Korea, Indonesia to facilitate bilateral trade in won, rupiah

The central banks of South Korea and Indonesia agreed to facilitate the settlement of bilateral trade in their currencies from next year as the electric vehicle industry of Asia’s fourth-largest economy is expanding its business in Southeast Asia’s biggest market.

The Bank of Korea (BOK) and Bank Indonesia (BI) said on Sunday that the central banks agreed to establish the operational guidelines for the framework on transactions in South Korean won and Indonesian rupiah. The agreement came after they signed a memorandum of understanding in May on a cooperation framework to promote bilateral transactions in their local currencies.

“The framework, scheduled to be operationalized in 2024, will facilitate the settlement of trade transactions between Indonesia and Korea in their local currencies, reducing exposure to exchange rate risk and costs for businesses and other users,” said the BOK and BI in a joint statement.

Banks in Indonesia and Korea will be able to quote the local currency pair, according to the central banks.

The agreement will ultimately contribute to promoting trade between the two countries, as well as deepening the financial markets in local currencies in both countries, the monetary authorities said.

“This provides more options for users for trade transactions and serves as a key to improving transaction efficiency and strengthening macroeconomic stability by encouraging more extensive use of local currencies for bilateral trade transactions,” said BI Governor Perry Warjiyo.

HYUNDAI’S EV BASE FOR SOUTHEAST ASIA

Indonesia is leading South Korean automaker Hyundai Motor Co.'s EV hub for Southeast Asia.

Hyundai, the world’s third-largest carmaker along with its smaller affiliate Kia Corp., is manufacturing its flagship EV model, the IONIQ 5 crossover at its newly built plant in the Deltamas Industrial complex in Bekasi Regency, about 40 kilometers (25 miles) east of Jakarta.

South Korean LG Energy Solution Ltd., the world’s No. 2 EV battery producer, is also operating a joint plant with Hyundai to supply cells to the carmaker’s factory for EVs to be sold in Southeast Asia.

"Indonesia, with its vast territory and population base, plays a crucial role in the global supply chain of advanced sectors such as batteries and electric vehicles. The interest of Korean businesses in Indonesia is also steadily growing,” said BOK Governor Rhee Chang-yong.

“Against this backdrop, the implementation of the LCT framework which promotes the use of local currencies in bilateral trade transactions, is expected to positively impact economic development through promoting bilateral trade and also wider use of local currency,” Rhee said, referring to the local currency transaction.

Currently, the Chinese yuan is the only foreign currency, except for the US dollar, that South Korea has agreed to use along with the won to facilitate the settlement of bilateral trade. Seoul signed a similar deal with Japan in 1996 but the agreement was terminated after just four months due to a lack of transactions.

Write to Jin-gyu Kang at josep@hankyung.com
 

Jongwoo Cheon edited this article.