Indonesia Forces Exporters to Keep FX Earnings Onshore

(Bloomberg) -- Indonesia is pushing ahead with a plan to force natural resource exporters to keep more foreign exchange earnings onshore in Southeast Asia’s largest economy, aiming to bolster central bank reserves by $80 billion and reverse a slide in the country’s beleaguered currency.

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President Prabowo Subianto on Monday said he had signed a regulation requiring exporters across a wide swathe of Indonesia’s natural resources industry — including mining, plantation, forestry and fisheries sectors — to retain all of their overseas earnings in the country for a year.

The new rules, which mark a change from requiring companies in the sectors to keep 30% of proceeds onshore for at least three months, will take effect in March. Officials estimate the move will add $80 billion to the central bank’s foreign exchange reserves this year.

Oil and gas exporters are exempt from the regulation, Prabowo told reporters. He added that exporters will be allowed to use their foreign earnings to pay dividends, taxes, loan payments and other obligations, as well as to procure raw materials, capital goods and other materials not readily available locally.

“Natural resource revenues must be optimized for the nation and the people — for development, domestic money circulation, increasing foreign exchange reserves, strengthening the exchange rate,” Prabowo said. Up till now, he added, “funds have been largely deposited in banks abroad.”

Natural resource exports from the mining, plantation, forestry and fisheries sectors amounted to $166 billion or 63% of Indonesia’s total exports last year, according to Coordinating Minister for Economic Affairs Airlangga Hartarto.

Indonesian Mining Association Executive Director Hendra Sinadia said affected miners were “quite relieved” to learn that their foreign earnings could still be used for various payments, helping them to better manage cash flow.

Hosianna Evalita Situmorang, an economist at PT Bank Danamon Indonesia, said more technical information about the allowed uses of foreign exchange is needed to understand the change’s full impact.

“With foreign exchange still allowed to be used for payment and operating costs in foreign exchange, the value placed in the domestic financial market may not be as effective as 100%,” she said.

The rule change, raised publicly by Prabowo’s new administration last month, comes as Indonesia is seeking to prop up the rupiah, which has been among Asia’s worst performers against the dollar in the past three months amid concerns of global trade tensions, weakening economic growth and Prabowo’s big-ticket spending plans. Persistent weakness has prompted market interventions by the central bank to smooth out volatility and boost market confidence.

Bank Indonesia Governor Perry Warjiyo said Monday that he expected the expanded export forex earnings rule to boost domestic financing, aid rupiah stability and improve financial system stability.

The announcement of the rules change came shortly after officials released monthly trade data underscoring weak consumption in Indonesia’s $1.4 trillion economy, with the country posting a rare drop in imports as consumers cut back on imported goods spending in January. The statistics agency attributed the declines to industrial and economic activity running below full capacity in the wake of recent holidays.

Monthly exports rose, but at their weakest pace in seven months as a steep jump in agricultural and fisheries products was offset by declines in shipments of mining products, coal and palm oil.

--With assistance from Prima Wirayani.

(Updates with comment from mining association. Earlier version corrected value of Indonesia’s economy.)

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