Bank Indonesia is intensifying its fight to protect the nation’s currency and bonds with a slew of measures that includes more hedging tools.
The central bank plans to soon introduce overnight index swaps and interest-rate swaps to widen its pool of hedging tools for investors, exporters and banks.
It is also to start offering a one-month tenor foreign-exchange swap hedging facility, executive director for monetary management Nanang Hendarsah said.
Four interest-rate hikes since May and direct market intervention have failed to halt the slump in the rupiah to its 1998 financial crisis level, forcing Bank Indonesia to be more innovative in fighting the contagion sweeping the emerging markets.
Gripped by fear of further weakening in the currency, importers and exporters are chasing US dollars and the monetary authority is to remain the sole supplier of green bucks, PT Bahana Sekuritas said.
“Indonesia has more companies with dollar liability compared to those who are willing to hedge their foreign-exchange earnings, creating an imbalanced market and costly hedging,” PT Bank Central Asia economist David Sumual said. “Indonesia needs to establish the market while the government expedites structural reform.”
Bank Indonesia has drained billions of US dollars from its reserves to halt the currency rout and increased the frequency of foreign-exchange swap auctions from July to boost liquidity in the banking system.
It has also taken steps to lower the hedging cost with the volume of rupiah injected into the market surging almost 13-fold in about a month.
A new overnight benchmark rate for interbank lending was started from Aug. 1. The rate, known as Indonia, is meant to serve as the basis for commercial lenders to set their prime lending rates.
The initiatives are working, but raising awareness among exporters and importers about benefits of hedging is to be critical to managing liquidity, PT Bank Mandiri finance director Darmawan Junaidi said.
Bank Indonesia last month relaunched long-term tradable certificates, which allow participation of non-residents, and slashed minimum transaction size of foreign-exchange swap hedging to US$2 million from US$10 million to steer firms away from purchasing US dollars in spot market.
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