Indonesia to Hedge Foreign Debt Costs First Time on Rupiah Slide

Indonesia will guard its foreign-debt costs for the first time against exchange-rate fluctuations as the rupiah extends a six-quarter slide versus the dollar.

The Finance Ministry will start hedging interest payments on foreign-currency liabilities against exchange-rate volatility this year to prevent the budget deficit from widening beyond estimates, Bambang Brodjonegoro, head of fiscal policy, told reporters in Jakarta today. The government is studying which instruments to use for the purpose, he said, adding current rules allow such transactions to be undertaken only in 2013.

The rupiah’s 5.9 percent drop last year was the biggest since 2008 and the worst performance among Asia’s 11 most-traded currencies. Indonesia had $90.7 billion in foreign-currency debt as of Dec. 31, or 44.4 percent of its outstanding borrowings, finance ministry data show. The ratio was 45.1 percent at the end of 2011 and 46.3 percent a year earlier. The rupiah, which weakened every quarter since mid-2011, weakened 1.3 percent this month to 9,760 per dollar, according to prices from local banks compiled by Bloomberg.

“Hedging is only a common practice to prevent uncertainty in the budget, and it does not mean we are not confident of the rupiah,” Brodjonegoro said. “Currently we are only allowed to hedge our debt interest payments, but we have proposed to be able to hedge fuel costs in 2014.”

Officials in the nation’s debt management office have discussed the plan in the past two months, Singgih Gunarsa, a spokesman for the office, said by phone today. They have proposed derivatives including currency and interest-rate swaps to the finance minister as possible hedging tools, he said.

Bank Indonesia

Indonesia’s central bank said this week that it stepped up intervention in the past two weeks to support the rupiah after an offshore fixing sank to the biggest discount to the onshore spot rate in almost 16 months.

Bank Indonesia acted to boost dollar supply in the market to revive confidence in the rupiah and narrow the gap between local and overseas prices, Hendar, executive director for monetary policy, said in an interview on Jan. 28. The monetary authority sees room to adjust foreign-exchange rules to temper excess dollar demand and stabilize the rupiah, he said, without elaborating.

The difference between rupiah quotes within Indonesia and those outside reached 2.6 percent on Jan. 11, the widest since Sept. 22, 2011. Analysts at HSBC Holdings Plc led by Paul Mackel in Hong Kong wrote in a research note on Jan. 11 that the “two-tiered market” for the rupiah may prompt companies to hoard dollars and Indonesians to prefer foreign currencies.

Volatility Eases

One-month implied volatility for the rupiah, which measures expected moves in exchange rates used to price options, has declined to 6.25 percent from last year’s peak of 17.73 percent in May, which was the highest level since July 2009, data compiled by Bloomberg show.

The government has a long-term plan to reduce its reliance on international borrowings to better manage its foreign-currency risk, Robert Pakpahan, director general at the debt office said in a Nov. 22 interview.

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