Indonesia to offer carrot to dollar hoarders to boost rupiah

[JAKARTA] Indonesia is close to finalizing incentives for exporters holding billions of dollars in banks to encourage them to convert the funds into rupiah, as the central bank steps up efforts to shield the local currency from a global emerging market rout.

Lenders are in talks with Bank Indonesia on details of the measures to be offered to companies with forex earnings from exports, said Kartika Wirjoatmodjo, president director of PT Bank Mandiri, the nation's largest lender by assets. The banks may be able to tap exporters' funds through special deposit accounts in the next one or two months, he said, without giving details.

"We cannot force exporters to convert, but we could provide them with better incentives to bring forex to Indonesia," Mr Wirjoatmodjo, who is also the chairman of the Indonesian Banks Association, said in an interview on Wednesday. "Banks are open to the idea of allowing them to open a special account."

Indonesian authorities are intensifying efforts to ease pressure on the rupiah that's slumped to its lowest level since the 1997-98 Asian financial crisis, and tapping the idle funds with exporters may boost dollar supplies in the short term. The government has already ordered commodity shippers to keep half of their earnings in the country and convert them to the local currency.

Exporters converted less than 15 per cent of their earnings into the local currency in the first half of the year, according to Bank Indonesia. Onshore forex deposits amounted to about US$50 billion as of June, according to Bank of America Merrill Lynch.

While the series of steps taken by the authorities have cushioned the impact on the rupiah of rising US interest rates and a trade war, the volatility in the currency may persist until the first quarter, Mr Wirjoatmodjo said. Indonesia's balance of payments may improve in the fourth quarter with an increase in import tax on consumer goods, a wider biofuel mandate and the potential return of portfolio investors, he said.

Foreign investors have dumped a net US$3.3 billion of stocks and bonds from Indonesia this year after being net buyers of about US$9 billion each in the previous two years, data compiled by Bloomberg show. A current account deficit of 3 per cent of gross domestic product and high foreign ownership of government bonds have made the country vulnerable to the global sell-off, squeezing local dollar supply.

Bank Mandiri's exporter clients have started selling dollars in a sign of confidence returning to the currency, Mr Wirjoatmodjo said. "We expect the volatility to remain high, but the trend in the mid-term is more flattish. It's optimistic to hope for a rebound," he said.

The rupiah is down almost 9 per cent against the dollar this year, falling to as low as 14,945 early this month and making it the second-worst performer in Asia.

While the general public may be worried about a rupiah at 15,000, the financial markets are unperturbed by the threshold, and there were no visible signs of stress in any industry, Wirjoatmodjo said.

"After the 1998 crisis, there are only a few companies managing their books in a very open way. They are now more aware of long-term risks," Mr Wirjoatmodjo said. "In terms of balance sheet management, 15,000 is not worrying. Otherwise, we would see weakness in the non-performing loans."

Credit growth at Indonesian banks jumped 12.1 per cent in August, the Financial Services Authority said Thursday. That's the fastest growth since February 2015, according to data compiled by Bloomberg. The gross non-performing loans ratio stood at 2.74 per cent, while the capital adequacy ratio was at 23.01 per cent at the end of August, the authority said.

Bank Mandiri is coordinating efforts to reduce the need of state-owned companies including oil major PT Pertamina to meet their dollar needs in the sport market to ease pressure on rupiah, Mr Wirjoatmodjo said. The bank has extended a US$2 billion credit line to Pertamina and the oil importer was expected to raise funds offshore to meet their medium-term demands, he said.

The central bank's plan to allow lenders to offer domestic non-deliverable rupiah forwards contracts, that will settle in the local currency, will allow Bank Indonesia to supervise dollar demands better and prevent speculative traders, Mr Wirjoatmodjo said.

"The benefits should outweigh the consequences," Mr Wirjoatmodjo said. "The local perception is easily being dominated by the NDF price in Singapore and that creates psychological pressure that we should do something about it."

BLOOMBERG