FX & Treasury in Indonesia

Indonesia is regularly requested by our members: it contains most of the challenges which typify complex countries. It is large, with a population of over 250 million, and it has significant natural resources. It extends over 13,000 islands, and a large portion of the population lives in very rural conditions. At the same time, Jakarta is a major, bustling, metropolis with traffic gridlock. There is also significant ethnic, cultural and linguistic diversity, even if 95% of the population share the same religion (Islam). 

Although Indonesia has a strong commitment to liberal economic policies, it has, over the years, introduced measures designed to protect the local currency (the rupiah, IDR), as well as the financial system. It has a notoriously difficult tax system, and, despite repeated attempts at reform, it continues to perform poorly in the annual perception surveys of Transparency International: it comes in 102nd out of the 180 countries surveyed, with a score of 37/100. 

This was a small, but very lively, group. One participant has a retail business, which makes multiple  low value deliveries to many outlets across the country. They are installing an innovative cash management solution with a fintech and two banks, one local and one foreign. With this solution, cash is paid electronically without having to open a plethora of bank accounts: the cash is then swept into a cash pool for the whole country. This requires leaving a float with the bank, but it reduces the time for cash to be made available in the centre: the previous two to three weeks should come down to three days.

This solution does not involve any cross-border sweeping: Indonesian regulations make that very difficult. Intercompany loans are possible, but there are documentation requirements, and Indonesian law now requires all foreign currency debt to be hedged. Given the high IDR interest rate (usually between 10% and 15%, hedging is expensive – as is the alternative of borrowing locally.

A large portion of the discussion centred on the trade-off between local funding and offshore borrowing, given the high cost of hedging. One participant has very long payment terms: they use supplier financing products, and often discount the resulting receivables. Hedging also presents execution challenges: the currency is very volatile, and pricing can vary considerably between banks – shopping around often results in significant savings. Most participants use the offshore NDF market for hedging, while some also use the local market, and one makes the maximum use of natural hedges. 

One participant has cash building up in the country, and uses interim dividends as a means of repatriating it. This carries a cost in terms of withholding tax, but there is also a risk of potential issues with the tax authorities, should the dividends declared ever exceed the final available retained earnings.

Bottom line: Indonesia is challenging, but it is open, and it does work. Also, the logistical challenges involved in dealing with a large and widely dispersed population are leading to some interesting innovations in cash management. Watch this space!