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Gaining Grounds on Trade and Rupiah Security



The Indonesian Government obligated exporters to save their incomes in the domestic bank, instead the foreign exchange reserves plummeted in December 2022. A number of US$7,7 billion had declined compared to the previous year. Uncertainty about the global financial market is believed to cause the downfall. The Indonesian President, Jokowi, took action to evaluate the current export earnings (DHE) regulation. As a result, Jokowi demanded that his subordinates thoroughly revise PP No.1/2019, circulating the DHE regulation on natural resources. The Coordinating Minister for the Economy, Airlangga Hartarto, stated that this endeavor surged in hopes of simultaneously increasing exports and foreign exchange reserves. Other developing countries such as Thailand and India have previously established a regulation in which they store their incomes within six months (Thailand) or a year (India). Unfortunately, The Indonesian Government has yet to make their approach to this subject. As far as additions of new sectors to the PP No.1/2019, the manufacturing sector is still in talks to be included in it. Airlangga added that the current mandatory sectors stated in the regulation are mining, plantations, forestry, and fisheries. Airlangga Hartanto conveyed this according to President Jokowi's direction in a limited cabinet meeting at the Presidential Palace, Wednesday (11/1/2023).


A record high of US$268,2 billion was achieved in the export earnings during January-November 2021. Most of it came from crude palm oil, iron and steel, and coal. In other words, the plantations and mining sectors are dominating Indonesia’s exports. Maintaining this substantial amount in the long term would have resulted in the withholding taxes of natural resource exporters. Nevertheless, they violated the policy and kept their savings in a foreign country. Consequently, this turned into one of the factors in the misalignment of reserves and the number of exports. This action was preferably taken considering the high-interest foreign banks have to offer. The Central Bank of Indonesia has come down to prevent export earnings from going overseas. For instance, BI allowed domestic banks to compare interest rates with foreign ones. This step allows exporters to be persuaded in bringing their money inside the country. Moreover, an extended measure to launch a new monetary instrument is needed for foreign currency “savings.” As a result, DHE monetary operations instruments are projected to boost the supply of foreign exchange in the domestic financial market. Long-term benefits from the DHE monetary operations instrument are expected to strengthen the rupiah exchange rate, provide solid foreign exchange reserves, and achieve macroeconomic stability.


Innovative ideas appeared as the Central Bank strived to take DHE into repo transactions, such as rupiah monetary operation. The decision is set to adapt to the latest financial market happenings. Similarly, the upcoming monetary policy also consists of two measures–actions when it lacks and exceeds liquidity. When a bank lacks liquidity, it can sell government securities (SBN) to BI using a repurchase agreement (repo) within a certain time, and vice versa. Along with that, the SBN repo transaction rate acts as a benchmark, called BI 7-day Reverse Repo rate (BI7DRR). More importantly, to optimize the idea, BI decided to combine DHE and DNDF (domestic non-deliverable forward) monetary operations instruments. A currency rate agreement between the two parties is supposed to occur at the end. Other than that, the DNDF market could be seen as a way to fulfill hedging efforts and forecast changes in the exchange rate. The third innovation is designed to be released when global interest rates and inflations follow an upward trend. Based on the law of economics, the difference paid by BI in the DHE and DNDF cases, respectively, is an incentive premium for the availability of foreign exchange in the future. Meanwhile, the reference interest rate set by BI represents the pure cost of funds of the rupiah. Identical to the previous innovation, this method could predict inflation by analyzing the changes in the reference interest rate. Implementing these three concepts correspondingly to its case will accomplish what the President wished for.


Sources:

Bisnis

CNBC Indonesia

Nasdaq


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