23 January 2019

Indonesia: Turmoil expected for both domestic and multinational Companies

JAKARTAL- Indonesia intensifes its journey into economic isolationism when banking regulations go into effect banning the use of currencies other than the rupiah for settling domestic transactions.

As much as US$12 billion a day in such settlements between domestic parties, including multinationals doing business in Indonesia,  are expected to be banned and must be transacted in rupiah, which is expected to cause turmoil for both domestic and international companies, unloading currency risk onto local companies as the rupiah continues to descend in value.  Roughly 45 percent of Indonesian working capital and investment lending in the last year was in foreign currencies, according banking research reports, and now will have to be settled in rupiah.

Multinationals, particularly in the extractive industries such as crude production and mining, face disruptions as dollars are commonly used to buy and sell commodities and equipment on the international markets. The mining industry had already been hit with an earlier law that said all ore must be refined in the country, requiring the construction of domestic smelting plants although most mining is far from areas where there is enough energy to operate smelters.

A ban on export of minerals until the smelter issue could be solved resulted in an exports contraction for most of 2015, down 15 percent annually in May. Imports, a leading indicator of domestic demand, are falling even faster, down for the second month by more than 20 percent annually. 

Nonetheless, although the rupiah has been the worst-performing currency in Asia for several months, Ronald Waas, the deputy governor of Bank Indonesia, told bankers on June 15 that  “the  regulation…is expected to promote strengthening and purifying payment transactions within the Republic of Indonesia by the use of rupiah.” 

“In the beginning there may be one-off adjustments to prices and rates, but in the long run, it should make them more cost-efficient,” Peter Jacobs, a director at the monetary authority, said in an e-mailed response to journalists last week. “There is a cost to mitigating foreign-currency risk, but this is good corporate governance and when hedging products become more common in Indonesia, the cost will fall.”

The opposite appears to be happening.  Indonesia is plagued by a current account deficit that for the first quarter reached 1.8 percent of gross domestic product – while it fell over the 2014 final quarter – is expected to widen again. The current account deficit has plagued the currency, Asia’s weakest, which has fallen to its lowest level since the 1997Asian Financial Crisis. 

The country also faces the highest inflation in the Asean region at 7.40 percent annually, limiting the ability of the central bank to raise rates to combat the currency’s decline, which is now close to 13,500 to the US dollar, down from Rs11,500 as late last August. (asia sentinel)

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