Indonesia plans to enforce a new rule requiring commodity firms to keep their export earnings onshore for at least a year, aiming to bolster the country's foreign-exchange reserves and support the rupiah. While the policy seeks to stabilize the economy, exporters express concerns about potential cash flow disruptions and increased borrowing needs.
Indonesia is set to implement a new policy requiring commodity firms to retain their export earnings onshore for a minimum of one year, intensifying an existing requirement. This measure, scheduled to come into effect on March 1st, aims to bolster Indonesia's foreign-exchange reserves and provide support to the rupiah currency.
However, exporters have expressed concerns that the policy will negatively impact their cash flow management and necessitate larger loans to cover daily operational expenses. Currently, exporters are obligated to keep 30% of their export proceeds in Indonesia for a period of at least three months.David Sumual, chief economist at Bank Central Asia, cautioned that a sudden shift in policy could disrupt businesses and strain their cash flow. He emphasized that unprepared exporters would face significant challenges. The Indonesian rupiah has been under pressure from the strengthening US dollar, depreciating by over 7% since the end of September, despite multiple interventions by the central bank. Bank Indonesia's unexpected interest rate cut last week further exacerbated the country's economic woes. This new regulation emerges at a time when Indonesia's natural resources sector, the cornerstone of its economy, is grappling with other abrupt policy changes under the newly inaugurated President Prabowo Subianto.While the incoming administration had previously signaled its intention to extend the foreign-exchange retention period, the magnitude of the changes has taken exporters by surprise. This marks a departure from the more gradual approach adopted by Prabowo's predecessor, Joko Widodo, who relied on tax incentives and clearly communicated export bans to encourage investment in the processing of raw commodities. Moreover, this policy shift coincides with a period when coal and nickel, two of Indonesia's most valuable commodities, are trading near multi-year lows. Both sectors, along with the country's extensive palm oil plantations, will be significantly impacted by this measure. Sutrisno Iwantono, head of the public policy division at the Indonesian Employers Association, expressed concern that such a retention rule could trigger potential job losses due to strained company cash flows within the mining and plantation sectors. He also warned of a ripple effect stemming from reduced coal and mineral production. The commodities covered under the new rule account for nearly half of Indonesia's non-oil and gas exports. Shipments of mining, agricultural, forestry, and fisheries products reached nearly $115 billion last year. Coordinating Minister for Economic Affairs Airlangga Hartarto stated that exporters can utilize their foreign currency proceeds to settle state dues, taxes, and dividends, according to a statement released by the presidential palace. They are also encouraged to convert their funds into rupiah and employ a specific deposit instrument as back-to-back collateral for loans obtained from banks or Indonesia Exim bank. Bank Indonesia Governor Perry Warjiyo affirmed that BI is providing support for the program by offering attractive interest rates on FX deposit instruments and hedging through FX swaps. He further disclosed that BI is in the process of preparing two foreign currency-denominated securities, known as SVBI and SUVBI, where exporters can park their earnings, in addition to term deposits and swaps currently available under the existing policy. These instruments can be traded in the secondary market
COMMODITIES EXPORT EARNINGS INDONESIA RUPIAH FOREIGN EXCHANGE RESERVES CASH FLOW ECONOMIC POLICY BANK INDONESIA
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