Financial Crime World

Indonesia’s Proactive Risk Management Strategy Yields Significant Savings in Currency and Interest Rate Risks

Strengthening Financial Resilience through Effective Debt Management

Jakarta - Indonesia has successfully executed a currency conversion strategy that could potentially save the country USD 1.771 million, demonstrating its proactive approach to financial risk management.

Reducing Vulnerability to Currency Risks

The World Bank Treasury played a key role in facilitating the transaction, which involved converting USD 700 million of outstanding International Bank for Reconstruction and Development (IBRD) loans from variable rates denominated in US dollars to fully fixed rates in euros. This move aims to reduce Indonesia’s vulnerability to currency risks and achieve a balance between fixed and variable rate debt.

Debt Management Strategy

As per Indonesia’s 2023-2026 Medium-Term Debt Strategy, at least 80% of its debt must be at a fixed rate. The country has been proactive in managing its debt portfolio, focusing on maximizing domestic financing sources and utilizing external financing as a complement. Its debt management strategy involves:

  • Coordinating debt risk management through the Assets and Liabilities Committee
  • Using hedging or liabilities management mechanisms to manage debt service fluctuations
  • Supporting infrastructure development through public-private partnerships

The Role of the World Bank Treasury

The World Bank Treasury played a crucial role in facilitating the currency conversion, providing market projections for currency and interest rates, scenarios for alternative risk management tools, and executing a series of currency swaps. The transaction was executed at a favorable price, leveraging the World Bank’s triple-Α credit rating and relationship with international banks.

Benefits of Proactive Financial Risk Management

Indonesia’s proactive financial risk management approach has yielded significant benefits, including:

  • Reduced exposure to USD-denominated liabilities
  • Increased diversification of its IBRD loan portfolio

As of August 2023, Indonesia has decreased the share of USD-denominated obligations to 86%, and the debt management office has also reduced the share of variable rate IBRD loans from 93% to 90%.

Expertise in Risk Management

The World Bank Treasury’s role in facilitating the currency conversion demonstrates its expertise in helping borrowers manage interest rate and currency risks in their debt portfolios. For emerging economies like Indonesia, proactive financial risk management is crucial for sustainable development.

Contact Information

For more information or assistance with financial risk management strategies, please contact:

  • Miguel Navarro-Martin, Manager, Financial Products & Client Solutions, The World Bank Treasury