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Editorial: Our financial safety net
Even though the Indonesian government has not said it in so many words, it has consistently been demonstrating since last month a sense of crisis and an even greater sense of urgency in acting to prepare our economy, especially our financial sector, for any possible fallout from the global financial crisis
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Even though the Indonesian government has not said it in so many words, it has consistently been demonstrating since last month a sense of crisis and an even greater sense of urgency in acting to prepare our economy, especially our financial sector, for any possible fallout from the global financial crisis.
In the latest series of concerted efforts to cushion the blow from the financial panic in the United States and Europe, President Susilo Bambang Yudhoyono enacted Monday two government regulations in lieu of laws, effective immediately, to strengthen the banking industry.
The first regulation raises the maximum guaranteed deposits at banks by 20-fold to Rp 2 billion (US$200,000) to revive investor confidence in banks. This additional measure increased the government's insurance coverage of third-party depositors at banks from 95 percent to 97 percent.
The second regulation makes it much easier for illiquid banks to get emergency credit from the central bank (Bank Indonesia), as the lender of last resort, by expanding the categories of assets that banks can pledge as collateral.
These concerted measures to strengthen the banking industry are quite strategic, given that almost 80 percent of the country's financial assets are still concentrated in banks.
Earlier last week, Bank Indonesia helped ease tightening liquidity at banks by cutting the minimum reserve requirement from 9.08 percent to 7.5 percent (of total deposits).
In another move, also to help restore confidence in the domestic financial market, the government decided last week to set aside Rp 4 trillion as reserve funds to buy shares in state companies that were dumped on the stock market at irrationally low prices, as happened early last Wednesday before the regulatory agency abruptly closed the exchange for three days.
In addition to reducing the restrictions on buying back shares on the stock market, the fiscal authorities announced another set of measures last week to ease the procedures for government procurement of goods and services, thereby expediting the disbursement of budget funds for pump priming.
The stock market reopened Monday with stronger confidence, closing that day up almost 1 percent as most benchmark share indexes in Asia, Australia and New Zealand advanced on the back of stronger government support of the financial sector.
Earlier, the Australian and New Zealand governments said they would guarantee all deposits with financial institutions. European leaders pledged Sunday to guarantee new bank debts until the end of 2009 and keep distressed lenders afloat. All these measures contributed to restoring confidence in the financial market.
Confidence is the key to normal operations and stability of the financial industry because financial assets, whether corporate stocks, government bonds or more complex instruments, are all essentially claims on the future. They promise income from future economic activity, whether interest payments on loans, dividends from business or an appreciated price (capital gain) when the assets are sold.
Investors may determine each day how much their respective holdings are worth from the market prices but their wealth exists more as potential than as reality.
But it is the basic elasticity in the value of financial assets that allows financial markets, in extreme circumstances, to become decoupled from the tangible realities of the real sector, as happened last week due to the fallout from the financial panic in Europe and the United States.
The physical property -- the underlying assets of the companies listed on the Indonesian Stock Exchange such as coal factories, plantations or telecommunications networks -- continues to exist. But the market's confidence in their supported future worth as income-producing assets weakened as foreign investors who got burned in Europe and the United States reassessed their risks worldwide.
It is therefore most imperative that the government keep taking whatever additional measures are needed to strengthen confidence in our financial sector amid the ongoing global financial meltdown.
