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Indonesian banking and global recovery
The 2009 economic growth rate was predicted to reach 4
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he 2009 economic growth rate was predicted to reach 4.3 percent, placing Indonesia in an elite group of countries with positive growth.
From a price stability perspective, inflation in 2009 was recorded only as high as 2.78 percent, the lowest in the last decade.
The Indonesian balance of payments in 2009 reached a surplus of around US$12 billion, supported by current account and capital account surpluses.
Indonesian foreign reserves at the end of 2009 were recorded at $66.1 billion, which is the equivalent of 6.6 months of imports and the repayment of all foreign government debts due.
Such a positive development in the external sector has fundamentally contributed to the strengthening of the rupiah, particularly since the second half of 2009.
The rupiah has appreciated since the 2nd quarter of 2009 and reached the level of Rp 9,425 per US dollar at the end of the year, a 16 percent increase since that quarter.
Bank Indonesia had consistently and mindfully lowered the BI rate from last January to the current le-vel (6.5 percent). Domestic economic prospects in 2010 are expected to improve further. The economy is predicted to grow around 5.2 percent in 2010 and subsequently to 6.0 percent in 2011.
On the price stability front, the 2010 inflation pressure will be due to issues in market structure, especially related to food commodities, problems in distribution and the dynamics of international prices.
Nevertheless, the Indonesian economy in 2010 will face a number of rather serious challenges.
The main challenge is how to create a more balanced growth rate through an increase in investment.
Such effort requires sufficient infrastructure and an improvement in the investment climate.
Another challenge comes from a number of limitations in monetary policy transmission. Effectiveness of the transmission through the banking sector, using both credit and interest rate channels, needs to be improved. A decrease in credit interest rates, in my opinion, is still possible.
For the year 2010, the inflation target is in the range of 5 percent + 1 percent. On the medium horizon, Bank Indonesia is committed to guide the inflation in a declining trend so that it reaches the low level comparable to inflation rates in neighboring countries, which are around 3 percent.
Stability in the financial sector naturally draws some support from the performance of the banking industry. The industry wide capital adequacy ratio as of November 2009 was as high as 17 percent with relatively satisfying profitability and very sound liquidity.
However, credit growth, was rather below target, recorded at the level of 10.7 percent at the end of December 2009.
In 2010 Bank Indonesia will launch four main policy guidelines based on incentives and disincentives principles.
First, Bank Indonesia will deliver a set of policy improvement initiatives that will enhance banking resilience by refining existing regulations and implementation, strengthen banking supervision practices and establish a competitive banking industry as well as launch financial deepening.
Regarding policies on improving regulations and their implementation, we will adjust regulations on capital requirements to strengthen the resilience of banks facing risks, regulate the transparency of financial reports, improve the quality of good governance and enhance effective risk management.
Policies on strengthening banking supervision will be achieved through, among others, improving and strengthening risk-based supervision, reinforcing the framework for bank supervision, enhancing regulation on fit-and-proper tests and increasing cooperation with domestic and international supervisory authorities for non-bank financial institutions.
Policies on improving competition in Indonesia’s banking industry will be performed through improvement in the banking structure by aligning the scale with capital adequacy in order to mitigate the risk. Moreover, Bank Indonesia will improve the regulation of bank mergers, consolidations and acquisitions, the source of funds for bank acquisitions, conditions for the eligibility of an institution to take over a bank and the role of owners.
Policies on financial market deepening will focus on developing financial products that can be utilized by banks as an alternative way to channel and place funds productively for the real sector, especially infrastructure funding. As a result, financial markets are expected to be more liquid and banks will not be too dependent on revenues from the placement at Bank Indonesia’s instruments.
Second, encourage bank intermediation through the improvement of regulation and the building of infrastructure. Regulatory refinement covers the area of reserve requirement, operational efficiency and simplification of the foreign currency transaction requirement, which will consequently increase lending. Bank Indonesia will also encourage the establishment of an institution that provides a sectoral and regional credit database, thus facilitating risk measurement.
Third, carry out policy initiatives to improve the role of Islamic banks in the economy and increase their overall soundness. The policies will stimulate the formation of a stronger industry wide capital profile, facilitate the further development of Islamic business units and subsidiaries and facilitate the training and education of the pool of competent human resources.
Fourth, conduct policy initiatives to push the role of rural banks in micro finance and improve their overall soundness. The policy will provide incentives for a stronger formation of capital build-up, facilitate training to improve the competence of the human resources and in essence will ensure the more optimal functioning of rural banks as community banks.
Thereby, the improved soundness, higher efficiency, and optimal intermediary functions are in essence the keywords in our policy guidelines based on the incentives and disincentives regulation scheme.
In order to improve the efficiency of the banking sector, Bank Indonesia will initiate the benchmarking of cost of funds, overhead costs and risk premium and profit margins based on the market-friendliness principle. This effort will help banks to be more efficient in adjusting the credit rates.
Bank Indonesia will establish cooperation with other financial market supervisory authorities for further development of short-term money market instruments, as an alternative for the short-term credit.
Lessons learned from the recent global crisis have taught us to understand the importance of a systemic regulator whose responsibility covers the overall stability of the financial system.
The main role of the regulator is to gather reports and data and analyze them with the main aim to detect any early indication of systemic risks in the financial system.
The systemic regulator is also responsible for the set-up of the law and regulation, as well as coordination with other financial supervisory authorities, including fiscal authorities, to establish the proper crisis protocol.
I recognize three reasons for the central bank to play the role of systemic regulator.
First, a central bank transacts with the market on a daily basis when it conducts the open market operation or when it intervenes in the market, thus making it knowledgeable about the financial market and data.
Second, the responsibility for maintaining macroeconomic stability has close similarity with the responsibility for maintaining financial system stability.
Past experience shows that signi-ficant economic crises in the world were always predated by a financial crisis. Naturally the central bank integrates information and data from the financial sector in its monetary policy analysis.
Third, the central bank is the last resort lender. This function entails the central bank can inject liquidity for very short-term purposes during a crisis.
The central bank has enough information about a particular cash-strapped bank to justify the decision to channel the liquidity for short-term rescue.
Such decisive action by the central bank can stop the whole financial system from disintegrating due to impending systemic risks.
This article is a condensed part of a speech delivered by Bank Indonesia’s acting governor Darmin Nasution at the annual Bankers’ Dinner on Jan. 22, 2010.
