Indonesia will mandate exporters to repatriate part of their foreign currency-denominated earnings starting Aug. 1, as part of efforts to increase dollar supply and help ease pressure on the local currency.
(Bloomberg) — Indonesia will mandate exporters to repatriate part of their foreign currency-denominated earnings starting Aug. 1, as part of efforts to increase dollar supply and help ease pressure on the local currency.
Exporters of natural resources must keep a minimum 30% of their FX proceeds onshore for at least three months, according to a revised government regulation posted Friday. It will apply to those in the mining, plantations, forestry and fisheries sectors with earnings of at least $250,000 or equivalent. The sectors are largely unchanged from the previous rule, despite officials earlier signaling they could include manufacturing.
The government could also require exporters to convert earnings during crisis times. “In the event of problems with macroeconomic stability and/or financial system stability, conversion of natural resource FX export earnings in the special account can be carried out in accordance with applicable laws and regulations,” the regulation read.
Indonesia’s Bid for Dollars Spurs Concern of Capital Flow Strain
The move comes as the rupiah is weighed by a bout of capital outflows. Foreign investors have pulled $308.6 million from the nation’s bond market so far this month, causing the rupiah to be among the worst performers in Asia. The currency has strengthened just 0.4% against the greenback this month while a gauge of Asian peers has climbed almost 2%, according to data compiled by Bloomberg.
The rupiah gained 0.1% to 14,958 against the dollar at the close on Friday, its strongest level in three weeks.
Southeast Asia’s largest economy has been seeking to ensure that the country benefits from its booming commodity sector and nascent downstreaming industry. Bank Indonesia said that bulk of dollar earnings end up being kept in bank accounts abroad where exporters can avail of higher interest rates. The central bank debuted a similar facility in March but it has seen tepid demand.
The rule change can boost Indonesia’s onshore foreign currency deposits by roughly $7 billion dollars cumulative over three months, according to calculations of Citigroup Inc. economist Helmi Arman. Most of this will likely be placed in Bank Indonesia’s special term deposit facility, which in turn will boost the central bank’s reserve position.
“In the midst of high US interest rates and in the absence of any significant positive carry for holding IDR deposits (relative to USD deposits), we have been of the view that capital flow management policies will have to be the main tool to temper resident capital outflows and cap downside risk to Indonesia’s balance of payments,” Arman said.
HSBC Holdings Plc sees “limited potential” this could support the rupiah as exporters may likely convert some of their FX proceeds anyway as they’ve already forgone the opportunity to invest offshore.
“That said, the bigger picture is that commodity prices are falling and the current account will likely fall into deficit from the second quarter onwards,” HSBC said in a note.
–With assistance from Matthew Burgess and Norman Harsono.
(Updates with comments from economists)
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