Indonesia Asks Companies to Remit Export Earnings

By Leony Aurora and Arijit Ghosh
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Oct. 29 (Bloomberg) -- Indonesia asked state companies to bring export proceeds home and will scrap a levy on overseas palm oil sales to boost the rupiah, after the currency plunged as much as 29 percent in the past month.

The government and the central bank will also buy bonds from the market to restore investor confidence, the government said in a statement in Jakarta last night. The rupiah, which fell as much as 8.7 percent yesterday before recovering, is up 0.9 percent against the dollar today. State companies will also have to report their dollar requirements and buy foreign- exchange through local banks.

Indonesia, the world's biggest palm-oil producer, wants to spur the currency from a seven-year low and bolster investor confidence that's been eroded as funds desert emerging markets amid the global credit crisis. Stocks in Jakarta have declined 59 percent this year, headed for their worst year on record, and the country's bonds have plunged.

``Indonesia is an expected victim of the flight to safety that has been pressuring the currencies of emerging economies in the current environment,'' said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. ``There would not appear to be many easy options for stemming the slide in the rupiah.''

Indonesia may also use currency-swap agreements with central banks in China, Japan and South Korea if needed, Finance Minister Sri Mulyani Indrawati said yesterday.

IMF Bailouts

The International Monetary Fund this month agreed to lend to Ukraine and Hungary as investors sold emerging-market assets. Belarus and Pakistan are also seeking help. Indonesia was one of three countries in Asia to seek a bailout from the IMF during the Asian financial crisis a decade ago.

Indonesia will scrap the palm-oil levy to boost exports after the Trade Ministry on Oct. 24 cut the crude palm oil export-tax rate for November to 2.5 percent. Exporters pay tax on palm-oil shipments using a base price and a tax rate set by the trade ministry every month. Palm oil futures in Malaysia, which have fallen about 65 percent since March, gained for the first time in five days yesterday.

In 2005, the last time the rupiah plunged, Bank Indonesia raised its policy rate by 4.25 percentage points in the five months to December to 12.75 percent, and the government more than doubled fuel prices to help boost the currency from a four- year low in August that year.

Indonesia, where 35 million people live on less than 60 cents a day, raised fuel prices in May by more than a quarter, the first increase in three years, to cut subsidies after crude oil hit a record $135.09 a barrel. The 2008 fuel subsidy budget amounts to 180.3 trillion rupiah ($16.7 billion).

Government Bonds Slide

The government is now considering lowering subsidized fuel prices after crude oil futures fell to the lowest since May 2007, with the contract for December delivery dropping 49 cents to $62.73 a barrel in New York yesterday.

The Jakarta Composite index has plunged 61 percent after touching a record in January. Government bonds have dropped 17 percent, according to data from HSBC Holdings Plc, the worst among 10 Asian nations. Overseas holdings of bonds have declined 11 percent to 94.91 trillion rupiah from a record in August.

``Government bonds were impacted by negative perception of a slowdown and as there's redemptions from bond holders who need to take back the cash to their own countries,'' Sri Mulyani said at a briefing in Jakarta late yesterday. ``We will buy back the bonds to show that the government and BI cares for the quality and price of the bonds.''

Boosting Rupiah Supply

The rupiah is declining even as the government said it expects the budget deficit to narrow to 1 percent of gross domestic product, from a previous forecast of 1.3 percent, on lower oil prices. Indonesia's economy is forecast by the government to expand between 5.5 percent and 6 percent next year.

The central bank's move to ease reserve requirements earlier this month also helped boost the supply of rupiah and contributed to the currency's decline, central bank Governor Boediono said yesterday. The government needs to manage the excess liquidity, he said.

``The government and central bank are trying to do too many things at once with conflicting policy goals,'' said Nikhilesh Bhattacharyya, an economist in Sydney at Moody's Economy.com Inc. ``Over the longer term, I am optimistic about the rupiah. But things are so fluid at the moment that it is hard to know what will happen in the short run, with the risks still weighted to the downside.''

Foreign Reserves

Indonesia's central bank had $57.1 billion of reserves as of Sept. 26. The nation paid back its last loan from the IMF in 2005, four years ahead of schedule.

The Washington-based institution arranged a $25 billion package between 1997 and 2003 to help rescue Indonesia's banking system and rehabilitate the economy by restructuring private and government debt.

The Indonesian government also said yesterday it will allow imports of food and beverages, shoes and garments only by registered importers and through five sea ports and two airports.

State-owned companies won't be allowed to move deposits from one bank to another, in a bid to reduce competition among lenders, Sri Mulyani said.

To contact the reporter on this story: Leony Aurora in Jakarta at laurora@bloomberg.net