Indonesia central bank slaps controls, offers Mercantilist incentives as rupiah slides

JAKARTA, Sept 25 (Reuters) – Indonesia’s central bank will announce new policies aimed at increasing onshore supply of dollars, as part of the second installment of a stimulus package to support the shaky rupiah.

Earlier this month, Indonesia’s government unveiled the first installment of a stimulus package, which analysts argue did not directly affect the exchange rate because most of the changes were deregulation measures to attract direct investment.

"This part of the package we hope will be able to stabilise the exchange rate more," said Juda Agung, Bank Indonesia’s (BI) executive director for monetary and economic policy, on Friday.

Hit by sliding prices for commodities, cooling demand from China and a likely rate hike in the United States, the rupiah has lost about 16 percent against the dollar so far this year – the second worst performing currency in emerging Asia.

Analysts say indonesia’s current account deficit and the big share of its government debt in offshore investors’ hands make it especially vulnerable to capital outflows in the event of a rate rise in the United States.

The central bank’s new policies will include a relaxation of requirements on forward dollar selling and a tax incentive for exporters to keep their dollars in local banks, he said.

Under the current rules, firms have to show an underlying document for every forward dollar selling transcation exceeding $1 million. Agung said BI will raise that threshold to about $5 million.

BI is also in talks with the Finance Ministry to lower the tax exporters have to pay on bank interest should they deposit their money in local banks, either in dollars or in rupiah, Agung added.

Currently the tax rate on bank interest is 20 percent.

"We have three strategies right now for our policy: strengthening monetary operation, increasing supply-demand of foreign exchange (transaction), and strengthening our foreign exchange reserves," Agung said.

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The move will increase onshore dollar liquidity," Bahana Securities’ analyst Fakhrul Fulvian said in Jakarta.

"But BI still needs to improve confidence so that people will want to sell their dollars," Fulvian said.

The rupiah was trading at 14,677 per dollar at 0700 GMT, having touched a new 17-year low of 14,700 earlier in the day.

BI has been intervening heavily in the currency market. Its foreign exchange reserves have decreased by $12 billion since February through to Sept. 21.

Indonesia’s economy grew an annual 4.67 percent in the second quarter – the slowest in six years.

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