HEDGING IN STATE-OWNED COMPANIES

Lately there had been heightening argument about hedging done by State Owned Companies [BUMN]. The substantial problem was fear that hedging by BUMN would someday” disadvantage the state financial”.

So BUMN players felt the need for legal protection for them in doing the hedging strategy in every transaction based on foreign currency so they would not be criminalized in the future. As known, there had been different opinion between Government’s auditor and BUMN executives in regards to hedging practices. It seemed reasonable that BUMN circles demanded legal protection whereby to their job professionally.

First all the definition of hedging itself must be commonly understood by both parties to synchronize perception. Hedging was strategy in trading “to restrict” or “to protect’ traders form disadvantageous currency. Hedging enable traders to protect themselves from any possible loss when making transaction. The step saw to minimize the risk of loss when monetary fluctuation made it impossible for traders to make profit.

So far the Government already had the Regulation of the Ministry of finance on hedging, i.e. Permenkeu No. 12/PMK.08/3013 on Hedging Transaction in managing Government’s debt. In Permenkeu it was mentioned that although hedging was a system to mitigate risk or protect the value position or obligation against the risk of fluctuation of interest and currency value of the future.

The transaction of hedging was transaction exercised by the Government with their counterpart in controlling inflation risk payment of interest and capital and/to protect the position of debt value from risk or predicted to happen due to currency volatility.

Counterparty of hedging, further referred to as counterparty was bank or non-bank institution and/or international financial institution who was willing and ready to do hedging with the Government. But the substance of the Permenkeu was not addressed to BUMN, so it was necessary to give legal protection for BUMN.

Legal protection which was never given to companies, especially BUMN was classic; excuse by corporate not to do hedging. Beside no legal assurance, BUMN circles also feared the potential of loss in doing hedging, because the risk must be paid for.

In this case, BUMN doing hedging was like buying some sort of insurance policy to prevent loss in the future due to difference in currency exchange value. As know Rupiah was the most fluctuative currency in Southeast Asia, so hedging could mitigate the risk of exchange rate value.

For example, PLN once lost to as much as Rp48 trillion due to currency exchange risk. In combination with company’s income the loss borne by PLN in 2013 totaled Rp29 trillion. And yet in 2012 PLN made profit of Rp.3.2 trillion.

PLN suffered loss because they did not do any hedging when paying debt. Fluctuating Rupiah against USD was because the domestic money market was shallow. By May 2014, the total transaction of foreign currency in Indonesia came to USD 5 billion, while Singapore had posted USD 300 billion per day. And Malaysia and Thailand had scored USD 12 billion per day.

Most Countries of the world were doing transaction of foreign currency by swap. In Indonesia 70% of foreign currency transaction was at the spot market, so in case of sudden transaction where vast amount of USD was needed. Rupiah could suddenly weaken. It would be the right step for the Government to prepare a legal umbrella for BUMN whereby they could do hedging.

Legal protection was an urgent matter because so far BUMN feared that hedging had the potential to cause loss on Government part. The important thing was common perception over hedging itself. Hedging was a way to minimize risk.

For example, Rupiah exchange rate value was Rp11,400 per USD. Considering Rupiah volatility a company choosed to make hedging at Rp11,600 per USD. When soon Rupiah was at Rp11,700 the company only had to pay the excess of hedging. In case Rupiah strengthen to Rp11,200 per USD the over value would be regarded as cost.

Reluctance among BUMN to do hedging was payment in post Rupiah strengthen was feared to be classified as “Government’s loss” trough evaluation by Government’s Auditor or Financial Examination Board [BPK] in fact the hedging concept was just like health insurance policy or natural disaster insurance where premium was paid monthly. Heading expenses was regarded as cost to be paid.

The way it had been, companies or BUMN choosed to buy USD at the spotmarket. By high demand amidst limited supply of foreign currency might cause pressure on Rupiah, but if a company had done hedging, demand at the spot market would be reduced. The result was that Rupiah depreciation would lessen in that case Rupiah stability could be maintained.

To illustrate, PT Pertamina [Persero] as BUMN with high demand of foreign currency per day had not done hedging for fear of the above. And yet high import of oil-gas amidst depreciation of Rupiah could trigger such enormous deficit in oil-gas. For that matter, the Government must sit together to pursue regulation for hedging toward common perception of all parties.

Soon Pertamina could buy USD on forward transaction basis for a certain period of time, for example 3-6 month as needed. Thereby if Pertamina made hedging they could not be blamed as accounting wise payment based on hedging by Pertamina was cost, not loss.

About the technical team who would set up legal ground, it would be best to involve BI, the Ministry of Finance, the Ministry of BUMN, The Financial Examination Board [BPKP], the Police, State Court, and Corruption Eradication Commission [KPK].

Previously BI had issued regulation on hedging transaction for buying and selling. This PBI regulation was supportive to the Regulation [Permen] of BUMN and hedging transaction by BUMN on September 25, 2013. The regulation enable BUMN companies to do hedging

In the future development, BPK had conducted coordinative meeting under the theme of hedging for the interest of the nation to prevent moral hazard. In a closed meeting at the BPK office in Jakarta June 19, 2014 last attended by related institutions i.e. BI, BPK, the Ministry of finance, Bereskrim, KPK, Jampidsus and BPKP.

The meeting outcome presented by BI about hedging, the participants attending meeting at BPK office agreed that the hedging transaction was inclusive of cost consequences, as long as transactions were done consistently, consequently and accountably in accordance with regulation, and the cost was cost to be borne by the Government.

Furthermore with the implementation hedging policy, it was expected that payment of overseas debt [ULN] by the Government trough the ministries/institutions was unaffected by Rupiah depreciation against USD. However implementation of hedging might incur loss due to the difference in exchange rate although the value was not as much as hedging. The point was that risk and burden of hedging would be account of current year APBN.

The coordinative meeting also agreed on common effort to pursue three objective:

Firstly, coordinate effort to stabilized Rupiah through hedging-based transactions.

Secondly, synchronous perception of transaction by hedging of Government’s debt and forex obligation of BUMN especially in regard to loss caused by exchange rate disparity in the hedging process. As known, according to data complied by BI and BPK, only 2 BUMN had done hedging. And yet Hedging could save the company from the risk of loss due to Rupiah depreciation.

Thirdly, to enhance effort of preventing fraudulence caused by hedging of government’s debt. Besides, the coordinative meeting agreed to set up a technical team to follow up action, among others to review stipulation and underscore implementation of regulation and to exercise illumination widely.

In the post agreement era, BI rated that loss caused by hedging on BUMN’s debt was not loss on State’s finance. However, the hedging was done consistently, consequently and the accountable way in accordance with the Law.

BI had pled corporation including BUMN to manage overseas debt effectively, to avoid the risk of mismatch. In this case hedging was the right way to do it: but the few BUMN doing hedging forced BI to run publicizing, illumination and coordination with the Government to enable other BUMN to do hedging. (SS)

Business News - June 27, 2014