Adjustments of the Non-Financial Sector to the Rise in Exchange Rate Volatility and Their Policy Implications in Indonesia

Abstract

This paper presents evidence on exchange rate exposure of the returns of five non-financial sectors—agriculture, mining, consumer goods, basic industry, and manufacturing—in Jakarta Stock Exchange. The data covers the period from January 2000 to July 2006 with monthly frequency. Using different measures of industry-specific real exchange rates, the results of this paper show that none of the five sectors are significantly exposed to exchange rate fluctuations at 5 percent significance level. From an anecdotal survey of a sample of non-financial publicly traded firms, we find that the hedging strategy of the firms in facing exchange rate risk vary across firms. Some firms engage in hedging while others do not. Hedging instruments used by the hedged firms include forwards, swaps, and options. For non-hedged firms, the main reason for not hedging is that the cost of currency hedging is greater than its benefit