Maintaining financial stability while supporting growth

Thursday, 15 Feb 2018
Maintaining financial stability while supporting growth
Bank Indonesia Governor Agus Martowardojo (JP/Wendra Ajistyatama)

Jakarta - Indonesia’s central bank, Bank Indonesia (BI) will continue to focus its policy mix on maintaining macroeconomic and financial stability, which is a basic prerequisite for creating a more sustainable economic recovery. The monetary policy will continue to maintain price stability while supporting economic growth.


BI complements its policy orientation with other policies to enhance efficiency and productivity, thereby ensuring that economic recovery will be promptly translated into strong, sustainable, balanced and inclusive economic growth.


This policy direction is translated into BI’s policy mix, consisting of three pillars: monetary policy, macro-prudential policy, and payment system policy and management of currency circulation.
BI will consistently pursue a measured monetary policy stance that is consistent with efforts to maintain inflation within the target corridor and manage the current account deficit at a healthy level. To enhance the effectiveness of the monetary policy, BI will strengthen monetary operations, maintain exchange rate stability in line with its fundamental values and continue the process of deepening the financial market.


Reinforcement in the monetary operation aims to provide flexibility in managing banks’ liquidity to help stabilize interest rates in the money market. In this regard, BI will strengthen the implementation of a rupiah reserve requirement average mechanism. The policy, implemented since last July, has had a positive impact not only on the macroeconomic perspectives, but also on banks.
On the macroeconomic side, the policy has helped to accelerate financial market deepening through the creation of new instruments to absorb additional liquidity during the maintaining period of the rupiah reserve requirement averaging, as well as strengthen money market stability.


On the microeconomic side, the policy has helped to increase the efficiency of daily liquidity management and optimize income, while maintaining prudential principles. BI will enhance the rupiah reserve requirement averaging system, so that in addition to the rupiah reserve requirement, the averaging system will also apply to the foreign currency reserve requirement, as well as sharia-compliant banks.


BI will continue measured and prudent exchange rate management to maintain exchange rate stability in line with its fundamental value, while also maintaining market mechanisms.
To strengthen the rupiah’s stability, BI constantly encourages efforts to reduce dependence on certain foreign currencies. For that reason, BI continuously seeks to strengthen bilateral cooperation to increase the settlement of bilateral trade transactions using the local currency through the Local Currency Settlement (LCS) framework.


BI’s efforts to improve the LCS scheme is facilitated by authorities and central banks, such as Bilateral Currency Swap Arrangements (BCSA) LCS scheme based on Appointed Cross Currency Dealers (ACCD), which involve the authorities and the private sector beginning early this year.
In addition, BI will continue to develop non-US dollar hedging swaps by increasing the number of currencies eligible for transactions.


BI will also continue to encourage risk mitigation of non-bank companies in managing their external debt activities. Regulations concerning the application of prudential principles to the management of non-bank corporate external debt will constantly be strengthened, especially in terms of expanding the scope of external debt.


In addition, the central bank shall consistently strengthen the credibility of the financial market by requiring money market and foreign exchange market players to meet mandatory treasury certification policies, thereby enhancing professionalism and global competitiveness.


BI also will continue to improve its macroprudential policy to enhance the financial market’s resilience against systemic risk amid challenges and complexities. In terms of strengthening liquidity, BI will implement the Macroprudential Liquidity Buffer (MPLB) as a refinement to the secondary statutory reserve requirement.


MPLB requires banks to maintain a certain amount of liquid instruments, covering all bank securities that may be repurchased through BI, pursuant to prevailing regulations on monetary operations.
In order to strengthen the quality of financial intermediation functions, BI will implement the Macroprudential Intermediation Ratio (RIMP) to substitute and improve the loan to funding ratio (LFR). Unlike the LFR concept, however, the RIMP will accommodate diverse bank intermediations by including bank investments on securities, such as corporate bonds, medium-term notes (MTN) and floating rate notes (FRN), which meet specific requirements, when calculating
the RIMP.


Moving forward, BI shall also strengthen its loan-to-value (LTV) policy through targeted LTVs to boost instrument effectiveness. The targeted LTV policy was designed to mitigate the risk of a bubble in certain sectors with more specific measures.


Regarding payment systems, BI will continue to support economic efficiency in accordance with the existing Payment System and Rupiah Currency Management Blueprint for 2017-2024. BI’s policy for non-cash payments will focus on developing an interconnected, affordable, innovative and competitive system.


First, BI will promote the use of interconnected and interoperable instruments, channels and domestic retail payment infrastructure under the National Payment Gateway (NPG), which was launched in early December 2017. The respective positions and functions of Standards, Services and Switching Institutions, as operators of the NPG, should be strengthened to ensure debit card and electronic money system interoperability.


