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Currency hedge catch-22 confounds Indonesia as rupiah swings

Tuesday, April 28, 2015 - 15:40
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Indonesian companies encouraged to protect themselves against swings in the rupiah are being presented with a dilemma, as the instability that makes it Asia's most volatile currency also ensures it's the most expensive to hedge.

[JAKARTA] Indonesian companies encouraged to protect themselves against swings in the rupiah are being presented with a dilemma, as the instability that makes it Asia's most volatile currency also ensures it's the most expensive to hedge.

The rupiah's one-month onshore implied yield, a gauge of expected interest rates and fluctuations used to price the forwards that companies use to hedge against exchange-rate losses, rose to 13.05 per cent April 9, the highest level since 2010, before slipping back to 8.76 per cent on Monday, according to data compiled by Bloomberg. That compares with 3.54 per cent for Malaysia's ringgit and 2.51 per cent for the Philippine peso.

"With hedging so expensive, it becomes more viable for companies not to do it as they can book the 9 per cent as profit while their peers who hedge book it as a cost," Branko Windoe, president of the Indonesian arm of ACI, a financial market association, said in an April 17 interview at his office in Jakarta. "That turns into a race to the bottom where nobody wants to hedge, which creates unnecessary volatility." The reluctance of state-owned companies to follow a 2013 rule requiring them to hedge is adding to the risks for Indonesia as President Joko Widodo seeks to support an economy whose growth has slowed for the past four years. Less than 30 per cent of Indonesian companies' new foreign-currency corporate debt is hedged, Bank Indonesia Governor Agus Martowardojo said this month, a situation that could hurt the economy should the rupiah extend its 10 per cent slide over the past 12 months.

PT Garuda Indonesia entered into a hedging agreement in June 2014. PT Perusahaan Listrik Negara has signed a US$950 million hedging facility due to large foreign-exchange exposure from overseas borrowing, President Director Sofyan Basir said April 10 in Jakarta. The facility has yet to be used.

Companies use hedges to mitigate the effect of currency swings on overseas revenue and import costs. Typical agreements include forward contracts, which lock in foreign-exchange rates at some point in the future, and options, which give investors the right to make certain trades at a later date.

PT Pertamina and PT Aneka Tambang, which have been encouraged by State-Owned Enterprises Minister Rini Soemarno to hedge, haven't done so. That's even after Bank Indonesia asked the National Police, the Finance Ministry and the Supreme Audit Agency in September to give statements clarifying that fees incurred would be considered operational costs and not speculation.

Aneka Tambang is considering the premium it has to pay to put in hedges, President Director Tedy Badrujaman said on April 14 in Jakarta. Garuda signed a cross-currency swap to cut interest-rate costs and address a mismatch between its rupiah bonds and dollar-linked revenue, Chief Financial Officer Ari Askhara said in an April 16 interview at his office near Jakarta's airport.

"Hedging would need strong political backing for companies that rely on subsidies for a large part of their revenue," said Mr Askhara, who was formerly finance director at state-owned port operator PT Pelabuhan Indonesia III. "Garuda isn't subsidised, so it's a non-issue for us. But for those companies whose task is to put tax money to work in a transparent way, there's little incentive to hedge."

Subsidies accounted for 27 per cent of oil company Pertamina's revenue in 2014 and 34 per cent for Listrik Negara, according to statements on the companies' websites. These two firms need to hedge, Dahlan Iskan, then minister for state-owned enterprises, said last October.

Pertamina is in discussions with Bank Indonesia and lenders to finalize a hedging facility "in a short time," Finance Director Arief Budiman said in a mobile-phone text message on April 16.

Allowing structured products for the exclusive purpose of guarding against currency moves could offer a less expensive hedging option for companies, said ACI's Windoe, who is also head of treasury at PT Bank Central Asia, the nation's largest lender by market value.

"This becomes a chicken-and-egg problem, where hedging is expensive because of high volatility which is driven by lack of hedging," he said. "Letting banks offer structured products can be one way to break the cycle."

Bank Indonesia will slowly relax rules on structured products to deepen financial markets, Director Nanang Hendarsah said Jan 29 in Jakarta. Such products may allow investors to profit from a change in value of the underlying securities, as well as to benefit from any appreciation in the currency of denomination.

The rupiah and local government bonds declined on Tuesday. The currency weakened 0.1 per cent to 12,990 a dollar as of 1:15 pm in Jakarta, prices from local banks show. The yield on Indonesia's sovereign debt due March 2024 climbed two basis points, or 0.02 percentage point, to 7.72 per cent, the highest since Jan 19, according to the Inter Dealer Market Association.

"Rising implied yields due to demand from companies seeking to hedge would also damp foreign investor demand for local stocks and bonds, so that's an additional concern," Irene Cheung, senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd in Singapore, said in an April 24 interview. "This is something that will take some time to resolve."

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