Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=cbie20 Bulletin of Indonesian Economic Studies ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: https://www.tandfonline.com/loi/cbie20 Risks, Resilience, and Reforms: Indonesia’s Financial System in 2019 Adam Triggs, Febrio Kacaribu & Jiao Wang To cite this article: Adam Triggs, Febrio Kacaribu & Jiao Wang (2019) Risks, Resilience, and Reforms: Indonesia’s Financial System in 2019, Bulletin of Indonesian Economic Studies, 55:1, 1-27, DOI: 10.1080/00074918.2019.1592644 To link to this article: https://doi.org/10.1080/00074918.2019.1592644 Published online: 24 Mar 2019. Submit your article to this journal Article views: 375 View related articles View Crossmark data
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Full Terms & Conditions of access and use can be found athttps://www.tandfonline.com/action/journalInformation?journalCode=cbie20
Risks, Resilience, and Reforms: Indonesia’sFinancial System in 2019
Adam Triggs, Febrio Kacaribu & Jiao Wang
To cite this article: Adam Triggs, Febrio Kacaribu & Jiao Wang (2019) Risks, Resilience, andReforms: Indonesia’s Financial System in 2019, Bulletin of Indonesian Economic Studies, 55:1,1-27, DOI: 10.1080/00074918.2019.1592644
To link to this article: https://doi.org/10.1080/00074918.2019.1592644
outflowssawtherupiahfall12%againsttheUSdollarinthe10monthstoOctober2018.ButthisfallwasfarsmallerthantheoneduringtheTaperTantrum,3 and the rupiahhadalmostcompletelybouncedbackbyJanuary2019.4Otherrecentindicatorspointtoasimilarlyrobustperformance(table1).GDP
thantwoyears,6andunemploymentremainedbelowitsfive-yearaverage.7 In late 2018,consumerandbusinessconfidenceremainedrobustbyhistoricalstandards,8 andthegovernmentbudgetimproved.Thedeficitshrankbyalmostathirdin2018,9
6.The inflationratewas2.8% in January2019, the lowestsinceAugust2016 (TradingEconomics2019).7.Theunemploymentratewas5.3%inthesecondhalfof2018.Thefive-yearaveragetoend2018is5.7%(TradingEconomics2019).8.Businessconfidencewasat108indexpointsinthethirdquarterof2018.TheaveragesinceJanuary2016is107indexpoints.Consumerconfidencewasat127indexpointsinDecember2018(TradingEconomics2019).9.ThebudgetdeficitasapercentageofGDPwas1.8%in2018,downfrom2.5%in2017and2016and2.6%in2015(TradingEconomics2019).
andthecostoffinancingIndonesia’scomparativelylowgovernmentdebt10fellbyonepercentagepointafterOctober2018.11 Similarly, Indonesia’s political system appears stable, even as 190million
therearereasonstobelievethatanincomingPrabowogovernmentcouldseeshiftsineconomicpolicy.AlthoughJokowihasbynomeansbeencommittedtomarket-basedpolicies,especiallyinagriculture,aPrabowogovernmentmayhavealess-favourableattitudetowardsIndonesia’sopennesstotherestoftheworld.Whilecampaignrhetoricmaynotnecessarilytranslateintogovernmentpolicy,Prabowohaspaintedhimselfasanationalist,implyingthatWidodoistoofriendlytoforeigners(McCawley2018).HecalledforIndonesia’shostingofthe2018IMFandWorldBankannualmeetingstobescaledbacktoredirectthemoneyelsewhere(Tempo2018).HearguedinthefirstofthefivepresidentialdebatesthatIndonesia’seconomylackedself-sufficiencyandhadbecometooreliantonforeigners(Lipson2019).Prabowo’s brother,HashimDjojohadikusumo, haswarned against foreign
RISKS FACING THE ECONOMY AND FINANCIAL SYSTEMDespiteIndonesia’sresiliencethroughoutadifficultperiod,risksremain.Threeareasinparticularwarrantspecialattention:financingofinfrastructurebystate-ownedenterprises(SOEs),liquidityinthebankingsector,andfinancinginthepublicandprivatebondmarkets.
