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Indonesia's central bank relaxes forex rules to bolster domestic market

[JAKARTA] Indonesia's central bank on Monday relaxed some of its foreign exchange regulations to bolster and deepen the country's domestic foreign exchange market.

Among the changes, Bank Indonesia relaxed a requirement that banks had to monitor and manage their net foreign exchange exposure every half an hour of the trading day, and said it could now be done at the end of the day.

All of the revisions will be effective from June 1.

Banks in Indonesia can have a maximum net open position (NOP), which measures the difference between assets and liabilities in foreign currencies, of 20 per cent of their capital.

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"Global risks are increasing and the so-called super dollar is possible," said Nanang Hendarsah, a director at the central bank. "This will push companies to hedge, which means there is an urgency to deepen the (forex) market especially for hedging purposes."

Bank Indonesia also removed the minimum period for hedges that foreign investors in its bond and equity markets put on as a way to protect themselves against volatility and illiquidity in the foreign exchange markets.

The central bank had in August 2012 changed the minimum tenor on such forward hedging contracts to one-week from an existing 3-month guideline. It announced it would remove the one-week stipulation, thus enabling foreigners to book even shorter maturity hedges.

To deepen the foreign exchange market, Bank Indonesia also expanded its definition for derivatives to include cross currency swaps. To use cross currency swaps, banks must have at least 1 trillion rupiah (S$1 million) in capital.

A large expansion of foreign currency debt by Indonesian in recent years has led to worries about defaults if the rupiah weakens further and has led Bank Indonesia to push borrowers to hedge their dollar liabilities.

The rupiah market has also been dogged by worries over availability of dollars and poor liquidiity in the currency markets.

Last Friday, Moody's Investor Services, a credit-rating agency, told a media briefing in Jakarta that it is watching companies' foreign-currency borrowing.

"We are concerned that some of these exposures might be unhedged and hence corporates ability to service these obligations might be affected if the rupiah weakens even further," said Simon Chen, Moody's senior analyst for financial institutions.

"It's not clear when we speak to the banks what is hedged or unhedged," Mr Chen said.