April 25, 2018 / 2:31 AM / 8 months ago

UPDATE 3-Indonesia urges firms to bolster hedging as rupiah risks grow

* Current minimum requirement is 25 pct of liabilities 3-6 months before they are due

* Rupiah at fresh 2-year low; stock index down by 2 pct; bond yield up

* Indonesia prone to capital outflows due to high foreign ownership of govt bonds (Adds details of market movements and outflows)

JAKARTA, April 25 (Reuters) - Indonesia’s central bank on Wednesday urged businesses to hedge their foreign exchange needs beyond minimum requirements, as policymakers seek to mitigate risks of further capital outflows following the rupiah’s slump.

The U.S. dollar’s broad rally since February and particularly in the past couple of weeks has been fuelled by worries over inflation and bond supply in the United States and a subsequent spike in Treasury yields. As investors slowly reduce dollar-funded carry trades in emerging markets, the Indonesian rupiah has become one of Asia’s biggest decliners.

Nanang Hendarsah, who heads the department at Bank Indonesia responsible for deepening financial markets, said that hedging schemes will help foster stability in the currency market. The rupiah’s heightened volatility risks also come at a time when many companies usually pay their offshore debts and transfer dividends abroad, pushing dollar demand higher, he said.

“Even though BI will continue to maintain stability of the currency, we need the support of many parties to maintain this through hedging schemes,” Hendarsah told Reuters on Wednesday.

The rupiah touched 13,915 per dollar at 0740 GMT on Wednesday, a fresh two-year low. The main stock index dropped by as much as 2.4 percent earlier, while the benchmark 10-year government bond yield rose to 6.944 percent, the highest since August 2017.

The dollar has rallied through much of the past week as concerns over the U.S.-China trade dispute receded, and as the U.S. 10-year bond yield shot past 3 percent for the first time in four years.

Southeast Asia’s largest economy is especially vulnerable to sudden capital flight from its sovereign bond market, which could weaken the rupiah further.

Foreigners owned 861.02 trillion rupiah ($61.94 billion) worth of Indonesian government bonds or 39 percent of the total, as of April 24.

They sold a combined 12.32 trillion rupiah of Indonesian bonds and stocks in the three consecutive trading days to Tuesday.

BI Governor Agus Martowardojo said on Tuesday the central bank had been intervening with “quite a sizeable amount” to defend the rupiah and will continue to stabilise the currency.

Under central bank rules introduced in 2014, companies are required to hedge a minimum 25 percent of their liabilities in foreign currency 3-6 months before they come due.

Hendarsah said while most companies meet those requirements, they have not gone beyond the minimum threshold. However, about 10 banks have improved their hedging products, adding more derivative products, such as forex call spread options, interest rate swaps and cross currency swaps, he said.

Indonesia’s financial regulator on Wednesday removed cash collateral requirements for banks selling structured products, a move that Hendarsah expects will help make hedging cheaper for bank customers.

For now, market participants expect the rupiah to continue to face pressure though they don’t anticipate the kinds of precipitous declines seen in past years. Lukman Otunuga, an analyst with forex broker FXTM, said technical traders may continue to test the 13,900 level despite BI intervention.

S&P said in March a rupiah exchange rate of 15,000 a dollar is “the psychological level” at which companies with weak balance-sheets could struggle with repayments and those with good cashflow might start to proactively restructure their debt.

BI, which will have a new governor next month, managed to keep the rupiah relatively steady throughout most of 2017. The currency weakened less than 1 percent despite the Federal Reserve raising U.S. interest rates three times in the year and BI cutting its key rate twice.

Indonesia has also been upgraded by Fitch and Moody’s to one notch above the lowest investment grade, while S&P rates the government debt at the bottom of its investment grade rankings.

“We believe UST yield will not sustainably go higher than 3 percent,” said Handy Yunianto, head of fixed income research at Mandiri Sekuritas. “The rupiah also won’t weaken to more than 14,000 against U.S. dollar by end of this year.” ($1 = 13,900.0000 rupiah) (Reporting by Gayatri Suroyo and Fransiska Nangoy; Editing by Shri Navaratnam and Sam Holmes)

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