The Indonesian rupiah has not stabilized and there is a risk the currency could fall further due to trade war tension, a deputy governor of Bank Indonesia (BI) said. (Antara Photo/Puspa Perwitasari)

Bank Indonesia Lowers Forex Swap Hedging Floor to $2m to Encourage Wider Use


AUGUST 22, 2018

Jakarta. Bank Indonesia has lowered the minimum limit on foreign exchange swap hedging from banks to the central bank to $2 million from $10 million, to attract more customers.

Hedging is done to protect foreign exchange transactions against possible losses from unfavorable exchange rate swings. Many local exporters have been reluctant to convert their foreign exchange earnings to rupiah for fear of losses as the currency continues its depreciation against the United States dollar.

The central bank introduced the facility four years ago, hoping that exporters, fund managers, buyers of government securities or even foreign exchange debtors would make use of the facility, but few are currently doing so.

"This has been a challenge for us, as Bank Indonesia has done a lot of relaxation but not many are interested yet. This is to reach more customers," Nanang Hendarsah, head of monetary management at the central bank, said at a press briefing in Jakarta on Monday (20/08).

Nanang said many potential customers may not yet know of this facility.

Potential customers can make use of the hedging facilities, facilitated by their banks. The new, lower limit will allow more flexibility to meet liquidity requirement for foreign exchange swap hedging, thus enabling them to assist more clients.

The facility can cover any transactions in yen, euro and yuan and is available for tenors of three months, six months and a year, with interest rates determined before transactions.

To use the facility, exporters are only required to submit proof of foreign exchange ownership in domestic banks and an exporter statement letter. They were previously also required to submit export earnings information.

For fund managers, the guarantee is only an investment plan letter in state securities in the country, while buyers of government securities must submit debt securities sale reports.

For companies working on government infrastructure, the underlying transaction is the project approval document from the authorized agency, while for nongovernment projects, they must submit project approval documents from project owners.

Bank Indonesia said it hopes exporters will convert their foreign exchange at domestic banks, instead of in the spot market to help stabilize the rupiah.

The central bank will meet with 20 financial institutions to convey information on the new rules. These are Bank Mandiri, Bank Negara Indonesia, Bank Rakyat Indonesia, CIMB Niaga, HSBC Indonesia, Maybank Indonesia, Standard Chartered Bank Indonesia, Bank of Tokyo-Mitsubishi UFJ, ANZ Indonesia and UOB Indonesia.

The government previously called on exporters to keep their earnings onshore for longer to help stabilize the rupiah, which has lost 7.7 percent of its value so far this year. Vice President Jusuf Kalla said earlier this month that Indonesia's free capital flow regime makes the currency too vulnerable to market volatility.