Indonesian Government Decides to Participate in Hedging for Supporting Declining Rupiah

For the 1st time ever, the Indonesian policy makers have decided to guard the foreign debt costs against the exchange rate fluctuations. The Rupiah, the major currency of Indonesia has extended a six quarter slide against the greenback and this movement is touted to be because of this. In 2012, Rupiah dropped by 5.9%, marking its biggest decline since 2008. It was also the worst performing currency among the 11 major Asian currencies. As of 31st December, 2012, Indonesia has a total foreign currency debt of $90.7 billion and it is actually 44.4% of the outstanding borrowing of the same, as far as the Finance Ministry data is concerned. The ratio of foreign currency debt to outstanding borrows was of 45.1% at 2011 year end and 46.3% at 2010 year end. Since mid-2011, Rupiah has declined on every single quarter and on January, 2013; it has so far went down by 1.3%. A single USD costs 9760 Rupiah currently.

Right in 2013, the Indonesia Government will be starting hedging interest payments on the foreign currency liabilities against the exchange rate volatility so that the budget deficit doesn’t end up going beyond the estimates. The news was announced by Bambang Brodjonegoro, who heads the Fiscal Policy of Indonesia. Bambang added that the Government is analyzing numerous instruments in an attempt to find the most suitable one for using in this purpose.

Bambang added further that they have full confidence in Rupiah and hedging is a pretty common practice undertaken to prevent uncertainty in the budget. In 2013, they will only be hedging the debt interest payments; however, they look forward to hedging fuel costs in the next year as well. The debt management office of Indonesia officials have been discussing about this plan for the last 2 months, as confirmed by Singgih Gunarsa who is a spokesman of the office. Singgih confirmed that numerous hedging tools already have been considered so far and one of those are currency and interest rate swaps.

On 11th January, the difference between the quotes of the Rupiah within the country and outside got to 2.6%, the highest level since 22nd September, 2011. On the other hand, the 1-month implied volatility for Rupiah has gone down to 6.25%. This measures the possible moves in the exchange rates which are used to price the options.