The government plans to hedge the value of the rupiah against foreign currencies for the first time this year, so that fluctuations in the rupiah exchange rate do not cause any unwelcome surge in its foreign debt payments. Under the hedging mechanism, the government would set a certain value for the rupiah against foreign currencies, which would be used as the basis for the payment of foreign debts, the acting head of the Finance Ministry’s fiscal agency, Bambang Brodjonegoro said in Jakarta on Wednesday.
“Hedging is basically a common practice to avoid uncertainties in the budget. It does not mean that we do not have faith in the rupiah,” he told reporters. This year, the Finance Ministry issued ministerial regulation No. 12 on hedging and debt management. The regulation stipulates that both banks and non-banks can act as counterparties with the government to perform such hedging mechanisms as long as they have experience in managing foreign exchange (forex) transactions.
The regulation stipulates that the counterparty must have an ‘A’ credit rating from at least two internationally recognized rating agencies. The government will also prioritize Indonesia-based financial institutions in deciding on the counterparty, the regulation adds. The Finance Ministry’s debt management office will be responsible for the hedging process, according to the regulation. “With this regulation, we pay our debts at a fixed currency rate that is set at a certain level,”
The Finance Ministry’s debt management office head, Robert Pakpahan, said when asked about the hedging mechanism. “It’s a kind of ‘insurance policy’ protecting us from losses stemming from currency fluctuations,” he said on Wednesday. The rupiah was Asia’s worst performing currency in 2012, having depreciated 5.9 percent against the US dollar throughout the year. The assumption of the rupiah exchange rate against the US dollar is Rp 9,300 in the 2013 state budget.
Such a target, however, has been met with skepticism by many, including Finance Minister Agus Martowardojo, who recently said that the currency could trade as low as 9,700 throughout the year. On Wednesday, the rupiah fell 0.4 percent to 9,715 against the greenback, prices from local banks compiled by Bloomberg show. Economists agree that the hedging regulation would cushion Indonesia from suffering currency losses when paying its foreign debts, given the weak depreciation trend of the rupiah at the moment.
“The potential amount [of foreign debts] involved could be significant,” Citibank Indonesia economist Helmi Arman wrote in a research note released on Wednesday. With projected payments of Indonesia’s debts and interest amounting to around Rp 90.5 trillion (US$9.4 billion) this year, the hedging regulation would protect the government from having to pay more than the projected figures, said Helmi. Nevertheless, he argued that it was worth paying attention not only to US dollar-denominated debts, as around 45 percent of the government debt is in fact denominated in other currencies, such as the Japanese yen and the euro.
The Finance Ministry’s Bambang said that the government was still undecided as to what would be the foreign currencies to be hedged against the rupiah. “We are still looking for the safest, the most beneficial hedging instrument for Indonesia.” (sat)
source : the jakarta post
source : the jakarta post
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