The Indonesian government implements new regulations on foreign exchange retention to strengthen financial stability.

Indonesian President Prabowo Subianto announced on Monday the signing of new foreign exchange management regulations that require natural resource exporters to keep all overseas income in the country for at least one year to optimize the flow of resource benefits domestically and enhance Indonesia's economic resilience.

The benefits of natural resources must be maximized for the development of the country and its people, increasing foreign exchange reserves, and stabilizing exchange rates, "Prabowo said. In the past, a large amount of export revenue was deposited in overseas banks, which put pressure on Indonesia's foreign exchange reserves.

This regulation applies to mining, agriculture, forestry, and fisheries, but the oil and gas industry is exempted. The new regulations have significantly tightened the requirement for 30% foreign exchange to be retained for three months, aiming to increase central bank reserves to $80 billion and maintain financial stability amidst global economic turbulence.

The background of the Indonesian government's push for this reform is that the rupee has recently become one of the worst performing currencies in Asia, continuing to weaken over the past three months due to global trade concerns and the Indonesian government's large-scale fiscal spending plan. To curb the depreciation of the rupee, the Indonesian central bank has repeatedly intervened in the market, and this new regulation is seen as a key means to strengthen foreign exchange supply and stabilize the local currency.

Bank of Indonesia Governor Perry Warjiyo stated:

The expanded rules for retaining foreign exchange earnings will enhance domestic financing capabilities, help stabilize the rupee, and improve the stability of the financial system

However, economists warn that there is still uncertainty about the actual effects of policies. PT Bank Danamon Indonesia economist Hosianna Evalita Situmorang pointed out that:

Foreign exchange earnings can still be used to pay operating costs overseas, so their retention in the domestic market may not reach 100%

Although the new regulations impose certain restrictions on exporters, the government still allows foreign exchange to be used to pay dividends, taxes, loans, and import raw materials to alleviate the financial pressure on businesses.

Hendra Sinadia, Executive Director of the Indonesian Mining Association, stated:

After learning that foreign exchange can still be used for payments, mining companies feel relatively relieved, which helps manage cash flow

From an industrial perspective, natural resource exports will reach 166 billion US dollars in 2023, accounting for 63% of Indonesia's total exports, with minerals, coal, palm oil and other resources being the main contributors. However, the latest data shows that Indonesia's exports of minerals, coal, and palm oil decreased in January, while exports of agricultural and fishery products increased, indicating that global demand fluctuations still pose challenges to Indonesia's exports.

Editor's viewpoint:

The Indonesian government's strengthening of foreign exchange controls to increase reserves and stabilize the rupee is an important measure to address global economic uncertainty. In the short term, this policy will help enhance domestic US dollar liquidity, boost market confidence, and reduce the intervention pressure on the Indonesian central bank. However, the actual impact of the policy depends on the capital allocation strategy of the enterprise, especially how exporters find a balance between paying operating costs overseas and storing foreign exchange domestically.

In addition, the slowdown in Indonesia's economic growth and the decrease in import demand also indicate that domestic demand may face challenges. If companies become more concerned about liquidity, it may affect future investment and trade vitality, which requires the government to further adjust policies to achieve a balance between foreign exchange management and economic growth.