The introduction of mandated foreign exchange risk management hasn’t just brought benefits to Indonesia’s economic stability, it has also provided an excellent stream of business for CIMB Niaga, which retains its position as the country’s pre-eminent derivatives house.
While the US Federal Reserve has been taking a gradual approach to raising interest rates, its peers in Jakarta have taken a more hawkish stance over the past 12 months. At the end of June, Bank Indonesia increased its policy rate, the seven-day reverse repo rate, by 50 basis points in one go. This move was the third hike in just six weeks, as the Indonesian central bank grappled with a weakening rupiah, which had lost 5% against the dollar up until that point.
Sharp forex moves are a source of serious concern for Indonesia, given the country’s experiences during the Asian financial crisis in 1997 and 1998. During that period, local corporates were unable to service their unhedged US dollar loan exposure, with the resulting slew of defaults bringing the currency down and creating an economic meltdown that shaved 13.8% off the country’s GDP in just one year.
Fortunately for the Indonesian economy, the authorities have taken steps to avoid a repeat of that situation. In 2015, it introduced regulations requiring corporates to hedge out their foreign currency loan exposure, and last year it banned non-rupiah forex transactions onshore.
“The main change in the markets since the previous year is the depreciation of the rupiah from 13,400 to 14,000, and also the increase of Bank Indonesia interest rates. We have adapted to this by increasing the volume of our forex and interest rate hedging demand from clients,” says Ferdinand Wawolumaya, head of trading and structuring at CIMB Niaga.
The figures are impressive, with forex derivatives sales increasing by a staggering 1,300% over the award period.
“In previous years, our volumes of forex options have been very small, whereas over the last 12 months this has been the driver of this part of the business,” says Wawolumaya. “Because the dollar/rupiah has depreciated by so much, and corporates are now required to hedge out part of this exposure, we saw a lot more activity in this area. The macroeconomic climate drove more corporates to hedge, while the relaxation around forex option rules was the most important regulatory change in 2017.”
Key to this expansion was the decision in 2017 by the local securities regulator, OJK, to allow the use of call spread options, when before it had restricted firms to vanilla forex hedging instruments.
By issuing structured products, the bank is able to strengthen the ability to market-make interest rate and forex hedging products for corporate clients. The structured product and forex and interest rate derivatives businesses are therefore complementary
Ferdinand Wawolumaya, CIMB Niaga
“Previously, corporates were looking at just using standard forex hedging instruments, such as forwards and cross currency swaps,” says Wawolumaya. “But now Bank Indonesia and OJK has allowed call spread options, which of course enable a customer to gain protection at a lesser premium, there has been a massive increase in sales of these structures.”
CIMB Niaga has a long history of innovation in Indonesia. In 1987, it became the first bank in the country to introduce ATMs. Then 14 years later it was the first firm in the market to provide online banking services to its customers. Similarly, it has been at the vanguard of developing the local derivatives market, and was a pioneer in providing the first rupiah-structured products onshore in Indonesia.
The past 12 months saw continued success, as the Jakarta-based bank consolidated its position, with sales of rupiah structured products increasing 100%, on top of the 129% rise seen in the year previous – an expansion Wawolumaya attributes to OJK allowing the firm to sell products of a greater duration.
“When we originally approached OJK about structured products, we asked for a licence to sell securities up to three years in duration, but now they are allowing us to sell five-year structures, and this has been well received by our clients as you can see from the sales totals.”
With the structured products being linked to the Jakarta Interbank Offered Rate, the increase in volumes also had a positive knock-on effect on the firm’s corporate interest rate hedging franchise. The net result for CIMB Niaga was a 300% increase in sales of rupiah interest rate derivatives. And it is not just corporates that the firm is serving – the bank also offers rupiah interest rate hedging for the banking books of four Indonesian banks.
“By issuing structured products, the bank is able to strengthen the ability to market-make interest rate and forex hedging products for corporate clients. The structured product and forex and interest rate derivatives businesses are therefore complementary,” says Wawolumaya.
