Market Pulse

CURRENCY
Cabinet Line up Hurts the Rupiah

President Jokowi's cabinet lineup did not impress the market with the rupiah tumbling to a low of Rp12,169 per US$, a day after the announcement. The rupiah continued to wobble throughout the week, before ultimately closing at Rp12,085 on Friday, just 0.17 percent weaker than it was a week ago. A day earlier, the Government announced regulations designed to limit the risk exposure of volatile currency swings that could hurt companies with large foreign currency borrowings should the rupiah weaken further. Regulators want to avoid another 1997/8 financial crisisand are now insisting that companies have at least a BB global rating before they can borrow in foreign currency. Furthermore, these companies have to hedge at least 20 percent of their foreign currency loans and maintain a foreign currency asset to foreign currency liability (liquidity) ratio of 50 percent. Under this scheme at least 70 percent of the company's exposure to currency swings is hedged or protected. The Government appears to be anticipating and preparing for a potentially weaker rupiah should short-term foreign funds flow back to the US, with US interest rates on the rise and the US economy showing better results than other major economies. Everyone is hoping this will happen gradually, thus making it easier for the market and its players to adjust to.

November 4, 2014