G20 host Indonesia promotes FX diversification as part of stimulus exit

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© Reuters. FILE PHOTO: Indonesia’s Central Bank Governor Perry Warjiyo speaks during a media briefing at Bank Indonesia headquarters in Jakarta, Indonesia, December 19, 2019. REUTERS/Ajeng Dinar Ulfiana

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By Gayatri Suroyo and Fransiska Nangoy

JAKARTA (Reuters) – Top Indonesian economic officials on Wednesday backed the expanded use of local currencies in trade and investment, instead of the U.S. dollar, to help maintain stability in global financial markets as pandemic-era stimulus is withdrawn.

Indonesia, which holds the presidency of the Group of 20 major economies this year, and a number of Asian countries have bilateral deals to settle transactions in domestic currencies, known as local currency settlement (LCS) arrangements, which cut demand for the dollar.

Bilateral currency swaps among members of the Association of Southeast Asian Nations (ASEAN), China, Japan and South Korea have reached $380 billion, according to the People’s Bank of China.

Indonesian Finance Minister Sri Mulyani Indrawati said LCS arrangements should be replicated more broadly globally to manage shocks, especially given emerging nations face potential capital outflows when bigger economies tighten monetary policy.

“This (LCS) has been brought into a global agenda because this can also create a financial safety net for financial transactions between countries and reduce the vulnerability risks due to global economic shocks that cause financial instability,” Sri Mulyani told a seminar ahead of a meeting of G20 finance ministers and central bank governors on Thursday.

Currency diversification would support economic stability, allowing countries to sustain their recovery from the COVID-19 pandemic, she said.

Indonesian officials have said the country’s main priority for this week’s G20 meetings will be to ensure that developed economies’ exit from easy monetary policy is well calibrated, well planned and well communicated, in order to limit the spillover impact on developing economies.

Previous periods of global monetary tightening have triggered capital outflows from emerging countries as investors flock to put their money in safe-haven assets. Indonesia saw the rupiah currency plummet by more than 20% in 2013 during the so-called “taper tantrum”.

Bank Indonesia (BI) Governor Perry Warjiyo told the seminar emerging economies will be able to weather global monetary tightening, including U.S. rate hikes, “much better” this year compared with previous periods of tightening.

Emerging markets, like Indonesia, had in place a better policy framework, higher foreign exchange reserves and had made efforts to deepen financial markets, he said, listing the LCS deals as an example.

LCS arrangements had cut Indonesia’s U.S. dollar exposure by $2.53 billion in 2021 and a further 10% increase in such settlements is expected this year as BI sought to expand deals with other countries and develop more hedging instruments, Warjiyo said.

China will work with Asian countries to beef up the use of local currencies in trade and investment, Yi Gang, the governor of the central bank, told the seminar, as part of plans to strengthen regional economic resilience.

Source: Investing.com