The Indonesian government plans to start hedging its foreign currency liabilities this year to support the currency, meaning it will deepen the country’s swap markets and provide a model for banks and corporations to become more active in managing foreign exchange risks.
Indonesia’s finance minister Agus Martowardojo issued a decree last month which will allow the government to hedge its foreign currency liabilities in both bonds and international loans. The country’s outstanding foreign currency debt comprises 44.4% of its IDR1,975 trillion (US$204 billion) of debt outstanding, according to local press which reported the change in regulation.
The rupiah was the worst performing currency among the 11 most traded Asian currencies in 2012, according to Bloomberg data. It weakened by 5.9% as the country’s current account deficit continued for the fourth quarter in a row. It opened trading on January 31 at IDR9,795 to the dollar.
The aim of the change in regulations is to enable the sovereign to keep to its planned debt repayments, as the currency mismatch means its foreign currency liabilities will increase if they are left unhedged.
Further details have not been made public, and commentators are unsure whether the government plans to hedge its offshore liabilities entirely, or the instruments it plans to use.
“By our calculations the total amount outstanding including interest payments for 2013 will be around IDR100 trillion, however the debt principle payments are not all in US dollars,” said Destry Damayanti, chief economist at Bank Mandiri.
“Around 40%-45% of [the liabilities] are in yen, euros and other foreign currencies such as the Singapore dollar. We are still not clear whether the government wants to hedge all of these, or just US dollars.”
However Indonesia is unlikely to be able to hedge its entire outstanding debt, as it would be too much of a shock to the domestic market.
“It’s unlikely that Indonesia can fully hedge their entire stock of foreign currency-denominated liabilities because it’s just too large,” said Christian de Guzman, vice president and senior analyst at Moody’s.
The market for hedging in Indonesia is very limited. So if the government wants to hedge it has two options. Either it can go to the offshore markets, or it can make the onshore swap market more liquid, according to Damayanti.
“They should choose to develop our swap market onshore otherwise they will have to go to the NDF [non-deliverable forward] market and this is out of the control of our central bank.”
Deeper market
“The government will take the lead on developing the swap market and others will follow. Once we have a liquid swap market this will provide some certainty for corporates, as they can hedge their positions, so I think this will be an incentive for corporates to issue more global bonds,” said Damayanti.
At the moment, a majority of companies and banks in Indonesia issue bonds denominated in rupiah rather than seeking funding offshore. This is due to a combination of better pricing, a lack of name recognition in the international market and the relatively small fundraising needs of the companies.
However, at the moment, those companies able to issue offshore and borrow funds in foreign currencies have to leave their positions unhedged. This is an added disincentive to tap the international markets.
The details of the government’s steps to improve the swap market depend on the central bank’s response to this proposal, which is not publicly available.
“Once this plan takes effect it will affect the Indonesian forward market. That’s why [the government] needs co-operation with Bank Indonesia (BI). The forex market is under control of the central bank and liquidity at the moment is very tight, not just for the forward but even for the spot market,” said Damayanti.
Debt management
Indonesia’s sovereign has a much larger percentage of its liabilities denominated in foreign currencies than other governments in the region, according to de Guzman. This is because the stock of domestic savings is insufficient for the government to issue debt exclusively in rupiah.
Indonesia is not alone, around Asia governments are attempting to better managing their liabilities as their markets grow and mature.
“This is in line with active debt management practices that you see elsewhere in the region. For example the Philippines is actively swapping its shorter-term paper for longer-term paper, so this is part of that broader theme as debt management officials become more sophisticated,” said de Guzman.
And although its percentage of foreign currency debt is lower, Thailand is also looking to fully hedge its mismatches by the end of this year.