Indonesia Plans Stimulus to Woo Investors as Rupiah Falls

Indonesia said it will increase foreign-currency supply to stem a sliding rupiah, while allowing more mineral exports this year to narrow a current-account deficit and spur economic growth.

The government will relax mineral-export quotas, introduce a simpler investment-permit process and accelerate some infrastructure projects, Coordinating Minister for the Economy Hatta Rajasa said in Jakarta today. Bank Indonesia will extend foreign-exchange term deposit tenors and ease regulations for foreign-exchange transactions, Governor Agus Martowardojo said.

A record current-account deficit in the second quarter, and worse-than-estimated economic growth and inflation data have prompted a stock selloff and helped push the rupiah to its weakest level since April 2009. The government is in talks to update so-called trigger points that would enable the country easier access to a standby loan of about $5 billion from the World Bank, Deputy Finance Minister Mahendra Siregar said today.

“The situation as of now is safe, but we must increase our vigilance with what’s happening lately,” Rajasa said. “In the short term, the government and of course Bank Indonesia will take steps to safeguard macroeconomic stability especially in the financial sector and the balance of payments. And these efforts will be combined with structural policies to maintain economic growth at a realistic level.”

‘Safe Levels’

The central bank plans to ease rules for exporters buying dollars, and said today the currency is “within safe levels.” The rupiah climbed 0.4 percent to 10,780 per dollar after the announcements, from as weak as 10,840 earlier. It has lost about 5 percent this month.

The government’s plans will be combined with Bank Indonesia policy changes to deal with the current-account gap and weakening rupiah, Rajasa said today as he unveiled higher import taxes on luxury goods. Car distributor PT Indomobil Sukses Internasional slid 7.3 percent and retailer PT Mitra Adiperkasa fell 3.1 percent after he said the tax on luxury imports will be raised to between 125 percent and 150 percent from around 75 percent currently.

The Jakarta Composite Index closed little changed after rising as much as 1.6 percent today. It slid 8.7 percent this week, the biggest decline since September 2011.

Not Enough

“The plans that have been outlined by the government were not enough to restore market confidence,” said Jeffrosenberg Tan, a portfolio manager at PT Sinarmas Asset Management in Jakarta, which manages about 5.9 trillion rupiah ($534 million). “I don’t think the government can come with a silver bullet that can solve everything. Most of the problems came from abroad. Like it or not, the market is at the mercy of the Federal Reserve’s decision on tapering.”

Global funds pulled $534 million from local stocks this week amid speculation the Fed will soon start tapering stimulus. Bank Indonesia will offer foreign-exchange term deposits with tenors of as long as 12 months, compared with a maximum of 30 days currently, Martowardojo said today.

President Susilo Bambang Yudhoyono, due to hand over power in elections next year, is seeking to shore up his legacy of political and economic stability in the world’s fourth-most populous nation.

Foreign direct investment increased at the slowest pace in three years last quarter, and the president said this week the government’s economic growth target of 6.3 percent this year will be difficult to achieve. The expansion may be between 5.8 percent and 5.9 percent in 2013, Finance Minister Chatib Basri said today.

Ore Exports

Indonesia will allow more shipments of unprocessed mineral ores for the rest of this year by dropping quotas before an export ban comes into force as planned in 2014, Basri said today. A 20 percent tax on overseas sales will be retained.

“Commodity prices remain weak, the mining sector’s profitability is declining rapidly, and government receipts through royalties and taxes would have suffered if the government had not taken any measures to relax the current ban or recalibrate the effective banning of exports of unprocessed ores in 2014,” said Xavier Jean, a Singapore-based director of corporate ratings at Standard & Poor’s. “That would have only added to the doldrums, so this is not coming as a surprise.”

Economic growth has slowed in the last four quarters, dipping below 6 percent in the three months through June for the first time since 2010.

Capital Outflows

“In the past few days we have seen a lot of capital flying out of Indonesia,” Alexander Rusli, chief executive officer of Indonesia’s third-largest telecommunications company PT Indosat, said in an interview with Bloomberg Television yesterday. “As a CEO of an Indonesian company, I do agree that we have been slow in taking measures to anticipate the situation.”

The current-account deficit swelled to $9.8 billion in the second quarter, the central bank reported on Aug. 16. That is the largest shortfall in data compiled by Bloomberg going back to 1989. The gap should narrow this quarter and next, Rajasa said today.

“A medium-term strategy to address the structural current-account deficit and financing would be helpful,” Barclays Plc analysts led by Prakriti Sofat, wrote in an Aug. 22 note. “However, the political cycle and nationalistic policy bias pose headwinds to undertaking such reform.”

The central bank raised interest rates by a total of 75 basis points in June and July to ease price pressures as the inflation rate reached a four-year high last month.

Aggressive Tightening

The country needs aggressive monetary tightening such as higher interest rates and reduced liquidity to avoid selling pressure on the rupiah, said Irene Cheung, a strategist at Australia & New Zealand Banking Group Ltd in Singapore. Bank Indonesia needs to raise the policy rate by 50 basis points, Citigroup Inc. wrote in a note to clients on Aug. 21.

“A cohesive plan involving policy rate hikes, better communication of policy response strategy, more transparent price discovery in onshore markets and visible coordination between the central bank and the government would reduce the degree of pressure,” the Barclays analysts wrote.

The government has already given state-owned companies permission to buy back shares, and others are seeking shareholder approval to do so, State-Owned Enterprises Minister Dahlan Iskan said on Bloomberg TV Indonesia yesterday, without providing details. State pension and other government-backed funds are also helping to support falling share prices, said Norico Gaman, head of research at PT BNI Securities in Jakarta.

“We’re studying whether we will buy back our shares,” Dwi Soetjipto, president director of PT Semen Indonesia, said Aug. 21. “We still don’t understand why everyone is panicking on the financial situation.”

The government raised pump prices in June for the first time since 2008 to cap an annual fuel-subsidy bill of more than $20 billion that is sapping funds needed for roads and bridges. A lack of infrastructure has created high logistics costs that are adding to inflation, said Keith Loveard, head of risk analysis at Concord Consulting in Jakarta.

“Tax holidays might interest some more investors but that is not an overnight fix,” Loveard said. “Nothing has been done during the good times to fix the structural problems.”