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BI to revise rules to mitigate currency risks

Bank Indonesia (BI) is working to revise regulations on foreign exchange (forex) transactions, expecting to mitigate currency risks that could burden companies, as only less than a third of local firms with foreign debts hedge their loans

Tassia Sipahutar (The Jakarta Post)
Jakarta
Mon, April 13, 2015

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BI to revise rules to mitigate currency risks

Bank Indonesia (BI) is working to revise regulations on foreign exchange (forex) transactions, expecting to mitigate currency risks that could burden companies, as only less than a third of local firms with foreign debts hedge their loans.

According to BI financial task force deputy head Nanang Hendarsyah, the central bank will soon launch the modified version of two regulations, locally known as PBI, on forex transactions conducted by both domestic and foreign banks and third parties '€” which facilitate companies in their forex debts and transactions.

 '€œSome points within the regulations need adjustments, including those on CCS [cross currency swap]. We want to see more CCS transactions take place because it is more beneficial than regular hedging line,'€ he said on Friday.

Cross currency swap is a form of hedging, aimed not only at preventing losses from currency fluctuation but also from interest rate volatility as it sets repayment at the original rate.

 '€œIt is better for companies to take on CCS if they have just acquired offshore borrowing. It will be as if they gained a rupiah loan with fixed an installment rate,'€ Nanang said, adding that demand for CCS was beginning to increase.

Last year, national flag carrier Garuda Indonesia signed its first CCS facility '€” worth Rp 500 billion (US$38.73 million) '€” with state lender Bank Negara Indonesia (BNI).

The facility was provided so that Garuda could match its rupiah-denominated loan from the Indonesian Export Financing Agency (LPEI) with its own US dollar-denominated revenue.

The flag carrier then signed another CCS '€” worth Rp 1 trillion '€” in January, with BNI, CIMB Niaga and Standard Chartered Bank. This time Garuda was looking to match its rupiah-denominated debt paper with its US dollar-denominated operational costs.

However, despite the rising demand trend in CCS, not all banks have the capability to carry out such transactions, according to Nanang. It adds to the fact that there are only 25 lenders '€” of a total 70 foreign exchange banks '€” that are active in the forex market.

'€œA lot needs to be done to trigger higher involvement from them because the potential is there. There are still many companies that have not hedged their forex exposure. So, we want to make the regulations clearer and more accommodating for banks,'€ Nanang said.

Data from BI said that only 26.5 percent of all companies with forex debt had carried out hedging. Around the same share (26.5 percent) are naturally hedged because their income source is in US dollars.

That leaves the banks with 47 percent in potential from the number of firms that have not hedged their businesses at all.

The central bank claims that higher hedging transactions will push forex market penetration deeper as well. Indonesia, according to BI data, only posts 0.6 percent in FX market turnover against the gross domestic product (GDP).

The figure is much lower compared to the 1.4 percent recorded in the Philippines, 3.5 percent in Thailand, 3.7 percent in Malaysia and 4.8 percent in South Korea.

Meanwhile, Bank Mandiri corporate banking director Royke Tumilaar said that the state lender had around $12 billion in realized hedging transactions under its belt as of 2014.

'€œWe now see about $1 billion in hedging potentials from state-owned firms and more than $10 billion in the same potentials from private firms,'€ he said.

Separately, Bank Rakyat Indonesia (BRI) finance director Haru Koesmahargyo said that the lender still had adequate room to provide hedging facilities, citing its current capital status.

By December 2014, the state-owned BRI had Rp 85.71 trillion in total capital, which will allow the lender to use up to 20 percent of the figure for hedging facilities.

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