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Business and Economics > Finance: General

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Cover IMF Staff Country Reports
Indonesia: Financial Sector Assessment Program-Technical Note on Stress Testing and Systemic Risk Analysis
International Monetary Fund. Monetary and Capital Markets Department
The FSAP team undertook a thorough top-down corporate and bank solvency, bank liquidity stress tests as well as analysis of interconnectedness using mid-2023 data. This note covers the methodology and results of the scenario-based solvency test, the single factor sensitivity analysis, the liquidity test, and interconnectedness analysis. The stress test exercise was carried out on a sample of 105 commercial banks. The analysis is heavily dependent on supervisory data on individual banks’ positions shared by the OJK and BI as well as publicly available information on corporate sector. While FSAP results are not directly comparable to the authorities’ own stress testing results due to differences in scenarios, methodologies, and objectives, they provide an assessment of the system-wide resilience of the Indonesian banking sector at the current juncture.
Keywords:
banking sector characteristic; coverage ratio; interconnectedness ANALYSIS; capital markets department; bank credit risk; liquidity sensitivity analysis; FX LIQUIDITY ANALYSIS; Stress testing; Commercial banks; Liquidity; Loans; Securities; Global
Cover IMF Staff Country Reports
Indonesia: Financial Sector Assessment Program-Technical Note on Climate Risk Assessment
International Monetary Fund. Monetary and Capital Markets Department
Indonesia is exposed to both climate change transition risks and physical risks. With primary energy supply heavily dominated by fossil fuels, like many other countries, and as a major exporter of coal and liquefied natural gas, Indonesia is exposed to risks from the transition toward a carbon-neutral economy. Moreover, Indonesia is vulnerable to natural hazards, such as floods, droughts, and wildfires. With global temperatures rising, the frequency and severity of such events is expected to rise as well.
Keywords:
staff team of the International Monetary Fund; World Bank staff; Indonesia FSAP; risk scenario; earnings before interest and taxes; interest coverage ratio; current ratio; Natural disasters; Climate change; Greenhouse gas emissions; Global
Cover IMF Staff Country Reports
Indonesia: Financial Sector Assessment Program-Technical Note on Macroprudential Policy
International Monetary Fund. Monetary and Capital Markets Department
The 2017 FSAP focused its recommendations around strengthening and clarifying the mandates of the authorities. The FSAP noted that the multiple objectives of the organizations, together with the fact that there was no defined framework for cooperation and the separate control over prudential tools, created the risk that policies implemented by both agencies might come into conflict or have undesirable consequences and blur accountability lines.
Keywords:
IMF-World Bank Financial Sector Assessment Program; Macroprudential liquidity incentive; Indonesia FSAP; Macroprudential intermediation ratio; financing ratio; Financial sector stability; Macroprudential policy; Systemic risk; Stress testing; Global
Cover IMF Working Papers
Following the Money: Who is Keeping Coal Alive?
Gregor Schwerhoff
and
Mouhamadou Sy
The 2023 United Nations Climate Change Conference reinforced already existing pressure to transition away from fossil fuels, in particular for the most polluting source, coal. We use a comprehensive dataset on bank loans for coal projects to shed light on which type of banks continue to finance coal and how coal phase-out commitments affect coal financing. We find that coal financing is becoming increasingly concentrated, partly in banks with a very high coal exposure. We also find that many coal loans have maturities much shorter than the remaining lifetime of coal assets, thus exposing equity holders of coal assets to the risk of a more difficult loan rollover. An econometric analysis shows that countries with a strong commitment to coal phase-out, fixed in national law for example, receive less coal financing. Using an instrumental variable, we identify this effect as causal.
