JAKARTA (TheInsiderStories) - Indonesia’s central bank Bank Indonesia (BI) is planning to expand bilateral currency swap agreements (BCSA) with other central banks to protect the local currency, Rupiah, from volatility of global financial market.
BI Governor Agus Martowardojo said, at present, Indonesia has bilateral currency swap agreements with five central banks in the Asian region, namely Australia, China, South Korea, Japan, and ASEAN.
Recently, BI and Bank of Korea extended BCSA for another three years which allows the two central banks to swap local currencies worth KRW 10.7 trillion or Rp 115 trillion.
“Currently, we are in talks with other central banks to make similar agreements, but we can’t disclose until the agreements reached,” he said on Monday (Mar 6).
Previously, the Federal Reserve Chair Janet Yellen signaled of raising the Fed Fund Rate (FFR) this month, which could further strengthen US dollar against other currencies. The Fed funds rate hike has prompted investors to invest in US dollar-based assets.
Those five countries’ central banks are the important trade partners for Indonesia. However, there are other jurisdictions who are also important for Indonesian bilateral trade, namely India and EU. In the ASEAN level, BI, Bank Negara Malaysia, and Bank of Thailand have signed Memoranda of Understandings (MoUs) to implement BCSA.
“We will implement it around second semester this year,” Agus Martowardoyo stated.
The BCSA will benefit two countries in trade and investment settlement because trader can do financing and make payment with local currencies. It means the two countries will reduce their dependence on US dollar as main trading currency. “We call on exporters and importer to use local currency. We also try to make the transactions to be less costly supported by better infrastructure,” he added.
Indonesia has also upgraded the BCSAs to become bilateral swap agreement (BSA) with some of central banks such as China, Japan, and ASEAN central banks. With BSA, two jurisdictions have the option to use local currency as economic and financial activities but also support existing financial safety net to anticipate the financial crisis.
In addition, Bank Indonesia continues to push businesses to use hedging transactions facility to mitigate the exchange rate risks. The central bank has also other derivative products, namely call spread to facilitate hedging transactions which cost less by around 2-3 percent.
BCSA, hedging transaction facility, and other instruments are important to reduce capital outflow caused by the rise of FFR. BI indicated that the foreign exchange reserves position in Februari 2017 to have increased from January’s position of US$116.9 billion, led by foreign exchange revenues and capital inflow.
“The fundamental economy of Indonesia has been solid, and with adequate instruments such as BSA partnership and crisis management protocol, the impact of FFR hike to Indonesia economy is likely to be limited,” Bank Permata Economist, Josua Pardede said. (RF)