Indonesia to Need Letter of Credit for Commodity Sale

By Yoga Rusmana and Claire Leow

Jan. 9 (Bloomberg) -- Indonesia, rich in metals including tin, nickel, copper and gold, will insist on letters of credit for exports of key commodities to cover risk of payment defaults as the global recession deepens.

The requirement will also apply to overseas sales of coffee, cocoa, rubber, mining ore and concentrate, and tin starting March 5, Trade Minister Mari Pangestu told reporters in Jakarta today.

The move comes within weeks after the country passed a bill to convert PT Bank Ekspor Indonesia into a financial institution called LPEI that will have more leeway in extending funds, trade guarantees and insurance to exporters.

“The letters of credit will ensure payment by buyers to exporters,” Pangestu said. Export proceed must be transferred and received through domestic banks, she said.

Indonesia’s exports declined 2 percent to $9.61 billion in November, the first monthly drop since March 2004, the Central Statistics Bureau said this week, as the global credit crisis hurt demand. Rubber and palm oil associations are among those facing order cancellations after prices tumbled.

Indonesia is also among the biggest producers of palm oil, coffee, cocoa and natural rubber.

“Using letters of credit is not a common practice anymore in exports,” said Rachim Kartabrata, executive secretary of the Association of Indonesia Coffee Exporters. “We have to talk this through with buyers and hope there won’t be any objections.”

A letter of credit is a document by which a bank guarantees a customer’s credit for a specific amount and time period.

To contact the reporter on this story: Claire Leow in Singapore at cleow@bloomberg.net