BI to Relax Dollar Hedging Rules
ID/Grace Dwitiya Amianti
Bank Indonesia plans to make it easier to engage in short-term foreign exchange hedging in an effort to woo investors worried about currency fluctuations.
All foreign exchange hedging instruments in Indonesia now have tenors of at least three months, unchanged since their introduction in 2005, but Hendar, head of the central bank’s monetary management department, said tools with a shorter time frame would be introduced soon.
The shorter tenor will cut the amount foreign investors need to pay to hedge their funds, he said.
“[Higher costs] inhibit the flow of foreign funds,” Hendar told reporters in a seminar on Tuesday.
In an attempt to remain an attractive investment destination, Indonesia has opted to not impose capital controls. This occurred despite the global financial crisis of 2008 in which there was a massive foreign capital outflow from Indonesia, putting pressure on the rupiah.
Instead, it opted to impose a one-month holding period for the central bank’s debt paper, known as SBI, sell longer-term bills and widen the spread on its overnight lending and deposit rates.
These measures aimed to reduce currency volatility.
But despite its seemingly accommodating stance, Bank Indonesia has been underwhelmed by the inflow.
“Now, with adequate reserves and the potential for substantial capital inflow, this is the time to review the provision that is likely no longer relevant,” Hendar said.
The country’s foreign exchange reserves stood at $106.5 billion at the end of June, which is enough to cover more than five months of the country’s imports and foreign debt payments. The reserves are more than triple the $33.9 billion balance at the end of June 2005.
The central bank plans to introduce hedging instruments with a tenor of a short as one week, Hendar said, adding that the central bank would complete a study on the plan by the end of this year.
“That will bring a positive effect to the bond market and increase our supply of foreign exchange,” Hendar said.
As an illustration, foreign currency held in the central bank term deposit has reached $2.36 billion since its introduction early this year.
“On the other hand, some $4.5 billion in exchange is traded each day by domestic banks in foreign countries, especially Singapore. In fact, our exports have hundreds of billions of dollars and foreign currency traded here is very small,” he said.
Foreign holdings of Indonesian bonds increased by more by $1 billion in July alone, suggesting that foreign investors are attracted to Indonesian high-yields assets, including bonds.
The offshore holdings of Indonesian bonds rose to Rp 234.5 trillion ($24.9 billion) at the end of July from Rp 224.4 trillion at the end of June, according to data from debt management office at the Finance Ministry.