Bank Indonesia Mandates The Use Of Rupiah For Domestic Transactions.

Policy Objectives

The new regulation have a clearly stated policy objective to mandate the use of IDR for most domestic transactions, and reduce reliance on foreign currency. Critically, PBI 17/3 not only requires payments to be made in IDR as contemplated by the Currency Law, it also prohibits quotes in foreign currency. Therefore, long-standing practices of quoting USD prices for hotel rooms, rents and professional services (among others) are now prohibited.
The full application of the regulation to cross-border transactions is explored in more detail. However, the new regulation may actually increase currency risk for Indonesian companies that traditionally set prices based on USD or have a significant component of their cost base in foreign currency (or commodities based on international prices). Companies in this position will need to look carefully at their foreign exchange position and see how they can mitigate this risk. The rules do not, however, expressly prohibit “ratchet” mechanisms based on exchange rate movements, and it is possible that many businesses may decide to incorporate these to cap their exchange risk.

The detailed provisions of PBI 17/3 are considered below.

Parties Must Use IDR Within Indonesia, Save For Limited Exceptions

PBI 17/3 obliges parties to use IDR to settle transactions in Indonesia of the following types:

• transactions for payment;
• settlement of other monetary obligations; and/or
• other financial transactions such as IDR bank deposits

except for:

• specified income and expenditure under the state budget, including offshore and onshore loan payments, and issuance of government bonds in foreign currency;
• providing or receiving a grant or gift where one party is based offshore;
• international commercial transactions, including:
  • import/export activities, excluding berthing, stevedoring, temporary container stacking and aircraft parking; and
  • cross-border service supplies (BI gives the example of online or call centre purchases) and offshore consumption;
• foreign currency bank savings;
• international financing transactions (one of the parties must be domiciled offshore); and
• permissible foreign exchange transactions including banks’ foreign exchange-based business activities, export credit agency activity and government-issued foreign currency securities (both IPO and secondary market) (Exempted Transactions).

PBI 17/3 is effective as of 31 March 2015, and 1 July 2015 for non-cash transactions. This is subject to the limited grandfathering period discussed below.

Requirement To State Prices In IDR

PBI 17/3 also requires parties to state prices in IDR only.

Applies To Cash And Non-Cash Transactions
The requirement applies not just to cash transactions, but also to non-cash transactions such as electronic transfers and credit card payments. This is a significant change, as previous Ministry of Finance guidance stated that the Currency Law IDR requirements only applied to cash transactions.

Parties May Not Refuse IDR

A party may not refuse to accept IDR for payment except: (i) as agreed in writing; or (ii) on cash transactions if there is doubt about the origin of the IDR (presumably aimed at money laundering).

The exception in (i) is only available for Exempted Transactions and transactions related to strategic infrastructure projects approved by BI.
Grandfathering of transactions made before 1 July 2015

PBI 17/3 grandfathers any arrangement to use foreign currency entered into before 1 July 2015. Such arrangement takes effect “as is” until the termination of the relevant agreement. Any extension or amendment must follow PBI 17/3.

Sanctions

The sanctions for breach of PBI 17/3 differ depending on the nature of the breach.

• Obligation to use IDR for cash transactions or prohibition against refusing IDR – up to one year’s imprisonment, a fine of up to IDR267m, and cancellation of licenses.
• Obligation to use IDR in non-cash transactions (i.e. transfers) – administrative sanctions, namely:
  • a written warning;
  • fine of one per cent of the transaction value up to a maximum amount of IDR1bn, and/or;
  • prevented from using the Indonesian payment system.
• Obligation to state prices in IDR – written warning.

BI is given wide investigatory and audit powers, and can also recommend that any other relevant regulator or authority take action (e.g. revoke the relevant business licence). BI is also given discretionary power to take action to deal with problems encountered by transacting parties with non-cash transactions.

Can Onshore Banks Still Lend In USD?

PBI 17/3 does not explicitly prohibit an onshore bank (including a branch of a foreign bank) from lending foreign currency as part of its banking business, provided that lending is permissible by law. It states that foreign currency loans can still be provided in connection with “export activities and other activities” which potentially covers almost all activities. As for non-bank lending (or other potential transaction using foreign currency), BI opens the possibility under Article 5(c) PBI 17/3, provided that such transaction is permissible by law. However, the loans will have to satisfy separate criteria for BI for onshore lending. Given that the Hedging Regulations apply only to offshore lenders, it is likely that we will see stricter controls on onshore foreign currency lending as well.

Conclusions

PBI 17/3 continues the Government policy of breaking down the dependence on foreign currency and transactions linked to foreign currency in Indonesia.

The requirement to quote in IDR is significant. The regulation seems to be particularly aimed at the practice of quoting in USD and merely accepting IDR at the time of payment. We also believe that quoting in IDR, but with a formula which very obviously links to a real price in USD, is contrary to the policy of objective of PBI 17/3 and may be a risky approach. That said, we think that this does not prohibit currency revision mechanics, such as quoting a particular price in IDR, which can be changed periodically based on specified market circumstances, including a material change in exchange rates or cost base. However, this should probably be used only as a risk mitigation device to cap foreign currency exposure – it should not be essentially the same as quoting in foreign currency and accepting an IDR equivalent.

We do also note that it is not clear whether it is possible to quote in USD for foreign purchasers of services – something very apposite for professional firms such as ourselves! As a policy reason, it would seem prudent to permit quotes in USD, otherwise the exchange rate risk connected to a fall in the IDR would fall on the Indonesian service provider. However, initial indications from BI have not fully confirmed this. We are continuing to consider this matter in the context of our own billing arrangements and will contact clients separately in due course.

While it is clear that PBI 17/3 does not prohibit offshore loans in foreign currency, these loans are now separately subject to the recent hedging regulations.

Parties preferring to transact in USD may wish to make use of the grandfathering window which will close on 30 June 2015. It is likely that only commitments made in definitive agreements will be recognised as sufficiently binding to be grandfathered, and care will need to be taken in relation to any subsequent amendments given the possibility that even minor amendments unrelated to the settlement provisions in such agreements may also require a further adjustment to ensure IDR settlement.

Given the need for clarification of various points, PBI 17/3 provides significant scope for the rules to be further developed by BI through its Circular Letters. BI has indicated that it will issue a Circular by the end of April 2015.

 

For further information, please contact:

 

Joel Hogarth, Partner, Ashurst
joel.hogarth@ashurst.com

Sean Prior, Partner, Ashurst 

sean.prior@ashurst.com