The financial market turmoil surrounding Indonesia’s new export regulations remained particularly prominent on Monday when global stock markets collectively weakened.
As of press time, the most prominent decline on Monday was Indonesian government bonds, with the yield on the ten-year government bond soaring 24 basis points.
(Note: A surge in yields means a plunge in Treasury bond prices), reaching the highest level in more than a year.
The benchmark stock index Jakarta Composite Index also fell by more than 4%, diving by more than 30% in less than two months; the Indonesian rupiah exchange rate against the US dollar also hit a record low.
The spark that triggered a new round of financial turmoil was the “new export control regulations” announced by the Indonesian government last month, which initially involved three products: palm oil, coal and ferroalloys.
Indonesia is the world’s largest exporter of palm oil and coal. Since banning the export of nickel ore in 2020, it has become the world’s largest exporter of ferronickel.
According to the new policy details that Indonesia added last week, for palm oil, the new regulations cover crude palm oil, as well as refined, bleached and deodorized palm oil, palm olein (olein) commonly used as edible oil, and also include residues such as waste edible oil and palm oil mill wastewater.
Palm oil is sold in many forms, and this rule covers several of the most common exported varieties.
Coal products covered include anthracite, bituminous coal, and lignite and peat, both pressed and unformed.
The list of ferroalloys includes ferrosilicon, ferronickel, and related products containing more than 2% carbon by weight.
The Indonesian government stated that the transition period for the new regulations will last until December 31. In the first three months starting from June, exporters can ship goods as usual, but they must submit transaction reports electronically to the newly established state-owned entity DSI.
Starting from January next year, DSI will take over all aspects of export contract negotiation, shipment and payment of the above-mentioned goods.
DSI’s parent company, Indonesian sovereign wealth fund Danantara, said it is building a digital platform to “analyze transaction data on strategic natural resource commodities” and identify potential tax evasion.
Although all these rules and hardware platforms are still under construction, the new policy was implemented last Monday (June 1), putting fragile market confidence under pressure in the chaos.
Jason Toovey, deputy chief economist for emerging markets at Capital Economics, commented that investors are “worried about the direction of Indonesia’s policymaking.”
He further added that since then, the policies adopted by the Indonesian government have become increasingly populist and interventionist, especially after the dismissal of former Finance Minister Sri Mulyani Indrawati last year.
At the same time, the soaring oil prices caused by conflicts in the Middle East have also drawn more attention to Indonesia’s economic problems.
Eurasia Group, the world’s largest political risk consulting firm
Peter Mumford, head of Southeast Asia business at the Group, also said: “In Asia, Indonesia is not the only country under tremendous financial market pressure, but as far as Indonesia is concerned, the global energy shock seems to have made investors more focused on its existing fiscal prospects and institutional operation problems.
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Although the Indonesian government has recently released stronger fiscal discipline signals in order to appease investors, the new policies have instead created more uncertainty.”
Faced with the “three kills of stocks, bonds, and foreign currencies”, the market has begun to expect the Indonesian central bank to raise interest rates significantly at next week’s interest rate meeting.
During the market turmoil last month, Indonesia’s central bank launched an unexpected 50 basis point interest rate hike. Judging from the results, it did not support the shaky exchange rate.
Indonesia’s central bank disclosed on Monday that the country’s foreign exchange reserves fell to US$144.9 billion in May, falling for the fifth consecutive month and the longest consecutive decline cycle since 2018.
Bank Indonesia revealed that the decline in reserves was due to the government’s repayment of foreign debt and the central bank’s intervention measures as the rupiah hit a new low.
Lionel Priyadi, macro strategist at PT Mega Capital Sekuritas in Jakarta, said: “To bring the rupiah back to a level below 18,000 rupiah per US dollar, the Indonesian central bank needs to raise interest rates by more than 50 basis points.”