State-owned Enterprises and Infrastructure FinancingWidodointroducedaplanin2014forinfrastructuredevelopment.TheNationalStrategicProjects(PSN)schemeincludedtollroads,seaports,airports,powerplants,andcleanwaterprojects,costingRp4,796trillion($363billion)from2014to2019(MorrisandTsjin2015).About40%ofthefinancingfortheseprojectswastocomefromthegovernmentbudget.Theremaining60%wastocomefromSOEs,andtheprivatesector(Amin2016).In thefirst fouryearsofWidodo’s administration,however, almost all the
SOEs(table4).ItisthebiggestSOEinIndonesia,withRp1,386trillioninassets.AlongwithstateoilandgascompanyPertamina,PLNisthemainvehicleforthe government’s energy subsidy policies.13 The government has injected asignificantamountofequityintothecompany,especiallyforthedevelopmentofits
35,000-megawattpowerplant,whichwasinitiallyprojectedtobecompletedin2019.Theambitiousdeadlinewillnotbemetandwillbeextendedto2024(Amelia2019).Even though PLN has increased its borrowing in the past four years, the
government’s equity injections have been dominating the dynamics of thecompany’scapitalstructureinthepastfouryears.Thecompanysignificantlydecreaseditsleverageratioto65%in2018.However,intheshortrun,itsprofitabilityhasdeterioratedsignificantly,ithaslessliquidity,anditisstrugglingwithsolvency.Withoutanymajorgovernmentpolicyreform,PLNwilllikelycontinuedownthispath.GiventhatPLNisthemainconduitforthegovernment’senergypolicy,thisposesrisksforthegovernmentbudgetanddebtmanagement.Pertamina’s involvement ingovernment infrastructureprojectscentreson
the development of oil refineries,which comewith a substantial cost. TheconstructionoftheTubanandBontangrefineriesistocommencein2019.Theywillbefundedthroughabusiness-to-businessscheme.Meanwhile,theincreaseinoilpricesin2016–18hashelpedPertaminareduceitsdebtandpaydividendstothegovernment.14Despitethehighburdenthatcomesfromthegovernment’senergysubsidypolicy,thecompany’sprofitabilitycontinuestoincrease.Insum,mostSOEsinIndonesiahavebecomemorehighlyleveragedeventhough
Banking Sector LiquidityThe Indonesian banking sector is highly capitalised. The capital buffers ofIndonesianbanksfarexceedwhatiscommonintheAsiaPacificandwhatisrequiredunderBaselIII.16Atthesametime,theproportionofnon-performingloans(NPLs)hasbeenlowandisdecreasing.BoththeseindicatorssuggestthatIndonesiaenjoysasolventbankingsystem.TheNPLratioofthebankingsectorfellto2.65%inOctober2018,aftertrending
authoritiescanmaintainsufficientliquidity,willbekeytomitigatingtheriskofhighLDRs.InOctober2018,portfoliocapitalinflowsbegantoresume,20 and the inflowofforeigndirectinvestment(FDI)islikelytostabiliseatitsmedium-termlevelof$12–16billionperyear.Ifthistrendcontinues,thethreatofaliquiditycrunchwilleaseformanyIndonesianbanks.Therecentdecreasein liquidity,however,highlightsakeysusceptibilityofthebankingsystem.NowisthetimetofocusonconsolidatingIndonesia’ssmallerbanks,ensuringthattheregulatoryframeworkissufficienttoprovideemergencyliquidityintheeventofabroaderliquidityshortage.
