Indonesia Tightens Export Earnings Retention Rule, Impacting Commodites Sector
Jakarta: Indonesia plans to implement a new regulation mandating commodity firms to retain their export earnings onshore for at least one year. This strengthens an existing requirement that has already led to increased regulatory uncertainty in the sector.
This policy, effective March 1, is designed to bolster Indonesia's foreign exchange reserves and stabilize the rupiah. However, exporters have expressed concerns about its impact on cash flow management, forcing them to secure larger loans for daily expenses.
Currently, exporters are required to hold 30% of their earnings in Indonesia for a minimum of three months. "A sudden adjustment could disrupt businesses and affect their liquidity," cautioned David Sumual, chief economist at Bank Central Asia. "It will be challenging if they are not adequately prepared."
The Indonesian rupiah has been depreciating against a stronger US dollar, losing over 7% since September despite central bank interventions. Bank Indonesia's unexpected interest rate cut last week further exacerbated the situation.
The new regulation coincides with other abrupt policy shifts in Indonesia's natural resources sector, a vital pillar of its economy, under the newly elected President Prabowo Subianto. Bloomberg reported last year that the country is considering cutting nickel mining quotas to boost prices, potentially aggravating global shortages.
Freeport McMoran Inc. and its state-owned partner's copper mine in Indonesia are currently unable to export their output as ministers debate whether to temporarily lift an export ban.
The expanded foreign exchange lock-up had been anticipated by the new government, but the magnitude of the changes has caught exporters off guard. It deviates from the more gradual approach adopted by Prabowo's predecessor, Joko Widodo, who utilized tax incentives and planned export bans to encourage investment in raw commodity processing.
The development comes at a time when coal and nickel, two of Indonesia's top-earning commodities, are trading near multi-year lows. Along with the country's vast palm oil plantations, these sectors will be impacted by the measure.
"A prolonged retention rule could lead to potential layoffs due to constrained cash flows in the mining and plantation sectors," warned Sutrisno Iwantono, head of public policy at the Indonesian Employers Association. "There are also concerns about the potential ripple effect of reduced coal and mineral production."
Commodities covered under the new regulation account for almost half of Indonesia's non-oil and gas exports. Shipments of mining, agricultural, forestry, and fisheries products amounted to nearly $115 billion in 2022.
Coordinating Minister for Economic Affairs Airlangga Hartarto clarified that exporters can utilize their foreign currency earnings to cover state levies, taxes, and dividends. They are also encouraged to convert their funds into rupiah and employ a designated deposit instrument as collateral for loans from banks or Indonesia Exim bank.
"We are supporting the program by offering FX deposit instruments with competitive interest rates and hedging through FX swaps," stated Bank Indonesia Governor Perry Warjiyo. He added that the central bank is developing two new foreign currency-denominated securities, known as SVBI and SUVBI, where exporters can deposit their earnings, in addition to term deposits and swaps available under the current policy. These instruments can be traded in the secondary market.