Indonesia plans to tighten control over commodity exports, potentially stirring up the coal and palm oil markets

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Indonesia is planning to significantly strengthen state control over commodity exports, aiming to crack down on tax evasion and bolster the continuously declining rupiah exchange rate, but this move could also impact the global coal and palm oil markets.

According to informed sources, the Indonesian government is planning to establish a new national agency dedicated to managing the export affairs of commodities such as coal and palm oil, in order to stop the widespread problem of under-invoicing. The agency will be overseen by the sovereign wealth fund Danantara, which reports directly to President Prabowo Subianto, and could be officially announced by the president as early as this Wednesday.

After the news broke, Indonesia's benchmark stock index closed down 3.5% on Tuesday.

This will be Prabowo's toughest measure so far to shore up state finances, driven by the financial pressure from his flagship high-cost policies such as the nationwide free school meal program. Meanwhile, rising energy import bills and growing concerns among the public over deteriorating governance in Indonesia have pushed the rupiah to its all-time low against the US dollar this week.

Structure of the new agency remains unclear, details still under negotiation

According to sources, the specific operation of the agency is still under discussion, and many details have yet to be finalized. The scope of its functions and its potential impact remain uncertain.

Danantara, the government communications bureau, the Ministry of Trade, and the Ministry of Finance have all declined to respond to Bloomberg's requests for comment.

Cracking down on under-invoicing and closing tax loopholes

Under-invoicing has long been a serious and deep-rooted problem in Indonesia's commodity sector. This practice refers to companies deliberately undervaluing goods when declaring exports, thereby shifting sales profits to low-tax jurisdictions and evading domestic taxes.

According to research by Global Financial Integrity, in 2016 alone, the Indonesian government lost as much as $6.5 billion in tax revenues due to this issue.

Finance Minister Purbaya Yudhi Sadewa said in an interview with Bloomberg last month that cracking down on under-invoicing is one of his policy priorities. He also previously threatened to replace Indonesian customs officials with foreign contractors to tackle corruption.

Global commodity markets may be affected

Indonesia is the world's largest exporter of thermal coal and palm oil. Should the state implement stricter export controls, the related global commodity markets could experience turbulence.

From past experience, Indonesia has repeatedly banned some natural resource exports in order to promote downstream manufacturing, safeguard domestic supply, and attempt to raise commodity prices through limiting production or mandating government benchmark prices.

A potential benefit of tightening export controls this time is the maximization of foreign exchange inflows, thereby supporting the rupiah. The Indonesian government has previously tightened foreign exchange trading restrictions to stem rupiah depreciation; the central bank has also intervened in the market frequently to support the exchange rate.

Financial pressure forces policy shift

The underlying reason for this policy shift is the multiple fiscal challenges faced by the Prabowo government. Flagship policies like the nation-wide free school meal program require huge outlays, energy import expenses continue to rise, and growing investor concerns about Indonesia’s governance have combined to push the rupiah to record lows.

Prabowo has repeatedly and publicly criticized elites and foreign forces for moving Indonesia's natural resource wealth overseas. His government has seized large amounts of land from palm oil and mining companies, and imposed heavy fines on companies accused of violating forestry licensing regulations.

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