Rupiah hits two-year low
JAKARTA: Indonesia’s central bank urged businesses to hedge their foreign exchange needs beyond minimum requirements, as policymakers seek to mitigate risks of further capital outflows following the rupiah’s recent slump.
The US dollar’s broad rally since February and particularly in the past couple of weeks has been fuelled by worries over inflation and bond supply in the United States and a subsequent spike in Treasury yields.
As investors slowly reduce dollar-funded carry trades in emerging markets, Indonesia’s rupiah has become one of Asia’s biggest decliners.
Nanang Hendarsah, who heads the department at Bank Indonesia (BI) responsible for deepening financial markets, said that hedging schemes would help foster stability in the currency market.
The rupiah’s heightened volatility risks also came at a time when many companies usually paid their offshore debts and transferred dividends abroad, pushing US dollar demand higher, he said.
“Even though BI will continue to maintain stability of the currency, we need the support of many parties to maintain this through hedging schemes,” Hendarsah told Reuters.
The rupiah touched 13,905 per US dollar yesterday, a fresh two-year low.
The US dollar has rallied through much of the past week as concerns over the US-China trade dispute receded, and as the US 10-year bond yield shot past 3% for the first time in four years.
South-East Asia’s largest economy is especially vulnerable to sudden capital flight from its sovereign bond market, which could weaken the rupiah further. Foreigners hold nearly 40% of government bonds.
BI governor Agus Martowardojo said on Tuesday the central bank had been intervening with “quite a sizeable amount” to defend the rupiah and would continue to stabilise the currency.
Under central bank rules introduced in 2014, companies are required to hedge a minimum 25% of their liabilities in foreign currency three to six months before they come due.
Hendarsah said while most companies met those requirements, they have not gone beyond the minimum threshold.
However, about 10 banks have improved their hedging products, adding more derivative products, such as forex call spread options, interest rate swaps and cross currency swaps, he said.
Indonesia’s financial regulator yesterday removed cash collateral requirements for banks selling structured products, a move that Hendarsah expects will help make hedging cheaper for bank customers.
For now, market participants expect the rupiah to continue to face pressure though they don’t anticipate the kinds of precipitous declines seen in past years. Lukman Otunuga, an analyst with forex broker FXTM said technical traders may continue to test the 13,900 level despite BI intervention.
S&P said in March a rupiah exchange rate of 15,000 a dollar is “the psychological level” at which companies with weak balance-sheets could struggle with repayments and at which those with good cashflow might start to proactively restructure their debt.
BI, which will have a new governor next month, managed to keep the rupiah relatively steady throughout most of 2017. The currency weakened less than 1% despite the Federal Reserve raising US interest rates three times in the year and BI cutting its key rate twice.