New Rules For Indonesia'S Currency Will Have An Impact On The Textile Industry

According to Reuters, the Central Bank of Indonesia has decided to ban the use of US dollars for trading in the country starting from July 1st this year.

The new regulation aims to ease the pressure on local currency and build confidence in local currency by reducing the demand for us dollar.

Although Indonesia may succeed in banning domestic use of the US dollar, the great benefits of reform will no longer exist, because Indonesian businesses are still settling in US dollars.

The continued weakness of the economy is one of the main causes of the pressure on the rupiah in Indonesia.

This year, Indonesia's economy continued to fall into recession, with an annual growth rate of 4.7% in the first quarter, worse than expected and the slowest growth since 2009.

At the same time, Indonesia is also facing the potential pressure of rising inflation, and the Indonesian rupee has also been weak.

On Thursday, the governor of Indonesia's central bank said that inflation in the two quarter and the three quarter is expected to reach about 7%.

The Indonesian rupee is the worst emerging Asian currency so far this year. The suspicion of rupee is deeply rooted in Indonesia. High interest rates and historically vicious inflation have prompted companies to borrow dollars and settle domestic goods and services in US dollars.

Many companies say that after the new rules come into force in July, they will still be subject to the shock market of Indonesia's rupee and inflationary pressures may arise as companies try to build enough buffers to withstand exchange losses.

Perusahaan Listrik Negara (PLN) is one of the companies affected by the new regulation in Indonesia.

Although the company has been charging its customers with a rupee currency unit, it still needs about $600 million a month in foreign currency, which is used to pay for its services in the form of dollars for local mining operators and producers, and for repayment of bank loans in the form of dollars.

After the implementation of the new regulation, PLN must pay the service fee by rupee.

Some analysts said that this theory is suitable for the company's situation, but in practice, the price of Rupee will be affected by the exchange rate against the US dollar.

"We are still negotiating with the government, but even if we accept the new rules to pay for the rupee, we still have to discuss the exchange rate with the other party."

Tjutju Kurnia, chief financial officer of PLN, said.

Tjutju Kurnia further pointed out that the company's service providers also have US dollar liabilities, so they will also generate exchange rate risks arising from the new regulation.

It is reported that about 20% of the office buildings in Jakarta are used to settle the rent in dollars.

The Indonesian Central Bank estimates that about 10% of domestic pactions are conducted in US dollars, equivalent to US $6 billion per month.

Indonesian domestic

It will also be affected by the new rules introduced in July 1st, which is the second largest export industry in Indonesia.

At present, Indonesia's textile industry is mostly imported. In the entire textile industry chain, almost all pactions are used in the US dollar. The labor cost paid to the workers is only local currency rupee.

Ade Sudrajat of the Indonesian textile association said that if the central bank insisted that enterprises use rupee settlement, the competitiveness of Indonesian textiles would even be lower than those imported from overseas.

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Analysts point out that the increase in ancillary costs will weaken the effect of the new regulation after the implementation of the new regulation, because the new regulation has not improved the real cause of the rupee fluctuations. Indonesia's economy is highly dependent on foreign capital, and if these problems arise or the Fed will raise interest rates later this year, these external capital will soon flow out.

At present, foreign capital holds about 38.4% of Indonesian national debt.

"The new rules of July 1st will play a role.

Our long-term view is that the Indonesian rupee will remain stable in the future, but it will not be maintained by such a new regulation (which restricts the use of the US dollar in the domestic market).

Victor Rodriguez, head of fixed income division of Asia Asset Management Asia.