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Indonesia more resilient, although still vulnerable: IMF

Indonesia may have learned its lessons from the 1998 Asian financial crisis as it is now in a better position than two decades ago, but the country should address its vulnerabilities, according to a book by the International Monetary Fund (IMF) published recently

Marchio Irfan Gorbiano (The Jakarta Post)
Jakarta
Thu, September 20, 2018

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Indonesia more resilient, although still vulnerable: IMF

I

ndonesia may have learned its lessons from the 1998 Asian financial crisis as it is now in a better position than two decades ago, but the country should address its vulnerabilities, according to a book by the International Monetary Fund (IMF) published recently.

The book, titled Realizing Indonesia’s Economic Potentials, was released in August, just two months before the IMF-World Bank Annual Meetings in Nusa Dua, Bali, from Oct. 8 to 14.

In one of the book’s chapters, University of Indonesia (UI) economist Chatib Basri notes that a number of reforms in various sectors, including banking, fiscal and monetary, have strengthened the country’s economic resiliency in facing external turbulence.

Chatib, a former finance minister, said reforms in the banking sector were among the most important factors that had allowed Indonesia to better cope with external challenges after the 1998 crisis, such as the global financial crisis in 2008 and the “taper tantrum” in 2013.

The United States Federal Reserve decided in 2013 to taper off its quantitative easing program, prompting jitters in global markets as investors attempted to adjust their portfolios.

Chatib argued that the 1998 Asian financial crisis exposed vulnerabilities in Indonesia’s banking sector, such as problems in non-performing loans and short-term debts. At the same time, the government’s decision to close 16 troubled banks resulted in bank runs as confidence in the financial sector plummeted, he said.

After the crisis, the government introduced several reforms in the banking sector, such as the establishment of the Insurance Deposit Corporation (LPS) in 2004. After the 2008 global financial crisis, the Financial Services Authority (OJK) was also established in 2011 to supervise the banking sector, which was previously under Bank Indonesia’s (BI) domain.

“Banking reforms, particularly those related to prudent banking regulations and oversight, reduced vulnerabilities in the banking sector,” Chatib wrote in the book.

Separately, LPS executive director Fauzi Ichsan concurred that the banking and corporate sectors were now more prudent and resilient against external shocks compared to the height of financial crisis in 1998.

“At that time, corporations were used to borrowing in US dollars, while they were generating revenue in the rupiah,” said Fauzi in Jakarta recently, referring to the problem of currency mismatch in the companies during the 1998 crisis.

Currently, domestic banks’ exposure to currency depreciation has been minimal as foreign-denominated funds make up only a small proportion of their overall lending structure, said LPS board of commissioners chairman Halim Alamsyah.

According to OJK data, Indonesian banks disbursed Rp 752.9 trillion (US$50.64 billion) in outstanding foreign currency-denominated loans as of July this year. The figure made up 14.96 percent of the overall loan disbursement of Rp 5.02 quadrillion in the same period.

Chatib said investors’ confidence toward the economy was also helped by the independency of BI after the 1998 crisis through the issuance of Law No. 23/1999 and the central bank’s adoption of an inflation-targeting regime with flexible exchange rates.

However, despite the numerous reforms, Chatib warned that the economy was still prone to external shocks owing to the large role of foreign portfolio investments in financing the country’s fiscal deficit.

Finance Ministry data shows that about 40 percent of Indonesia’s sovereign bonds was held by foreign bondholders. Meanwhile, data from the OJK revealed that foreign investors contributed 38.97 percent at the Indonesia Stock Exchange (IDX) on average from January to the third week of August this year.

“It is important for Indonesia to develop its domestic local bond market by attracting long-term funds, including pension funds and insurance,” Chatib wrote, arguing that market panic during shocks was usually triggered by sell-off in sovereign bonds, which were largely held by foreign investors.

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