JAKARTA: Over the past couple of decades, Indonesian companies have developed a tried and tested strategy to cope with the periodic plunges in the rupiah: retain dollars to protect their profits.
But their behaviour can add to downward pressure on the currency, exacerbating problems for policymakers in southeast Asia’s biggest economy, especially given its relatively open nature compared to neighbours with more restrictive currency regimes.
The rupiah has been one of Asia’s worst performing currencies this year and hit its lowest level since late 2015 at one point last week after being caught up in an emerging market selloff.
Bank Indonesia (BI), the nation’s central bank, has taken various measures to try to boost rupiah use and it is once again prodding firms to sell dollars, but companies surveyed by Reuters are maintaining U.S. currency holdings and only meeting minimum hedging requirements.
Many companies say that with a lot of their costs in dollars and their revenue largely in rupiah they can’t risk getting caught by a slide in the local currency. They also point out that hedging can be very expensive.
Vidjongtius, the president director of Indonesia’s biggest pharmaceutical company, Kalbe Farma
Having “cash on hand” dollars has been a strategy for Kalbe for a long time because “hedging with a banking product is relatively more complex and sometimes hard to monitor, plus there is a cost for that,” he said.
The pharmaceutical industry is particularly exposed to exchange rate risks as its raw materials are mostly imported and it only exports a small part of its production.
New BI Governor Perry Warjiyo told a media gathering last Wednesday that forcing exporters to keep earnings onshore for longer or making companies convert dollar holdings was not currently an option under Indonesia’s laws.
That is in contrast to tougher foreign exchange systems in existence in places like Malaysia, which since 2016 has made exporters convert 75 percent of their earnings into ringgit.
Indonesia is also vulnerable because unlike some countries in the region, it runs a current account deficit. In addition, foreigners own nearly 40 percent of the government’s bonds, so its currency can be hit by outflows from the bond market.
Warjiyo said there was a misperception among some companies about the cost of hedging and some alarmism over how low the rupiah might go.
He has pledged to communicate more on hedging and to provide “a rational expectation” of where the rupiah is heading after he cited market talk suggesting it could pass 16,000 per dollar. It currently trades around 13,900.
Some market participants have began to urge policymakers to reconsider Indonesia’s liberal rules on capital movement.
In a parliamentary hearing this week, Kartika Wirjoatmodjo, chief executive of Bank Mandiri, one of the largest banks in the country, suggested that after the period of volatility passes, the rules be changed to accommodate some sort of capital management.
“A softer approach would be to give exporters an incentive. So if they convert (earnings in dollars) to rupiah, maybe the tax on their deposit can be reduced,” he said.