Public and Private DebtIndonesia’sgovernmentdebtremainslow,evencomparedwithotheremergingeconomies(figure3).Thecountry’srelianceonforeign-denominatedborrowingsandshort-termborrowingshasbeenstable,whichhashelpedtoreducerisksfromcurrencyandmaturitymismatches(IMF2017).Butthehighproportionofgovernmentdebtthatisheldbyforeignerscreatesrisk,asdoestheincreaseinshort-termborrowingsbynon-financialcorporations.Intheeventofasuddenoutflowofcapital,boththesedevelopmentscouldcreatealiquidityprobleminthebankingsystem.GovernmentdebtwasRp4,400trillion($295billion)attheendofthethirdquarter
debtimprovedto58:42inthethirdquarterof2018,slightlybetterthantheratioof57:43recordedin2014(figure4).The trend for non-financial corporationswas similar. They increased their
foreign-denominatedborrowingsinthesecondhalfof2018afteravoidingforeign-denominateddebtinthefirsthalfoftheyearduetotheuncertaintycausedbythe strong depreciation of the rupiah. The interest rate differential betweenborrowinginforeigncurrencyandborrowingindomesticcurrencyhadwidenedsubstantially,21whichbroughttheratiobetweenrupiahandforeignexchangedebtto39:61(BankIndonesia2018). Thegovernmenthasconsistentlyacquiredonly3%ofitsdebtthroughshort-
term borrowing.On the other hand, non-financial corporations significantlyincreasedtheirshort-termborrowingsin2018.Theratioofshort-termtolong-termborrowingsbynon-financialcorporationsincreasedfrom13:87to19:81over2018.ThisrepresentsaRp60trillionincreaseinnewshort-termdebtinthefirstthreequartersof2018(BankIndonesia2018). Asharpwithdrawalofcapitalcouldcreateabroaderliquiditychallengeinthefinancialsystem.One of the biggest risks in the financialmarket, however, arises from the
RESILIENCE: IS THE NEW CRISIS FRAMEWORK UP TO THE TASK?ThegovernmentpassedLaw9/2016onFinancialSystemCrisisPreventionandMitigation(PPKSK)in2016.Itspurposeistopreventandrespondtofinancialcrisesthroughbetterpreparation,andthroughcooperationbetweenIndonesia’sregulatorsandinstitutions.Thelawdelegatesresponsibilitytosevenkeyentities(figure5).
At thecentreof responsibilityunder the law is theFinancialSystemStabilityCommittee(KSSK).ItsroleistocoordinateanddirectIndonesia’sfourkeycrisis-responseagenciestoprevent,preparefor,andrespondtofinancialcrises(vonAllmenandKang2018).ThesefouragenciesaretheMinistryofFinance,BI,theFinancialServicesAuthority(OJK),andtheDepositInsuranceAgency(LPS).TheKSSKmeetsformallyeverythreemonths.AmajorroleoftheKSSKisto
theactivitiesoftheKSSK.ThelawpreventstheMinistryofFinanceoranyothergovernmentagencyfromusingpublicfundingtobailouttroubledbanks(IMF2017).Instead,thelawrequirestroubledbankstobe‘bailedin’.Abail-iniswherea failingbank’s creditorsbecomeshareholdersand the resolutionauthorities
FIGURE 5 Summary of the PPKSK Law
Source: Prepared by the authors based on consultations with Indonesian authorities and analysis by the IMF (2017).
