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Source: www.asiaecon.org |

INDONESIA AND CHINA SIGN CURRENCY SWAP AGREEMENT


China and Indonesia agreed on a three-year currency swap deal worth 100 billion yuan or 175 trillion rupiah. The agreement aims to promote bilateral trade and direct investment between the two countries, and provide short-term liquidity to stabilize the financial market.  


China and Indonesia agreed on a three-year currency swap deal worth 100 billion yuan or 175 trillion rupiah. The agreement aims to promote bilateral trade and direct investment between the two countries, and provide short-term liquidity to stabilize the financial market.

The Bank of Indonesia announced, “the swap arrangement will contribute positively to an increase in trade and direct investment between the two countries, help provide short-term liquidity to stabilize the financial market, and help Indonesia overcome tight liquidity from overseas funds”.

If both sides agree, the three-year agreement can be extended.

With the rupiah pegged to the U.S. dollar, the currency swap helps the Indonesian Bank to have sufficient funds to defend the peg. Earlier this month, the rupiah was trading around 11,950 per dollar. During this year, the currency has fallen nearly 5.7 percent against the dollar, the second biggest drop among Asia’s 10 most active currencies.

Following the deal, the rupiah rose 1.9 percent to 11,558 per dollar, its biggest gain in 4 months.

With a large amount of overseas debt maturing this year, the Bank of Indonesia needs as much funds in their reserves as they can have to cope with the effects of the global financial meltdown.

Adrianus Mooy, a former Bank of Indonesia governor, welcomed any planned swap agreements Indonesia may forge, saying, “our foreign exchange reserves are still limited”.

As of March 13, 2009, Indonesia’s foreign exchange reserves stood at $53.9 billion, while analysts estimate Indonesia needs around $80 billion to cope with external debt. To escalate foreign reserve problems, nearly $22.6 billion worth of corporate overseas debt will be maturing this year, possibly draining nearly half of the foreign exchange reserves.

If foreign exchange reserves come to dangerous lows, Indonesia can resort to a foreign exchange reserve pool under the ASEAN+3. Under the ASEAN+3 grouping, a pool of funds, whose amount is set to be increased to $120 billion, could be used to add to the foreign exchange reserves of the member countries ofASEAN, under certain circumstances.

Indonesia could also draw on standby facilities provided by several countries and financial institutions to increase foreign exchange reserves. The standby facilities, amounting to $5.5 billion, can be used whenever the country needs the money. The standby facilities are contributed by the World Bank, the Japan Bank for International Cooperation, the Asian Development Bank, and Australia.

Indonesia would also greatly benefit from other currency swaps, as the need for U.S. dollars will diminish while increasing bilateral trade between the two nations under the swap deal. Transactions using dollars will be reduced, boosting the value of the domestic currency.

“We are open to swap arrangements with other nations,” Bank of Indonesia Governor Boediono spoke, on possible similar deals with other countries.

China has been very active in signing currency swap agreements with numerous countries as of late. The Central Bank of China signed a 180 billion yuan swap agreement with the Bank of Korea in December, while a 20 billion yuan deal with Belarus was signed earlier this month.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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