Indonesia and Australia have extended a currency swap agreement. (Reuters Photo/Daniel Munoz)

Indonesia, Australia Sign $6.92b Currency Swap Deal

BY :ADINDA NORMALA

AUGUST 12, 2018

Jakarta. Indonesia and Australia have extended a currency swap agreement that provides a $6.92 billion buffer to help Southeast Asia's largest economy curb currency swings.

The deal was signed by the two countries' central bank governors on Aug. 5 on the sidelines the Executive Meeting of East Asia Pacific (EMEAP) in Manila, the Philippines. While the previous currency swap agreement signed in 2015 lapses in December, its extension will be valid until 2021.

"The hegemony of the US dollar on our financial market is very strong, so every time there is a turmoil, we become easily affected … If trade transactions did not have to use the dollar, we could reduce its demand so the pressure on our currency could be reduced," Bank Indonesia's international department director Erwin Haryono said in a press conference on Friday (10/08).

Under the agreement, Indonesia can swap the rupiah directly to the Australian dollar at a predetermined exchange rate, instead of having to convert it first to other currencies.

Erwin said Indonesia could withdraw up to $112 billion from multilateral or bilateral swap deals in a second line of defense, should the country's foreign exchange reserves be insufficient to maintain the stability of the rupiah's exchange rate.

The $112 billion deals include a $66.6 billion loan facility from the International Monetary Fund (IMF) known as the flexible credit line, which has free conditions, Erwin said. The remainder is currency-swap agreements with Japan, China and South Korea and a multilateral deal with Asean countries known as the Chiang Mai Initiative.

"That large amount is for a rainy day," he said, referring to a situation when the country would run out it foreign exchange reserves, like it did in 1998.

Indonesia's foreign exchange reserves now stand at $118 billion, enough to cover more than six months of imports and external debt payments.

Bank Indonesia has spent approximately $13.7 billion since January to defend the currency, as investors have been leaving emerging markets, like Indonesia, in anticipation of higher interest rates in the United States.

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