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Tighter capital rules possible, yet controversial
The idea of regulating incoming foreign exchange has entered the public discourse again following recent global uncertainty that resulted in heavy capital outflows, but questions linger on whether the measure will negatively affect investor perceptions of the country
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he idea of regulating incoming foreign exchange has entered the public discourse again following recent global uncertainty that resulted in heavy capital outflows, but questions linger on whether the measure will negatively affect investor perceptions of the country.
Several bankers seem to be open to the idea, widely known as capital controls, but only with extra caution.
Kartika “Tiko” Wirjoatmodjo, president director of state-owned lender Bank Mandiri, said partial capital controls could be implemented by imposing an exit tax on investors who wish to pull investment out of the country, or implementing mandatory retention on export proceeds — which are usually in foreign currencies.
Another example, he said, was giving incentives to exporters and multinational companies through the form of a lower bank deposit tax should exporters deliberately wish to convert export proceeds to rupiah and store it in domestic banks.
“We see an imbalance in supply and demand for United States dollars in the medium term,” Tiko said during a meeting at the House of Representatives recently. “In an uncertain monetary climate, we are easily affected by portfolio outflows because we have a liberal foreign exchange system.”
The liberal foreign exchange system refers to a free-flow of foreign exchange, based on Law No. 24/1999 on the flow of foreign exchange. According to the law, there should be no restrictions or controls on incoming foreign currency-denominated funds.
However, many experts have argued that regulations on capital flows instead create difficulties for the central bank in managing the rupiah’s exchange rate during times of volatility in the global financial market, prompting suggestions that Indonesia might need to restrict foreign capital from freely coming in and out of its jurisdiction.
Malaysia and Thailand have imposed several forms of capital control in the past, such as an exit tax and minimum holding amount, particularly during and after the 1997 Asian financial crisis. They have since revoked the policies despite seeing some positive effects during its short-term implementation.
In the case of Indonesia, the government and lawmakers have to amend the 1999 law on foreign exchange in order to place more restrictions on foreign capital, but such a measure was seen as dangerous as it would risk harming investor perception and prompt economic instability.
Former Bank Indonesia (BI) governor Darmin Nasution on Oct. 3, 2011 instead chose to issue a regulation mandating all export proceeds be withdrawn through local banks and in rupiah denomination.
However, the regulation did not oblige exporters to hold proceeds for a certain period. As a result, after receiving proceeds in rupiah, exporters immediately converted the funds back to US dollars and stored it in overseas bank accounts.
“We cannot force them [to keep deposits domestically] because the law [No. 24/1999] is too liberal. This is the maximum we can do within the existing law,” said Darmin, who is now Coordinating Economic Minister.
Achmad Hafisz Tohir, a National Mandate Party (PAN) politician and deputy chairman of House Commission XI, said lawmakers were considering to amend the 1999 law to better manage global uncertainty, particularly because of the ongoing normalization policy of the US Federal Reserve.
Increases in the Fed’s fund rate triggered global fund managers to pull out money from emerging markets, depreciating many currencies including the rupiah, which has depreciated 4.75 percent year-on-year to Rp 13,923 per US dollar.
CIMB Niaga president director Tigor M. Siahaan argued that capital controls could only be implemented in a calmer economic climate, as implementation in times of market volatility would result in a negative reaction.
Meanwhile, BI Governor Perry Warjiyo said recently that he had met with Finance Minister Sri Mulyani Indrawati to ask her opinion on whether Indonesia could impose a tax on outgoing foreign funds with some form of retention period. However, two days after, Perry quickly clarified that it was only a thought.
Halim Alamsyah, chairman of the Deposit Insurance Corporation, argued Indonesia did not need capital controls as the country offers among the highest sovereign bond yields in the world.
“Our yield is among the highest; if foreign funds exit [Indonesia], they will come back quickly without any incentive,” said Halim, who is a former BI deputy governor.
