The question of whether the IDR is out of the fragile five comes with an eyebrow lift when some of the new government’s changes are bought into view. 40% of the countries trade is with other ASEAN nations.
A further 15% with China, and 10% UK, leaving only 11% with the US. Leaving it slightly less vulnerable to Taper Tantrum than last year.
It’s NDF trades close to the onshore rate and whilst the economy is not near to internationalization in the same way that China is – due to its low reserves and lesser financial experience when compared to the likes of Singapore or Hong Kong. It is taking some steps to deepen its financial markets.
The government has passed laws requiring onshore firms to hedge their currency risks - a boost to the local banking sector but also a way to increase IDR liquidity whilst also combating some unintended currency corruption. Which goes something like this.
Indonesian factory owner exports his products overseas – takes the hard currency receipts into his bank account in Singapore and once a month pops up for a shopping trip coming home with a suitcase containing USD $9,999 worth of IDR to pay his factory workers.
“ We’re not encouraging them – we’re enforcing them” says Perry Warjiyo, Deputy Governor of Bank Indonesia.
This new local currency hedging is an interesting move when you think what creates liquidity in a currency pair?
Certainly more trading/hedging by more participants – particularly when it’s a regulation - creates new liquidity, and a deeper IDR market benefits both the user and the economy as a whole - especially when it comes to smoother moves versus jumpy thin liquidity spikes.