechanism ahead of intensifying global risks next year. According to the BI governor, at least 67 percent of the total private sector debt of Rp 150 trillion remains un-hedged, leaving local corporations vulnerable to any unexpected movement of the rupiah against the dollar.

'€”JP/Satria Sambijantoro

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