CASE STUDY

Proactive Financial Risk Management Helps
Indonesia Manage Currency and Interest Rate
Risks
Indonesia converted USD 700 million ofoutstanding IBRD loans to EUR with fully
fixed interest rates in line with its financial
risk management approach and debt
management strategy. The currency
conversions executed by the World Bank
may save Indonesia USD 177 1 million.

Background

After the Asian financial crisis in the late 1990s, thegovernment of Indonesia adopted a conservative
approach to public debt management to increase
resilience to financial shocks and navigate futureglobal crises.
Indonesia’s debt management strategy focuses on i)
managing its debt-to-GDP ratio at a safe level, ii)
maximizing domestic financing sources and utilizing
external financing as a complement, iii) developing
financing instruments and deepening the investor
base to fulfill financing needs, iv) using debt
instruments to finance projects/programs that
support national development programs, v)
coordinating debt risk management through theAssets and Liabilities Committee, vi) using hedging or
liabilities management mechanisms to manage debt
service fluctuations or to achieve optimum portfoliomanagement,vii)
supporting
infrastructuredevelopment through the PPP scheme and theguarantee mechanism, viii) increasing transparencyof debt management and guarantee-liabilities
throughperiodicpublication
andpublicdissemination.2 A key directive of Indonesia’s 20232026 Medium-Term Debt Strategy (MTDS) is to ensurethat at least 80% of the debt is at a fixed rate.
Indonesia’s debt portfolio is dominated by USDdenominated debt. Financial analysis conducted by
the Ministry of Finance flagged opportunities toThe potential savings are based on the estimated interest to
be paid over the life of the loans (based on forward FX andinterest rates as of July 6th, 2023). The actual savings at final

1

Jakarta downtown skyline with high-rise buildings at sunset
Adobe Stock- By amadeustx

reduce vulnerabilities to currency risk, meet targets
for currency composition, and achieve the desiredbalance between fixed and variable rate debt.

Financial Objective

Help the Government of Indonesia manage currency
and interest rate risks on its debt portfolio.

Financial Solution and OutcomesIndonesia is one of the largest borrowers of IBRDloans. As of June 2021, 95% of Indonesia’s IBRD loans
was denominated in USD. The World Bank Treasury
assessed opportunities to convert a share ofIndonesia’s USD loans into EUR or JPY. At the requestof the Indonesian Debt Management Office, theWorld Bank Treasury executed market transactions
to convert two outstanding loans totaling USD 700
million from a variable rate denominated in USD to a
fully fixed rate in EUR. The conversion primarily aimed
to mitigate currency risk during a timely window ofopportunity when the environment allowed. It
reduced the share of Indonesia’s USD obligations tothe World Bank to 92%. To further reduce USDdenominatedliabilities
exposure,Indonesia
maturity may be higher or lower depending on the FX andinterest rates trajectory.
2
Source: Ministry of Finance, Indonesia

CASE STUDY
diversified the currency composition of its IBRD loan
portfolio by opting for new loans in other currencies
mainly in EUR or JPY. As of August 2023, Indonesia has
decreased the share of USD-denominated obligations
to 86%. The conversions also allowed the debt
management office to reduce the share of variable
rate IBRD loans from 93% to 90%.
Conversion options between major currencies andselect local currencies are embedded features of theIBRD Flexible Loan, making it possible for borrowers
to manage currency and interest rate risks without
entering into hedging transactions directly withmarket counterparties.
The loan conversions for Indonesia may generatepotential savings of USD 177 million over theremaining life of the loans according to market
projections as of July 2023, which can be reallocatedtowards development efforts.
The conversions helped Indonesia proactively
manage currency and interest rate risk in accordancewith its debt management strategy without facing
market counterparties themselves, posting collateral,or exposing themselves to default, replacement, andsettlement risk.

Transaction Structure
Variable rate USD 700 million IBRD loans converted into
fully fixed rate EUR 591.3 million loans.

World Bank Treasury’s Role••••

Analyzed market projections for currency andinterest rates and shared indicative quotes inEUR and JPY to assist the Debt ManagementOffice’s financial analysis and internal discussions.
Provided scenarios and options for alternativerisk management tools such as full and partial
maturity interest rate and currency conversions.
Led discussions with market counterparties
and executed a series of currency swaps,
leveraging the World Bank’s triple-A credit rating
and relationship with international banks, toensure the terms and price for Indonesia are as
favorable as possible under prevailing marketconditions.
Ensured the process was administratively
cost-effective for Indonesia by utilizing the preexisting conversion feature within the loanagreement while hedging IBRD’s own riskexposure.

For emerging economies such as Indonesia, proactive
financial risk management is crucial for sustainable
development. The World Bank Treasury helps
borrowers manage interest rate and currency risks intheir debt portfolios by sharing over 70 years ofcapital markets experience and providing access tohedging tools to mitigate risks.

*includes 6 bps transaction fee for currency conversion

Contact: Miguel Navarro-Martin, Manager, Financial Products & Client Solutions, The World Bank Treasury
 mnavarromartin@worldbank.org  +1 (202) 458 4722
1225 Connecticut Avenue NW, Washington, D.C., 20433, U.S.A.