Bank Indonesia
Liquidity advice
Coordination and direction
No public funding
Liquidity in exchange for
collateral
Declaration of crisis
Monitoring liquidity, solvency, and recovery plans
Resolution of troubled banks
President Banks
LPSDeposit Insurance
Agency
OJKFinancial Services
Authority
KSSKFinancial System Stability
Committee
Finance Ministry
Expanded power; e.g.,
bail-in
Advice on the state of the
financial system
14 AdamTriggs,FebrioKacaribu,andJiaoWang
terminateorwritedownthebank’sunsecuredliabilities,convertingcreditors’unsecuredclaimsintoequity(Dell’Aricciaetal.2018;FSB2014).Banksareexpectedtohaveenoughassetsandenoughflexibilityintheirdebtinstrumentstoallowthemtostabiliseinacrisis(vonAllmenandKang2018).Underthelaw,banksarerequiredtohaverecoveryplans.Theseplansshoulddetailhowthebanks’bail-inarrangementswouldoperateinacrisis,includingwhichassetstheywouldsell,whichsubsidiariestheywouldremovefromtheirholdinggroups,andhowtheywouldrestructuretheirdebtpositions(IMF2017).Unless the law is changed, theMinistry of Finance is also constrained by
Shortcomings of the PPKSK Framework: A Hypothetical Crisis Theshortcomingsof thePPKSK lawbecomeclearwhenahypotheticalcrisisisconsidered.Suppose that,asa resultofanyof therisksexploredearlier,asystemicallyimportantIndonesianbankweretosufferaliquiditycrisis.HowwouldthissituationberesolvedunderthePPKSKlaw?Ordinarily,BIwouldberesponsiblefordecidingwhetheremergencyliquidity
problemwould shift the onus of responsibility fromBI and theOJK to theresolutionauthority,theLPS.It,however,hasinsufficientfundstoresolvethefinancialproblemsofasystemicallyimportantIndonesianbank(RahadianaandHo2017),andthelawpreventsitfromusingpublicfundsinitsresolutionprocess.Itsbail-inpowersarealsonotavailableunlessthepresidentdeclaresastatusoffinancialsystemcrisis.Theconcernisthat,bythetimethepresidentmakessuchadeclaration,thevalueofthebank’sassets,includingitssubsidiaries,mayhavesignificantlydeclinedinvalue,andshareholdersanddepositorsmayhavewithdrawntheirstakesfromthebank.Thiscouldmeanthatabail-inwouldbeanunrealisticpolicyresponse,giventhesizeofthechallenge.AlthoughIndonesia’sbanksarewell-capitalised,thestrengthofthatcapitalisoftennotknownuntilacrisisoccurs(HagendorffandVallascas2013).Thiscouldmeanthatabank’srecoveryplan,whichshoulddetailhowthefirmwouldrescueitselfinacrisis,maynotbeeffectiveinreality.Thesecondconcern,whichunderpinsmanyoftheaboveconcerns,isthatthe
The Long Shadow of the Bank Century BailoutThePPKSKlawisdifficulttounderstandwithoutthecontextofthe2008BankCenturybailout.BankCentury,asitwasthenknown,wasthe13thlargestbankinIndonesia. In lateOctober2008,BankCenturybeganexperiencingseriousliquidityproblems.Thebank’smanagementrequesteda$108millionshort-termloanfromBI.BIprovidedtheassistanceandputBankCenturyunderaspecialmonitoringstatusinNovember.On20November,however,whenBankCenturywasreportedashavinganegativecapitaladequacyratio,thegovernmentdecidedthatemergencymeasureswerenecessary.Thegovernmentseizedthebankandgaveitselffiveyearstonurseitbacktohealthandthensellit.Afewdaysafterthebank’sseizure,oneofthebank’scofounders,RobertTantular,wasarrestedandlaterfoundguiltyofissuingfakelettersofcredit(Wall Street Journal2008).Thebailouthadasizeableeconomiccostofabout$700million(McLeod2010).
