De-Dollarization to Hit the Business Outlook
    Category: Column By : Raphael Mok Cheng Hao Read : 1236 Date : Tuesday, August 11, 2015 - 21:23:04

    The Bank Indonesia-imposed restrictions on the usage of foreign currency in domestic transactions will be negative for businesses in the near-term as the move will likely increase currency risk and reduce corporate profitability. However, the de-dollarization of the economy should help to support the ailing rupiah, which is at risk of a crisis of confidence.

    With corporate revenues and profits already under pressure from the weak consumption outlook in Indonesia, fresh foreign exchange controls (which came into effect on July 1, 2015) from Bank Indonesia (BI) will likely exert additional pressure on businesses over the near-term, in the form of additional borrowing, hedging, and procurement costs.

    BI has prohibited domestic transactions (both cash and non-cash) carried out in foreign currencies in an attempt to prop up the weakening rupiah. The central bank estimates that around $6 billion or 10% of monthly domestic transactions are conducted in U.S. dollars, and the ban will help to ease the problem of excessive foreign exchange demand, which has contributed, to the rupiah’s 16% sell-off over the past year.

    In order to encourage the use of rupiah, which in theory should provide support to the currency, BI passed Regulation 17 on March 31, which will prohibit the use of foreign currencies in domestic transactions. According to BI, the regulation will help the country avoid a “dollarized economy” and uphold the “sovereignty of the rupiah.” The regulation will apply to both cash and non-cash transactions, and mandates sellers to quote their prices in rupiah. Exceptions, however, are granted to the following:
    1. State budget transactions (i.e. foreign and domestic debt payments, capital expenditure from abroad, income from sales of government bonds denominated in foreign currency)
    2. Grants received or given to a party located outside of Indonesia International trade transactions (i.e. import and export of goods and services, cross border supply of goods and services)
    3. Bank deposits denominated in foreign currencies
    4. International financing transactions where one party is based abroad.
    5. Bank activities in foreign currencies (i.e. export credit, interbank money market, bonds, other securities denominated in foreign currency) government bonds and securities denominated in foreign currencies
    6. Infrastructure projects that are permitted by Bank Indonesia
    7. Transactions that were entered into before July 1 will not be affected until the contract expires.

    Penalty for noncompliance with the new regulation would include an imprisonment term of up to one year and fine up to Rp 1 billion.