Bank Indonesia Eases Currency Hedge Rules

By webadmin on 05:31 pm Aug 11, 2012
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Dion Bisara

Bank Indonesia has relaxed the rules for the hedging of foreign exchange transactions in order to prop up the rupiah after it announced the country had posted a record-high current account deficit blamed on a weak global economy.

Indonesia’s current account deficit — the extent to which the value of imports outpaces that of exports — stood at $6.9 billion in the second quarter, equivalent to 3.1 percent of the country’s gross domestic product.

The shortfall widened from a revised $3.2 billion deficit (1.5 percent of GDP) in the first quarter, the central bank announced in a statement on Friday.

The current account deficit is likely to weaken the already-battered rupiah further. The country’s currency is among the worst-performing in the region, having lost 4.5 percent against the US dollar so far this year. It strengthened 0.06 percent to 9,477 to the dollar on Friday, according to Bank Indonesia data.

“We need to take orchestrated policy measures so that the current account deficit will adjust toward a sustainable level in order to maintain economy growth,” Bank Indonesia governor Darmin Nasution said in the statement. Bank Indonesia held a meeting with the Finance Ministry to discuss the problems on Friday.

To help the local currency, the central bank said that starting on Tuesday, investors will be able to hedge their foreign exchange transactions using financial instruments that have tenors of as short as one week.

At the moment, all foreign exchange hedging instruments in Indonesia have tenors of at least three months, unchanged since their introduction in 2005.

The change aims to lure more foreign funds into the country because investors will have more flexibility to shield themselves against fluctuations in the rupiah. A shorter tenor will reduce the amount that foreign investors need to pay to hedge their funds.

Bank Indonesia also said on Friday that it had raised the floor of the money market rate by 25 basis points to 4 percent from the original level of 3.75 percent. The upper level remains at 6.75 percent.

The range marks the rate for the standing lending facility on the high end and the standing deposit facility on the lower end. That means that the cost of borrowing from the central bank is kept at 6.75 percent and sets returns from investing in central bank bills at as much as 4 percent.

The action aims to absorb excess rupiah liquidity, in turn helping the rupiah to strengthen against the dollar.

The new range, which took effect on Friday, compares to Bank Indonesia’s benchmark interest rate of 5.75 percent. The BI rate was kept on hold on Thursday, leaving it at a record low for a sixth consecutive month.

Bank Indonesia also said it was mulling plans to tighten banks’ lending requirements by banning the use of non-collateral loans as down payments for other lending, such as mortgages or vehicle loans.

Several economists in Jakarta hailed the collection of policy moves as a sign the central bank was aiming to better manage monetary and economics policies amid global market volatility.

Eric Alexander Sugandi, an economist at Standard Chartered Bank, said Indonesia’s current account deficit was temporary and healthy because it reflected weak external demand, while imports largely consisted of raw and capital goods.

“Indonesia is still growing strong and that makes a current account deficit not as dangerous as people might think,” the economist said.

Meanwhile, Coordinating Minister for the Economy Hatta Rajasa said the government would focus on curbing imports, especially of oil and gas.

“In the medium term, government policies are aiming to reduce import dependency and promote exports,” he said.

June’s $1.3 billion trade deficit was the third consecutive monthly trade deficit, bringing the total second-quarter trade deficit to $2.29 billion.

The deficit in part reflects the impact of Europe debt crisis, which has sapped demand from China and India, two of the major export markets for Indonesian commodities.

But Indonesia’s robust domestic growth, boosted by consumption and investment, means imports of capital goods and fuel increased.

Indonesia reported on Monday that its economy, the largest in Southeast Asia, grew 6.4 percent year-on-year in the second quarter, accelerating from 6.3 percent growth in the first quarter.

Investments constituted 32.9 percent of gross domestic product in the second quarter, the biggest share since the 1997 Asian financial crisis. Foreign direct investment in particular increased 30 percent.

As a result, the capital and financial account — which reflects the net change in national ownership of assets — recorded a $5.5 billion surplus in the second quarter, compared with a revised $2.5 billion surplus in the first quarter.

Nevertheless, the capital account surplus was not enough to counterbalance the current account deficit and, as a result, the deficit in Indonesia’s balance of payments widened to $2.8 billion in the second quarter from $1 billion in the first quarter.

Bank Indonesia has forecast the current account deficit to narrow to around 2 percent of GDP in the second half, with the central bank expecting exports to recover and imports to slow. It also expects the capital and financial account to expand further in the second half of the year.