J.P. Morgan On Recent Indonesian Export Earning Rule Changes

J.P. Morgan weighs in on the recent regulatory shift for Indonesian export earnings to be retained in the country, see below for more details.

"The recently issued government regulation 36/2023 obliges Indonesia’s commodity exporters – with export proceeds greater than US$250k – to retain 30% of their export proceeds from natural resources (DHE SDA) onshore for a minimum of three months effective August 1.

Although there is no conversion requirement into local currency per se, article 9 of the regulation provides for mandatory conversion should issues around macroeconomic or financial stability arise.

This regulation marks an additional measure in response to the low retention of export proceeds in Indonesia. It remains to be seen whether these regulations will affect exporter behavior in a more durable manner without addressing other issues, including the investment, regulatory and operating climate in the commodity producing sector.

FX deposits and gross FX reserves could rise, though impact on net FX reserves is less clear – Based on the recent export data, the regulation could see an increase of up to US$8.5 billion in FX export proceeds retained in the banking system. This should be evident in a rise in onshore FX deposits, which reached US$75.7 billion in May. However, whether the FX proceeds from the regulation are subsequently reflected in the central bank’s FX reserves will be a function of the instruments that the proceeds are placed-in and also of the central bank’s monetary operations.

On the former, the central bank launched a special exporter term-deposit facility in January. While placements in the facility would suggest a rise in gross FX reserves this would not necessarily translate into a rise in net FX reserves, which is a more useful measure of unencumbered reserves. On the latter, the central bank’s borrowings from the banking system would be evident in loans and deposits, subsumed under the IRFCL (International Reserves and Foreign Currency Liquidity) position, thus increasing gross FX reserves."