Keywords:
Coal; climate change; stranded assets; coal; divestment; United Nations climate change conference; Coal financing; phase-out commitment; coal financing; financing to the coal sector; Non-renewable resources; Financial sector development; Climate policy; Foreign direct investment; Asia and Pacific; Global; Europe; Middle East; Sub-Saharan Africa
Cover Departmental Papers
Navigating External Shocks in Southeast Asia's Emerging Markets: Key Lessons and Challenges in Applying the IMF’s Integrated Policy Framework
Corinne C Delechat
,
Umang Rawat
, and
Ara Stepanyan
As relatively small open economies, South-East Asian emerging markets (Indonesia, Malaysia, Philippines and Thailand or ASEAN-4) are highly susceptible to external shocks—both financial and real—that could induce large capital flows and exchange rate volatility that could lead to foreign exchange market dysfunction. With the exception of Bank Negara Malaysia, ASEAN-4 central banks mostly have flexible inflation-targeting frameworks for monetary policy implementation. Their main policy objectives include medium-term price stability, sustainable economic growth, and financial stability. Central Banks in ASEAN-4 economies have been early pilots in the operationalization of the IMF’s Integrated Policy Framework (IPF) in 2022-23, given their experience in using multiple policy tools besides the monetary policy rate, including macroprudential measures, foreign exchange intervention (FXI), and capital flow management measures, to achieve their multiple objectives. They have welcomed the IPF as a systematic, frictions-based approach to analyze the use of these multiple tools to manage trade-offs across policy objectives. This paper takes stock of the experience from these pilots, both from the perspective of country authorities and of IMF country teams. It aims at distilling key lessons, which could be used to inform broader IPF operationalization. The IPF conceptual framework and a related quantitative model were used to assess policy trade-offs in ASEAN-4 in the event of adverse external shocks. These applications reaffirmed the importance of using monetary policy to address persistent inflationary pressures stemming from real shocks and allowing the exchange rate to act as a shock absorber. However, a complementary use of FXI could improve trade-offs between price, financial, and output stability when economies are faced with large and financial shocks that result in abrupt spikes in uncovered interest rate parity premia resulting in inefficiently tight financial conditions that could hurt growth or risking to de-anchor inflation expectations. The IPF pilots also highlighted some challenges faced when operationalizing IPF principles, notably regarding the assessment of frictions and shocks that might justify the use of FXI. In particular, country teams at times lacked sufficient information to adequately assess the extent of frictions. Moreover, the time-varying nature of IPF frictions and the non-linear effects of shocks make it difficult to assess situations when benefits of a complementary use of FXI would overweigh its costs.
Keywords:
ASEAN; foreign- exchange intervention; Inflation targeting; Integrated policy framework; capital flows; IPF pilot; market dysfunction; IMF country team; IPF model; Policy mix; IMF seminar participant; Currency markets; Exchange rates; Inflation; Southeast Asia; Global
Cover IMF Staff Country Reports
Indonesia: Financial Sector Assessment Program-Detailed Assessment of Observance-Basel Core Principles for Effective Banking Supervision
International Monetary Fund. Monetary and Capital Markets Department
This paper presents a Detailed Assessment of Observance of the Basel Core Principles for Effective Banking Supervision for the Indonesia Financial Sector Assessment Program. The Financial Services Authority (OJK) achieves good baseline supervision; building supervisory capacity and enhancing the supervisory framework will contribute to achieving higher supervision standards. It is crucial for legislation to recognize the safety and soundness of banks and the banking sector as the OJK’s primary responsibility, given its broader mandates. The OJK is encouraged to continue to examine banks’ evolving business models to identify changing risk profiles early. There is further scope for the OJK to dedicate more attention to assessing a bank’s risk culture, model governance and stress testing. There is scope for more analysis of models, model governance, model validation, and the role of the independent risk management unit to verify and validate the results. Material enhancements are needed to effectively mitigate the risks associated with related party transactions and potential sources of concentration risk. While the OJK has broad powers for corrective measures, a portfolio view of noncompliance with regulations will help address early unsafe and unsound practices.
Keywords:
IMF-World Bank Financial Sector Assessment Program; bank Indonesia rupiah securities; banking segment; staff team of the International Monetary Fund; bank rating; Credit risk; Financial sector stability; Anti-money laundering and combating the financing of terrorism (AML/CFT); Market risk; Bank supervision; Global
Cover IMF Staff Country Reports
Indonesia: Financial Sector Assessment Program-Financial System Stability Assessment
International Monetary Fund. Monetary and Capital Markets Department
This paper presents financial sector stability assessment as part of Financial Sector Assessment Program in Indonesia. The financial system appears to be broadly resilient, has strong capital and liquidity buffers but remains relatively small and dominated by banks, especially few state-owned banks. Household and corporate indebtedness and public debt are low. The increase in banks’ holdings of government bonds and loans to state-owned enterprises has tightened the sovereign-bank nexus, but banks appear to be resilient. Credit risk tends to be higher in pandemic-hit industries and highly leveraged corporations. The mission recommends strengthening loan quality recognition by banks and risk assessment of small banks. Corporate and banks foreign exchange (FX) liquidity analysis could be integrated to identify systemic FX risks which can inform the setting of micro- and macroprudential policy instruments. Strengthening independence of the supervisor and providing clarity on primary supervisory objectives is important. Indonesia’s resolution framework should be more closely aligned to the FSB Key Attributes, including regarding the bail-in tool, and should cover financial conglomerates in the framework. Authorities should not delay resolution of weak banks by providing liquidity assistance from the deposit insurance fund.