parliamentbuilding.MembersofParliamentinstigatednumerousinvestigationsontopofthosealreadyunderway.Thetargetsoftheinvestigationsincludednumerousgovernmentofficials,suchasthethen(andcurrent)financeminister,SriMulyani,andthethenBIgovernor,Boediono.Parliamentheldavoteonwhetherthebailoutwaswarranted.Theresultwasaresoundingvoteofnoconfidenceinthegovernment(Wall Street Journal2008).AkeyconsequenceoftheBankCenturybailouthasbeennervousIndonesian
officials.Havingfacedabarrageofinvestigations,seniorofficialsinthefourKSSKagenciesreportedthattheywouldbelesslikelytoactifanotherbankorfinancialinstitutionweretorequiresupport,andthatthePPKSKlawwasdraftedforthisreason.25Thelawdeliberatelyabsolvesagenciesandofficialsfromindependentresponsibility forbankbailouts. It ensures that all agencies andofficials arerequiredtocollectivelymakedecisions.Thelawprovidesthemwithpoliticalandinstitutionalcoverifabailoutisnecessary,ratherthanrelyingonindividualagenciestoimplementspecificmandates.Theconsequenceofthisisthattheresponsetoacrisisislikelytobeslower
The Inadequacy of Regional and Global Safety NetsThisraisesthequestionofwhatexternalsupportwouldbeavailabletoIndonesiainacrisis.AgrowingbodyofresearchhashighlightedtheinadequaciesoftheregionalandglobalsafetynetsavailabletoAsianeconomies(Sterland2017).Theseinadequacies,combinedwithIndonesia’spoorhistorywiththesafetynets,wouldmakeforparticularlycomplexpoliticalandeconomicconsiderationsifIndonesiaweretorequireexternalassistanceinthefuture.Indonesiahasturnedtoregionalandglobalsafetynetsinthepast.26During
theAsianfinancialcrisis,IndonesiaenteredanIMFprogramthat,accordingtomanyanalysts,didmoreharmthangood(Krugman2009).WhatwasperceivedasbadadviceandunnecessaryconditionalityfromtheIMFhascreatedstigmaamongIndonesianofficialsandthepublicaboutgoingtotheIMFforassistance.WhenIndonesiafacedfinancialhardshipduringtheGFCandtheTaperTantrum,Indonesia’sauthoritiesexhaustedalmosteveryoptiontoavoidengagingthehelpoftheIMF.ThegovernmentsecuredacombinationofloansandbilateralswaplineswithAustralia,Japan,andKorea.ItobtainedaliquiditylinewiththeAsianDevelopmentBank(ADB)andhassinceexpandeditsswaplineswithothercountriesintheregion,particularlyChina.Indonesia would, it seems, have several options in a crisis. It could
access resources from the IMF, theWorld Bank, the ChiangMai InitiativeMultilateralization(CMIM),andtheADB,anditcoulddrawonitsswaplines
Other Shortfalls in Indonesia’s Regulatory FrameworkThere are several other challenges facing Indonesia’s regulatory framework,discussedindetailbyvonAllmenandKang(2018).TheOJKfacesaparticularchallengeinregulatingfinancialconglomerates.MostfinancialconglomeratesinIndonesiahaveahorizontalstructurethatincludesbanks,insurers,andothersubsidiariesthataresubjecttoregulation.Theholdingcompanythatcontrolsthegroup,however, isoftenunregulated.The lackofaregulatedbodywithclearascendancyoveralltheentitiesthatformaconglomerateposesimportantchallengesfortheconsolidatedsupervisionoftheconglomerate.TheOJKhasbeentryingtoaddressthisproblembynominatingafinancialinstitution,usuallyabank,astheleadentityofconglomerates.However,thiskindofleadentitylacksthelegalauthoritytoimposetheOJK’sregulatoryrequirementsonthegroup,andcompanylawrequirementsmayhinderinformationflows(vonAllmenandKang2018).BIisplayinganincreasinglyimportantroleinmacroprudentialpolicy,whichis
Reforms to Strengthen the PPKSK LawThe PPKSK law could arguably be reformed to strengthen and clarify theindependentrolesandmandatesofagencies,andothersunderthelaw.SeniorofficialsinthefourmainregulatorsoftheKSSKsuggestthatithasbeena
REFORMS: GROWTH AND STABILITY THROUGH FINANCIAL DEEPENING AND FINANCIAL INCLUSIONWhiletheIndonesianeconomyisapproaching20yearsofuninterruptedgrowth,Indonesia’sfinancial system remains shallow.Financialdeepening isvital toboostlong-termfinancialstability(Apergis,Filippidis,andEconomidou2007).Itisalsovitalforeconomicgrowth.AstudybyEkbergetal.(2015)estimatesthatforIndonesiatoachieveitsGDPgrowthaspirationsof$4.1trillionby2030,itsfinancial
announcedaFinancialServicesSectorMasterPlan(2015–19)inJanuary2016.Theplanseekstooptimisetheroleofthefinancialsectorinacceleratingeconomicgrowth;tomaintainfinancialsystemstability;toenhancethepublic’sfinancialindependence; and to support equitable economic development (OJK 2016).Thegovernmenthasalsointroducedacoordinatedfinancialinclusionstrategyto expand access to banking services. This National Strategy for FinancialInclusion (SNKI) focuses on financial education, public financing facilities,financialinformationmapping,supportiveregulations,distributionnetworks,intermediationfacilities,andconsumerprotection.Thestrategyisexpectedtoincreasetheshareofhouseholdsthathavebankaccounts,from36%in2016to75%by2019.Thedevelopmentofdigitalfinancialserviceswillbeacentralpartofthisstrategy(Parlina2018).Asambitiousasthesepolicyframeworksare,itistooearlytospeculateabout
27.TheIMF,theWorldBank,andtheADBregularlypublishresearchonIndonesia’seconomicdevelopmentanditsfinancialmarket.IndependentresearchinstitutionssuchastheMandiriInstitutealsocontributeanalysis.The Bulletin of Indonesia Economic StudieshasbeencloselyfollowingIndonesia’seconomyandfinancialreformsformanyyears.
