The government is preparing a financial scheme in which major state companies will be obliged to implement a hedging mechanism to guard the state budget against losses stemming from currency fluctuation.

The State-Owned Enterprises Ministry is preparing sanctions for state firms that refuse to hedge their US dollar costs, Minister Dahlan Iskan said on Thursday following a meeting attended by top officials from the Supreme Audit Agency (BPK), the Finance Ministry, Bank Indonesia (BI) and the Attorney-General'€™s Office (AGO) to discuss the standard operating procedure (SOP).

A taskforce could be established comprising officials from the State-Owned Enterprises Ministry, BI and others, which would meet every week to analyze the future movement of the rupiah, Dahlan suggested.

In the event that the taskforce concluded that the rupiah'€™s movement against the dollar posed significant risks, certain state firms would be obliged to apply the hedging mechanism for the set timeframe.

'€œI am thinking of applying a certain kind of instrument that could force [state-run firms] to implement the hedging mechanism,'€ Dahlan told reporters on Thursday. '€œIf we come to the conclusion that hedging is necessary, then any firm which refused to do so could be punished.'€

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

However, many state-run firms are still reluctant to perform hedging, as the bank fees paid could be recorded as state losses if the rupiah moves in the opposite direction to their estimates, leading to legal troubles for their executives.

To address such concerns, the BPK has formulated SOPs for the hedging mechanism, covering issues from the required underlying assets to clearer definition of state losses.

Among the state-run firms that will be required to implement hedging are oil and gas company PT Pertamina and electricity company PT PLN, according to Dahlan.

The steep depreciation of the rupiah last year caused PT PLN to suffer losses of Rp 30.9 trillion (US$2.5 billion), a reverse in financial performance after the Rp 3.2 trillion profits recorded by the firm a year earlier.

PT PLN, which imports a large proportion of the fuel used in its operations, is so exposed to fluctuations in currency that every 100-rupiah depreciation against the dollar could swell the company'€™s operating costs by at least Rp 1 trillion, president director Nur Pramudji said.

'€œWe want to implement the hedging mechanism professionally. Our company needs to conduct a
study first and we will use it whenever we feel necessary,'€ he said on Thursday.

Irvan Kamal Hakim, president director of state-owned steel manufacturer PT Krakatau Steel, acknowledged that his company benefitted greatly from implementing the hedging mechanism.

PT Krakatau Steel had hedged 50 percent of its daily dollar operations of around $100-120 million, he explained to reporters on Thursday.

'€œWe are of the opinion that the hedging mechanism is something that corporations really need,'€ said Irvan. The new SOP formulated by the BPK on hedging would provide clearer legal bases and further encourage state-owned firms to employ the instrument, he predicted.

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