Moving forward, the NPG shall act as the backbone of national retail payment transaction processing advancements, which BI will develop gradually to accommodate various noncash transactions, such as Electronic Billing and Invoicing Presentment and Payment (EBIPP), credit cards, e-commerce, payment hubs and other retail payment services.


Second, BI will accelerate digitization to support various government programs. In terms of poverty alleviation, digital cooperation with the government’s social-safety net programs will be achieved by raising the target for the disbursement of non-cash social assistance.
Third, BI will hone the regulation for Fintech players, including in e-commerce, to maintain business competition, mitigate risks and protect the consumers. A level playing field with formal financial institutions must be maintained. All Fintech players are required to register with BI, report their activities and complete regulatory sandbox trials.


Policy coordination

Coordination between BI and the government is already sound, but will steadily be strengthened, including in terms of the Round Table Policy Dialogue (RTPD), Inflation Control Team (TPI) and Regional Inflation Control Team (TPID), coordination meetings between central and regional governments and BI, the national and regional Investor Relations Units (IRU), Financial System Stability Committee, the National Islamic Finance Committee (KNKS) as well as the Indonesia Payment System Forum (FSPI).


It is encouraging to note that President Joko “Jokowi” Widodo himself has always paid great attention to the nation-wide inflation control program. Jokowi chaired the annual meeting of the Regional Inflation Control Team.


With regard to financial system stability, BI will continue to strengthen coordination with the Financial Services Authority (OJK) and Deposit Insurance Corporation (LPS). The exchange of information on supervision outcomes of the Domestic Systemically Important Banks (D-SIBs) has been conducted periodically as mandated by Article 17 of the Financial System Crisis Prevention and Mitigation (PPKSK) Act.


Furthermore, cooperation between BI and the Deposit Insurance Corporation (LPS) will be strengthened, encompassing the exchange of data and information regarding LPS government securities (SBN) holdings, following the joint agreement that allows the central bank to purchase government securities owned by LPS.


Economic Outlook

BI predicts global economic growth to accelerate gradually in the upcoming years. In the near term, BI expects more broad-based global economic growth, originating from both advanced and developing countries. In the medium-long term, however, developing countries will play a larger role as a source of global economic expansion.


The incremental gains in terms of global economic growth will be accompanied by a similar trend of rising commodity prices. But BI foresees commodity prices to contract slightly in 2018, before increasing gradually in the subsequent years, in line with global economic growth.


Global interest rates are predicted to continue rising, congruent with the normalization (tightening) of the United States’ monetary policy. The US Federal Reserve is expected to hike its Federal Funds Rate three times in 2018.


Consequently, BI believes Indonesian economic growth in 2018 will reach 5.1-5.5 percent, driven primarily by domestic demand. In the near term, government stimuli will play an important role in catalyzing the national economy.


Therefore, government stimuli, direct elections in 171 provinces, regencies and cities in June, 2018, and the hosting of the Asian Games in August 2018 will stimulate domestic demand, particularly consumption.


Government investment in infrastructure projects will continue to enhance future investment growth. In contrast, export growth is predicted to slow from previous years, with a concentration on commodities rather than a broad-based export structure. Consistent with BI’s economic growth projection and commitment to steer inflation within its target corridor, BI expects to see inflation in 2018 reach the target range of 3.5 percent, plus or minus1 percent.


Based on the economic outlook, BI predicts bank loan and deposit growth in 2018 at 9-11 percent and 10-12 percent, respectively. Meanwhile, congruous with expected investment gains and intensification of infrastructure projects, BI predicts the current account deficit to widen but remain at a healthy level of less than 3 percent of gross domestic product (GDP).


The near-term economic outlook represents a solid foundation for economic growth in the medium-to long run. In the medium term, BI expects the global economy to gradually gain momentum, while commodity prices should begin to rise as demand increases.


BI believes the government will continue to implement structural reforms to improve economic efficiency.

The government is expected to accelerate the implementation of infrastructure projects, which will have a significant impact on the economy, while issuing economic policy packages to create a more conducive investment climate.


Regulatory reforms at central and regional government ministries and institutions should restore confidence and draw more investment. In addition, the integrated licensing system and ease of doing business should further facilitate economic activities. By accelerating structural reforms, economic productivity will also surely increase. Accompanied by supply-side improvements, economic growth will accelerate without disrupting stability.


BI predicts economic growth to accelerate further during the period from 2019 to 2022, increasing to around 5.8-6.2 percent by 2022.


A more responsive supply side to accommodate demand should help to maintain inflation in the 2-4 percent range in 2022. Congruently, the current-account deficit is expected to narrow and remain healthy at below 3 percent of GDP.


This article also appeared on The Jakarta Post's Outlook 2018.