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Analysis: Managing foreign exchange from export proceeds
The weakening of the rupiah in the last few days, which was triggered by a crisis in Turkey, suggested that Indonesia’s financial market is very vulnerable due to its shallowness
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The weakening of the rupiah in the last few days, which was triggered by a crisis in Turkey, suggested that Indonesia’s financial market is very vulnerable due to its shallowness. Indonesia needs to deepen its financial market, especially the foreign exchange (forex) one. Currently, the average daily transaction of forex in Indonesia is only US$5 billion, lower compared to its peers, where the amount ranges from $10 billion to $15 billion.
One example of source of forex is export proceeds and countries’ need to manage those resources to support their currency. Countries differ with one another in managing forex from export proceeds, depending on their capital control regimes. Countries with restricted capital control can apply retention of export proceeds at a certain level.
For example, since 2016, Bank Negara Malaysia — the central bank of Malaysia — has required exporters to retain up to 25 percent of foreign currency from export proceeds. It applies for exports of goods only, while exports of services and those under free trade agreements are exempted.
The retained foreign exchange in Malaysia can be put in a trade foreign current account and is guaranteed the same exchange rates for import and foreign currency loan obligations, international transactions or permitted payments between residents.
The Malaysian central bank allows 75 percent of export proceeds that are converted into ringgit to be placed in special deposit facilities (SDFs) with special interest rates, namely 3.25 percent until December 2017 and 3.1 percent from January to March 2018. SDFs can only receive ringgit from export proceeds and cannot be used for any other purposes; therefore, banks need to ensure proper documentation.
As a result of that requirement in Malaysia, the ringgit saw less volatility in 2017, from 219 points in November last year to 53 points in February this year.
Countries with partial or free capital control can only require repatriation of export proceeds without any obligation to convert forex to local currencies. The time period of reporting also varies among countries. On average, a country requires repatriation within 90 days of export shipments. However, there is no time limit on how long repatriated forex should be kept in local banks.
So, it is possible for an exporter to repatriate the forex only to fulfill his or her requirement, but then return the funds back overseas for transactional purposes and precautionary motives in just a very short time. With this condition, the repatriation of export proceeds will not significantly increase the supply of forex in local market. This also happens in Indonesia with its policy in export proceeds, also known as devisa hasil ekspor.
The compliance of exporters regarding the repatriation of their export proceeds and the reports to Bank Indonesia (BI) are relatively good. The latest data from BI shows that the average ratio of export proceeds and export value is around 80 percent from the first quarter of 2015 until the first quarter of 2018. However, BI cannot monitor how long the export proceeds actually stayed in local forex banks and how much of the funds that were actually converted into rupiah. That information is important when we want to manage forex.
Despite a good compliance rate on forex regulation, there are ways to improve the collectability of export proceeds, which will ensure availability of forex in Indonesia and thus, affect the value of the rupiah.
Currently, exporters place forex from export proceeds in regular accounts in forex banks. The funds can be mixed with other revenue, such as from investment or loans. This condition makes it difficult for forex banks and BI to monitor the real foreign exchange activities from export revenue. Since there is no regulation on how long the forex revenue should be kept in forex banks, it is possible that exporters keep their forex funds in domestic banks for one day only for the sake of following the regulations and then transfer all the funds to offshore banks for transactional and precautionary motives.
One way to better monitor the flow of export proceeds is through BI, which can require exporters to place the funds into a special account in forex banks solely for the that purpose as the instrument cannot be used for any other revenue. There can be two types of special accounts, one for rupiah-based funds and the other for foreign currency denomination. The advantage of this special account is that BI can directly monitor the activities of forex resulting from export revenue, how long the exporters keep the forex in their accounts, where they transfer the foreign exchange and for what purpose.
Knowing the pattern of forex transactions can assist the government in anticipating outflow of forex caused by exporters shifting their funds to overseas banks. Since the special account made just for export-related transactions, foreign exchange banks need to have good monitoring systems to ensure the exchange rate is used just for export-related transactions and that the special rupiah account with higher interest is only for the rupiah as a result of conversion from foreign currency-denominated export proceeds.
As Indonesia has a regime allowing free forex movement, BI can provide two incentives to exporters to manage their export revenue.
Firstly, exporters can have guaranteed exchange rates when they convert foreign currency to rupiah and when they need to convert rupiah back to foreign currency for their export-related transactions. One reason why exporters keep their funds in foreign currency without converting them to rupiah is because there is a risk of exchange rate. Exporters have to bear double risks in exchange rate; one, when they convert their funds to rupiah and two, when they convert back to foreign currency for their export-related transactions.
With a guaranteed exchange rate, exporters will see no difference between holding foreign currency and rupiah. BI can fix the exchange rate for export proceeds with the same argument the Finance Ministry uses when calculating taxes with a certain level of exchange rate.
Secondly, as a supplement, foreign exchange banks can offer special rates for exporters if they put the export revenues in rupiah. The banks can offer higher rates for this special account, which can only receive rupiah converted from foreign currency export proceeds, not from other revenue. The higher rates will be provided by BI, while foreign exchange banks can ask BI to provide gains from those rate differences. This is a possible incentive from BI for exporters to boost the supply of foreign currency in the economy.
The objective of those incentives is to guarantee the supply of forex from export proceeds. One caveat for BI is that the cost for guaranteed exchange rate and special interest rates should not exceed the cost of direct intervention by the central bank into forex market in the case of short supply of forex.
Moreover, these incentives should not replace other government initiatives to increase the supply of forex, such as in the tourism sector and remittances from migrant workers.
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The writer is the head of Mandiri Institute.
