The hedging product PLN opted for with Bank Negara Indonesia (BNI), Bank Rakyat Indonesia (BRI) and Mandiri is a call spread forex option, making it the first state-owned firm to do so.

This derivative product allows customers to obtain two options or rights to buy and sell foreign currency at a certain level and is considered cheaper since customers can terminate one of the options if they consider the forex situation not in their favor.

PLN treasury division head Iskandar said while this was not the first time the electricity controller in Indonesia had hedged its forex loans, the call spread was slightly cheaper than the forward mechanism, which requires customers to complete their forex transactions even if the forex movement goes against their estimate.

“The forward mechanism was around 4.5 percent [of the hedge value] per annum, while it [the call spread] is lower at around 3 percent,” he said following the signing ceremony on Monday.

Hedge is an investment to reduce risk of adverse price movements in assets or liabilities. For PLN, it basically sets certain values for the rupiah against certain foreign currencies to provide financial protection against uncertainty during foreign exchange volatility and unwelcome surges in its future forex-denominated liabilities.

Iskandar explained that PLN needed around $7.5 billion a year in foreign exchange cash, which would contribute to various investments, energy supply and operational costs. PLN is responsible for one of the government’s most ambitious programs to procure an additional 35,000 megawatt (MW) of electricity by 2019, in addition to existing power procurement projects.

Meanwhile, BNI treasury and international director Panji Irawan said each bank would receive $10 million in hedging transactions from PLN, with a premium of 0.6 percent for a one-time period of two months starting August.

Under the dynamic scheme of hedging transactions, PLN can propose to continue the hedge after the two-month period if it chooses.

In the past, state-owned firms incurring financial losses owing to hedging practices could be considered as “causing state losses,” thereby opening up the possibility of being investigated by the Corruption Eradication Commission (KPK) or the Supreme Audit Agency (BPK).

However, the State-Owned Enterprises Ministry, Bank Indonesia and the BPK signed in 2014 a memorandum of understanding (MoU) stipulating that hedging on forex loans would no longer be considered “inefficient measures” nor be qualified as “a state loss.”

Companies are required to pay a certain amount of money as a premium payment when they hedge their forex loans. Losses from the hedge might happen if, for example, the rupiah stays strong against the hedged forex when the facility meets its due date.

Bank Indonesia (BI) continues to encourage state-owned firms to hedge their forex loans, and the fruits of its efforts is evident in an increase of forex transactions in the financial market.

“The current transaction volume in Indonesia’s forex market has reached around $6 billion per day, 40 percent of which are derivative transactions. This volume has increased from 2013, when the transactions only reached $1 billion per day,” he said.

Perry explained that hedging had become increasingly more important, especially on account of the large amount of infrastructure development in the country, as the funds were also obtained from abroad.

According to BI data, around 2,660 companies had foreign loans in the first half of the year, 88 percent of which had conducted hedging for the next three months.

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