Bank Indonesia to beef up tools in battle to save rupiah

Bloomberg

Indonesia’s central bank is intensifying its fight to protect the nation’s currency and bonds with a slew of measures that includes more hedging tools.
Bank Indonesia plans to soon introduce overnight index swaps and interest-rate swaps to widen its pool of hedging tools for investors, exporters and banks.
The central bank will also start offering a one-month tenor foreign-exchange swap hedging facility, said Nanang Hendarsah, executive director for monetary management.
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 dollars and the monetary authority will remain the sole supplier of greenbacks, according to PT Bahana Sekuritas.
“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,” said David Sumual, an economist at PT Bank Central Asia in Jakarta.
“Indonesia needs to establish the market while the government expedites structural reform.”
Bank Indonesia has drained billions of 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 thirteen-fold in about a month.
A new overnight benchmark rate for interbank lending was started from August 1.
The new rate known as Indonia is meant to serve as the basis for commercial lenders to set their prime lending rates.
The central bank initiatives are working and educating exporters and importers about benefits of hedging will be key to managing liquidity, according to Darmawan Junaidi, treasury director of PT Bank Mandiri. The rupiah slumped to as low as 14,943 to a dollar on Tuesday, the lowest level since July 1998, extending losses to 9.2 percent this year, according to data compiled by Bloomberg.
“A rigid policy approach of coercing business to exchange their dollars at all costs, in our view, might not be effective,” Satria Sambijantoro, chief economist at Bahana wrote in a note. “They will only be willing to exchange their dollars when they see rupiah as already undervalued and there is room for currency strengthening — or at least currency stabilisation in the short-run.”