Brexit and The Urgency of Hedging

Impact on Domestic Financial Markets

In the domestic market, the impact of Brexit Indonesia is relatively limited. The rupiah weakened around Rp 100 per US dollar, while the Jakarta Composite Index (IHSG) fell by 0.82 percent. However, JCI performed better compared to Hong Kong's Hang Seng that fell by 2.92 percent and South Korea's Kospi, which fell by 3.09 percent. At the same time, yields on short-term government securities rose by 1.4%, while the longer tenor bonds rose less.

Although the Brexit’s impact on Indonesian financial market is limited, the various risks arising from the uncertainties should be watched closely. Direct trade transactions between Indonesia and the UK is indeed not too significant. However, Britain's main trading partners such as Europe and the United States are also major trading partners for Indonesia. If UK’s trade performance weaken, the demand of Indonesian product from the major trading partner will likely to weaken as well.

Furthermore, the declining optimism in global financial markets will usually be followed by a tightening liquidity and interest rate hikes. This will cause an increase in the cost of capital for corporations across the globe including Indonesia driven by the increasing yield of bonds. Combined with the US dollar exchange rate appreciation, the cost of foreign debt will even be greater. Adequate risk management is required to minimize the impact utilizing some strategies and instruments. Hedging is one of the solutions.

We have witnessed the impact of the financial crisis that occurred in 1998 to every aspect of the nations life. The losses booked by Citigroup, Deutsche Bank, and Barclays, which reached $ 400 million last year due to the unanticipated floating Swiss franc is another example of the urgency of hedging.

Moreover, despite the relatively small probability of similar crises to happen in the near term, risk mitigation remains to be done to prevent the big effects of the crises. Benjamin Franklin said, “By failing to prepare, you are preparing to fail”. An Indonesian proverbs says,”Prepare the umbrella before the rain”.