The Indonesian government has pledged to show flexibility in the implementation of its new mandatory letter of credit regulation.

A law came into effect on April 1 requiring exporters of key commodities to use letters of credit (LC) in their shipments, as a means of keeping an accurate track of exports. The affected commodities are coal, palm oil and palm-kernel oil, oil and gas and minerals, including tin. These, combined, account for some 41% of the country’s exports.

The country’s trade minister Rachmat Gobel, however, has now offered some respite for those who are unable to immediately meet the conditions, amid fears that it would have a big impact on Indonesia’s exports.

In a statement, Gobel said: “This is intended to give time for exporters to adjust and revise contracts made and signed before the Trade Ministry Regulation No. 04/2015 was issued so that it will not hamper their exports.”

The government will also set up export support organisations that will, along with banks operating internationally, offer LC facilities.

An audit will decide who is eligible for the LC exemption, with the government seemingly offering an olive branch to the exporting community, many of whom have been up in arms about the ever-changing regulatory landscape in the region’s most populous nation.

The LC requirement is opposed by many companies on the grounds that it would impose additional costs, Anton Alifandi, IHS

Indonesia is seeking ways to maximise its earnings at a time when prices for its abundant commodity resources remain flat. It hopes to boost non-oil and gas exports by a quarter this year to almost US$200bn. The minister had previously said that the rule will “increase export earnings and at the same time get accurate records, particularly from sales of natural resources”.

Analysts have also tied the move to the government’s desire to increase tax revenues. IHS’ Anton Alifandi tells GTR: “This [ruling] would allow the authorities to identify companies that may be selling commodities overseas at artificially low prices. The LC requirement is opposed by many companies on the grounds that it would impose additional costs. Indonesia’s clampdown on corporate tax avoidance underlines an ambitious programme to increase tax revenue from 12% to 16% of GDP in five years – a level that has never been achieved.”

Some commodity players have warned that it will prove to be arduous, adding complications to existing relationships and increasing the burden of cost for finance and treasury teams.

The regulatory move came on top of restrictions placed on the export of raw minerals from Indonesia, with the government keen to graduate the economy to a more value-add model. Exporters are now required to invest in facilities to develop the raw materials, or at least showing evidence of their plans to do so, if they wish to export from Indonesia.

This too has been fraught with difficulties and brought some long-term shocks. The legal complications for those working in Indonesia were outlined to GTR recently by Norton Rose Fulbright partner Rick Beckmann:

“For the exporters, there has been considerable uncertainty. The onshore processing requirement was contemplated by Indonesia’s new mining law of 2009, but was left to further regulations. The further regulations then zig-zagged on the date of the onshore processing requirement – and the ban on raw ore exports – which ultimately came into effect early last year, but with some last minute compromises.

“Exports of certain concentrates could continue with specified minimum purities, but with an escalating tax regime ending in December 2016. Concession holders who intend to export were also required to commit to either build, or co-operate in the building of, a smelter. There was a further compromise focused on foreign investors, later in the year – if a concession holder builds a smelter, then the permitted foreign shareholding is 60%, as opposed to 49% for concession holders without smelters.

“For the banks – and obviously the mining companies intending to build smelters – the key issue becomes whether, against the current background of uncertainty, a bank would be willing to finance a smelter at the development stage.”