Indonesia Risks Own Goal as Rupiah-Only Rule Lifts Company Costs

Rupiah bills
Bank Indonesia officers collect worn rupiah banknotes and replace them with new and crisp bills at the border town of Badau, West Kalimantan. Photographer: Yudith Ho/Bloomberg

For Indonesian drug maker PT Kalbe Farma, a ban on using currencies other than the rupiah for local transactions is coming at the worst possible time.

Bank Indonesia will prohibit an estimated $12 billion a day of such trades between domestic parties from July 1. Kalbe Farma pays local suppliers in dollars for many raw materials and the rule will push up procurement expenses by 0.5 percent to 1 percent, said Director Vidjongtius. It will also have to rely on more expensive rupiah loans for working capital, boosting its cost of funds by 5 percent to 6 percent, he said.

“We don’t see it as good timing in this situation to increase the selling price where the consumer is in quite a weak situation,” Jakarta-based Vidjongtius said in a phone interview. “It will mean higher costs for companies like us that depend on imported ingredients.”

The transactions rule, aimed at stemming a drop in Asia’s fastest-falling and most volatile currency, will affect companies already under pressure after the economy grew at the slowest pace since 2009 in the first quarter. Dollars, from property rents to commodity deals, are often favored in a country where the rupiah has plunged 29 percent over the last three years.

About 45 percent of Indonesian working capital and investment lending in the last year was in foreign currencies, according to a June 9 research note by Irene Cheung, a senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd.

Natural Hedging

The rupiah rule puts a lot of the currency risk onto Indonesian companies, said Joel Hogarth, a partner at Ashurst LLP in Singapore, who has been advising clients on the regulation.

For onshore service providers, such as law firms, quoting in dollars is a natural hedge because they typically don’t get paid for several months after doing the work and the rupiah may have weakened during the period, he said. The Indonesian currency has dropped 6.9 percent this year.

At the same time it’s moving ahead with the rupiah rule, Bank Indonesia is requiring companies to hedge at least 25 percent of their short-term external debt that’s not offset by their foreign-currency assets, with sanctions coming into effect from October.

“On the one hand, they are saying companies shouldn’t be taking offshore currency risk,” said Hogarth. “On the other hand they’re saying they can’t do natural hedging by simply quoting to their offshore clients in foreign currencies.”

Inflationary Impact

Listing prices in dollars is common in the property market, particularly for apartment rentals and offices. About 30 percent of office rents are in dollars, said PT Colliers International Indonesia Managing Director Michael Broomell.

“It’s basically going to force people to borrow in rupiah,” he said in an interview in Jakarta. “This is an issue for developers that were looking at building office buildings. The numbers may not make any sense anymore.”

The rule will also be disruptive for companies in the energy and mining industries as dollars are commonly used to buy and sell commodities and equipment that are priced in the U.S. currency, said Bill Sullivan, foreign counsel with law firm Christian Teo Purwono & Partners in Jakarta.

“Companies are going to simply increase the price in rupiah” to mitigate the risk, Sullivan said. It will also complicate pay arrangements for foreign executives who will now have to be paid in rupiah, he said.

‘Tough’ Timing

Bank Indonesia doesn’t expect the rule to have a major impact on inflation, which is at the highest rate in Asia.

“In the beginning there may be one-off adjustments to prices and rates, but in the long run, it should make them more cost-efficient,” Peter Jacobs, a director at the monetary authority, said in an e-mailed response on Wednesday. “There’s a cost to mitigating foreign-currency risk, but this is good corporate governance and when hedging products become more common in Indonesia, the cost will fall.”

The rupiah’s volatility makes it relatively expensive for companies to hedge their exchange-rate risk. The currency is also not expected to stop weakening anytime soon. It will drop a further 2.2 percent by the end of the year and then another 2.2 percent in 2016, according to the median estimates in Bloomberg surveys.

“Timing-wise, it’s a tough thing to do, when you have the U.S. about to hike interest rates and the Indonesian economy slowing down,” said ANZ’s Cheung. “I don’t think it’s going to turn around the rupiah, at least not in the near term.”

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