Easing Banking Credit ConditionsThetighteningofcreditconditionsfromApril2018toJanuary2019reflectstheshallowandbank-dominatedstructureofthefinancialsystem.Itisalsoaresultofthebanks’largecapitalbuffersandthecompetitionfordepositsthatcomesfromthegovernmentbondmarket.Asprimaryfinancingchannels,thebanks,especiallythelargebanks,aremainlyresponsibleformeetingthelargefinancialneedsofinvestorsandthegovernment,particularlyforitsinfrastructureprogram.Asdiscussedearlier,thecapital-to-assetsratioofIndonesia’sbanksishigherthanrequiredunderBaselIII.Thispartlyreflectstheneedofthebankstoself-insure,duetothepolicyofbailingin,notbailingout,firmsincrisis.Marketparticipantssuggestthatthishasledthebankstoraiseadditionalcapital,whichhascontributedtotightercreditconditions(Ekbergetal.2015).Thebanksalsofacecompetitioninattractingdeposits.Therateofreturnongovernmentbonds(someintheformofcorporatebondsissuedbySOEs)reached7.8%inJune2018.Thisismoreattractivethanthebankdepositrateofaround5.5%.Thiscrowding-outeffectisparticularlyprominentfortheBUKU3and4banks,whichhavefacedtightercreditconditions.The government and regulatory bodies should focus on addressing these
distortionsinordertoeasecreditconditionsforthebanksandtohelpdeepenthe financial system while preventing further vulnerability and instability.Policymakersshouldbeawareofthetighteningofthefinancingenvironmentwithinbanks,andtheyshouldseektodivertsome,ifnotall,ofthefinancingneedstoNBFIsandthecapitalmarket.Thiswouldnotonlyreleasethecredittensionofthebanksbutalsohelpthenon-bankingfinancialintermediariesandcapitalmarkettogrow.
Developing the Capital Market and Non-banking Financial IndustryThetotalassetsoftheNBFIsandthecapitalmarketcombinedaccountforathirdofIndonesia’sfinancialassets.Thissmallsharehascontributedtotheshallownessofthefinancialsystem.Toensurefinancialdeepeningandinclusion,effortsshouldbemadetoexpandthefinancialmarket.Specifically,policiesshouldfocusonfurtherdevelopingtheNBFIs,suchaspensionfunds,insurancecompanies,andmutualfunds.Theyshouldalsofocusondevelopingthecapitalmarket,includingbydevelopingthemoneymarket.Reformsareneededtoenlargethedomesticinstitutionalinvestorbase,especially
by encouraging long-term institutional investors in the market. DomesticinstitutionalinvestorsinIndonesiacurrentlyhaveashort-termfocus.Forexample,definedbenefitpensionfundsfocusonshort-terminvestmentreturnsratherthanlonger-termopportunities(Ekbergetal.2015).Regulatorsandpolicymakersshouldencourageinvestorstorevisetheirevaluationcriteria,discouragepeoplefromwithdrawingtheirpensionsavingsbetweenjobs,andprovidesubsidiesandmoreincentivesforlong-terminvestmentproducts.Effortsshouldbemadetoencouragetheestablishmentofpensionfunds,money
Expanding Access to Finance and Financial Instruments Technologicalinnovationsthroughfinancialtechnology(fintech)havebecomeimportantinstrumentsforpromotingfinancialinclusioninIndonesia.Fintechenableshouseholdsinremoteareasandsmallbusinessestoaccessbankloansand/orpeer-to-peerloans.FintechinIndonesiahasbeendevelopedprimarilybythebankingsectorandallowshouseholdsinremoteandruralareasandsmallbusinessestoaccessbankcreditandpossiblyotherfinancingchannelsovertime.ComparedwithcountriessuchasIndiaandChina,Indonesiastillhassignificant
