PLN Signs US$30 Million Hedge Facilities With Three Major Banks

Photo by Bank Indonesia

JAKARTA (TheInsiderStories) – Indonesia state-owned power producer PT Perusahaan Listrik Negara (PLN) signed hedging transactions amounted US$30 million with three banks to minimize any risks arising from the fluctuating exchange rate in the future, said Sahala Lumban Gaol, Expert Staff for Minister of State-Owned Enterprises told press on Monday (21/8).

Hedging transactions are made through an agreement between a company and bank to purchase and sell Rupiah at a certain level against foreign currencies in the future. To raise understanding on the importance of hedging transactions, some law enforcement bodies have agreed that any loss arising from hedging transactions by SOEs will not constitute a state loss, provided that such transactions are made in a consistent, consequent, and accountable manner following the relevant regulations.

PLN signed the facilities with three state-owned lender PT Bank Mandiri Tbk (IDX: BMRI), PT Bank Negara Indonesia Tbk (IDX: BBNI), and PT Bank Rakyat Indonesia Tbk (IDX: BBRI).Previously in 2015, the power producer has signed same facilities with the three banks amounted $950 million in the last 2015 to cover their hedging demand.

“It is impossible to detach risk especially financial risk for a company that deal with such financing activities each day and I think state owned company will be exposed by this risk,” he said at the sidelines of socialization of SOE’s hedging guidelines in Bank Indonesia offices.

He added, hedging facilities can increase yield enhancement of company assets. Sahala explained, the company is pledged to build 35,000 megawatt power plant in the next few years. Company need at least $90 billion that mainly comes from external loans. PLN need $1.9 billion each month to maintain power production in all its plant as well as to build new power plants, where 30 percent of it will comes from foreign exchange financing.

Currently, there are six banks that obtain effective permission from the Financial Services Authority to conduct foreign currency spread call option transactions such as Bank Mandiri, BBRI, BBNI, PT Standard Chartered Bank, PT CIMB Niaga Tbk (IDX: BNGA) and PT Bank UOB Indonesia.

“In order to be cheaper, this call spread is signed in two transactions. On the one hand SOEs buy call spreads or pay premiums, and on the other hand with a certain period and then can sell call spreads,” Deputy Governor Perry Warjiyo stated.

Central Bank’s head of Financial Market Deepening Department, Nanang Hendarsah added, PLN has actually been the last two years of hedging transactions. However, for this time that signed for hedging call spread product with a value of USD30 million.

Nanang said, hedging facilities that used in this transaction with call spread option from previously used Foreign Exchange transaction and Forward Swap. Call spread option has more efficient premium cost compared to other instruments, he added.

In accordance with Central Bank Regulation (PBI) No. 16/21/PBI/2014, BI has mandated SOEs to use hedging facilities to minimize their loan exposure from the external market volatility as well as to spur domestic money market transaction activities. Currently, foreign exchange volume transaction in Indonesia recorded $6 billion per day, compared to last 2013 that only reach $1 billion per day.

Central banks has issued regulation about Standard Operation and Procedure on state owned hedging facilities last year called PBI No. 18/PBI/2016, that has been revised later on 5 July 2017. This revision include hedging facilities using derivative transaction using call spread option, as well as Cross Currency Swap and Interest Rate Swap. Call spread option has lower premium rate, about 2.5 percent per year compared to forward swap that has premium rate 5 percent.

As end of first quarter of 2017, BI noted 2,660 company has forex exchange debt. About 90 percent has sign hedging facilities for loan that matured in the next 6 months and around 88 percent of them has sign hedging facilities for next three months. (YW)