This content is from: Local Insights

Foreign exchange trading

The implementation of a free foreign exchange system in Indonesia has accelerated the expansion and integration of the Indonesian financial market into the world's financial markets. As a result, the growth in rupiah transactions between banks and foreign citizens and foreign legal entities has led to instability in domestic monetary conditions, putting pressure on the rupiah exchange rate. This has recently been exacerbated by state oil firm Pertamina buying large amounts of dollars to counteract increasing oil prices.

Bank Indonesia, the banking regulatory body, has taken measures to stabilize the currency in the foreign exchange market. They are set out in Bank Indonesia Regulation (Peraturan Bank Indonesia) 7/14/PBI/2005, dated June 14 2005. The Regulation, which improves on the previous regulation, sets out necessary prohibitions and restrictions in conducting foreign exchange transactions with foreign counterparts.

The limit on transaction amounts for commercial banks engaging in derivative transactions with foreign counterparts has been lowered from $3 million to $1 million. This limit will cover all types of transactions involving foreign exchange selling and purchasing against rupiah, whereas previously derivative transactions involving foreign exchange purchasing were not limited. However, the restrictions imposed on derivative transactions will not apply if the transactions are conducted for hedging purposes within the framework of an investment in Indonesia that will last for at least three months. The previous regulation did not provide any minimum period.

The Regulation requires foreign currency lending or domestic currency lending to foreign counterparts to be conducted in the form of a syndicated loan that engages a prime bank (that is, commercial banks with a certain investment rating from a renowned ratings agency) as lead bank and for the purpose of project financing in the real estate sector in the territory of the Republic of Indonesia.

The Regulation fines violations with a flat rate of 10% of the amount of the violating transaction. By implementing the flat rate, Bank Indonesia has stipulated more stringent sanctions than under the previous regulation, which provided a fluctuating rate equal to the amount of the violating transactions. These financial penalties, however, should not be more than Rp27 billion ($2.7 million).

Considering the increasing amount of financial transactions based on Sharia principles, the Regulation has clearly stated that all its prohibitions and restrictions will also apply to similar transactions conducted based on Sharia principles. This was missing from the previous regulation.

The Regulation came into force on July 14 2005.

Bank Indonesia hopes that the Regulation will reduce foreign exchange movement that is not related to a genuine underlying purpose. It is possible that the Regulation will be lifted when Bank Indonesia deems the rupiah exchange rate stable.

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