potentialtodevelopfintech.Policiesshouldbeimplementedtoboostthegrowthoffintechinstrumentsinthefuture.Furthermore,tofacilitatethedevelopmentofthemoneymarket,severalinstrumentsshouldbeintroduced,includingfloatingratenotes, certificatesofdeposit, and commercialpaper.Thiswouldhelp toremovetheincentiveforfirmsandhouseholdstoshiftmoneyoffshore,wheremoreinstrumentsareavailabletomeettheirfinancialneeds.AttractingthesefundsbackintoIndonesiawillbevitalintheoveralldeepeningofthefinancialsystemandstrengtheningoffinancialinclusion.
CONCLUSION AND FINDINGSTheglobaleconomyhasproducedacomplexenvironmentforIndonesia.Testingthe resilience of the Indonesian economy are rising global interest rates, anappreciatingUSdollar,tighteningglobalfinancialconditions,growthdowngrades,theriseofthefar-right,geopoliticaltensions,theunderminingofglobalinstitutions,theUnitedStates–Chinatradewar,andthethreatofaUSrecessionandpolicyuncertaintyfromBrexit.Indonesiahasmanagedthesechallengeswell.Itscapitaloutflowsweremuch
smallerthanintheTaperTantrum,andtherupiahhadregainedmostofitslostgroundbyJanuary2019.Indonesia’sstockmarkethasoutperformeditspeers,growth is forecast to remain stable, inflation is low,unemployment remainsbelowitsfive-yearaverage,consumerandbusinessconfidencearerobust,and
28.In2015,insurancecompanyassetscomposedonlyabout7%ofGDP,comparedwith15%inpeercountriesintheAsiaPacific(IMF2017).29. Law 40/2014 on Insurance appears to have improved insurance regulation andsupervision.SeeIMF(2017)foranassessmentoftheinsurancecoreprinciplesspecifiedbythislaw.
24 AdamTriggs,FebrioKacaribu,andJiaoWang
thegovernment’sbudgethasimprovedthroughasmallerdeficitandcheaperborrowingcosts.Butbeyondtheseshort-termindicators,significantrisksremainfortheeconomy.TheincreaseddebtofIndonesia’sSOEs,thethreatofliquiditywithdrawalfromIndonesia’sbankingsystem,theexpansionofgovernmentdebtheldbyforeigners,andthegrowingrelianceonshort-termborrowingbynon-financialcorporationscouldtesttheresilienceofthefinancialsystem.Giventhelikelyinadequacyofglobalandregionalsafetynetsinprovidingthenecessarysupport, the effectiveness of Indonesia’s crisismanagement framework—thePPKSKlaw—willbecrucial.Thispaperhasshown,however,thatthelawhasseriousdeficiencies.Itmay
officials should have better legal protection when they act in good faith inresponding to financial and economic crises. Individual agencies should bechargedwithresponsibilitiesintheirrespectiveareasofexpertise,withtheKSSKplayingonlyaninformation-sharingrole.BIshouldbereinstatedasIndonesia’slenderoflastresort.TheOJK’sabilitytoregulatefinancialconglomeratesshouldbestrengthenedandtheLPSshouldbeabletoaccessitsbail-inpowerswithoutpresidentialapproval.Thepresident’sroleshouldbelimitedtodecidingwhetherpublicfundingcanbeusedinabailout.Inthelongerterm,thegovernmentshouldredoubleitsreformeffortstodeepen
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