Keywords:
banks FX liquidity analysis; systemwide FX liquidity stress test; coverage ratio; bank FX liquidity stress test; banking sector; Financial sector stability; Anti-money laundering and combating the financing of terrorism (AML/CFT); Macroprudential policy; Commercial banks; Financial Sector Assessment Program; Global
Cover IMF Staff Country Reports
Indonesia: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Indonesia
International Monetary Fund. Asia and Pacific Dept
The 2024 Article IV Consultation highlights that Indonesia’s growth remains strong despite external headwinds. Inflation is firmly in the target range and the financial sector is resilient. The authorities have been pursuing an ambitious growth agenda to reach high-income status by 2045. This comprises public spending, institutional reforms, and Industrial Policy. Risks are broadly balanced. Key downside risks include persistent commodity price volatility from geopolitical shocks), an abrupt slowdown in Indonesia’s key trading partners, or adverse spillovers from tighter-for-longer global financial conditions. A slightly narrower deficit would support both growth and a more balanced policy mix. The policy rate is above neutral; with financial risks contained, accommodative macroprudential policy has supported credit growth while liquidity remains comfortable. Monetary policy should remain data-driven, based on the evolution of domestic conditions, and the exchange rate serving as a shock absorber. Bridging structural gaps will be needed to achieve higher and inclusive potential growth and reach high income status, as envisaged in the country’s national development strategy—the Golden Vision 2045.
Keywords:
SDR million; policy credibility; monetary policy stance; market development; policy effectiveness; Financial sector stability; Inflation; Anti-money laundering and combating the financing of terrorism (AML/CFT); Financial inclusion; Global
Cover IMF Working Papers
EMDE Central Bank Interventions during COVID-19 to Support Market Functioning
Kelly Eckhold
,
Julia Faltermeier
,
Darryl King
,
Istvan Mak
, and
Dmitri Petrov
This paper examines emerging market and developing economy (EMDE) central bank interventions to maintain financial stability during the COVID-19 pandemic. Through empirical analysis and case study reviews, it identifies lessons for designing future programs to address challenges faced in EMDEs, including less-developed financial markets and lower levels of institutional credibility. The focus is on the functioning of the financial markets that are key to maintaining financial stability—money, securities, and FX funding markets. Several lessons emerge, including: (i) objectives should be well-specified and communicated to facilitate eventual exit; (ii) intervention triggers should prioritize liquidity metrics over prices; (iii) actions should be sufficiently large to address market dysfunction; (iv) the risks of fiscal dominance and moral hazard should be minimized; and (v) program design should incentivize self-liquidation by appropriate pricing or through short-term operations that quickly liquidate. While interventions may increase risks to central bank balance sheets, potentially challenging policy solvency and operational independence, a well-designed framework can significantly mitigate these risks.
Keywords:
COVID-19 pandemic; central bank interventions; liquidity; and financial stability.; intervention trigger; money market intervention; market dysfunction; Chicago Board option exchange volatility index; government securities intervention; Central bank operations; Financial sector stability; Securities markets; Money markets; Global; Africa
Cover Shocks and Capital Flows
Shocks and Capital Flows
Policy Responses in a Volatile World

Abstract

The high exposure of open economies to shocks makes them particularly vulnerable to volatile capital flows and advanced economy monetary policy spillovers. How should and do domestic policymakers respond? The traditional answer has been to use flexible exchange rates as a shock absorber. But flexible exchange rates may not offer full insulation when financial markets are imperfect. This book brings together recent empirical studies at the International Monetary Fund (IMF) on the effectiveness of different tools in responding to such shocks. The 18 chapters in this volume provide a rich background to the recently launched Integrated Policy Framework by the IMF. They comprise assessments of countries’ actual use of different tools, as well as in-depth evaluations of their effectiveness and side effects, covering macroprudential policies, monetary policy, foreign-exchange intervention, and capital flow management policies. Many of the studies involve new data and methods to tackle the inherently difficult problems in identifying and comparing the effects of policies under different circumstances. As a result, the volume offers the reader a comprehensive, in-depth coverage of the policy-oriented empirical research that has informed the development of a new way of thinking about open-economy macroeconomics at the IMF.

Keywords:
Capital flows; monetary policy; exchange rate policy; foreign exchange intervention; macroprudential policy; capital controls; FX debt; account restrictiveness; exchange rate intervention; IT regime; Exchange rates; Macroprudential policy instruments; Global; Asia and Pacific; Caribbean; Central America; Europe