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IMF Country Report No. 21/47
INDONESIA
SELECTED ISSUES
March 2021
This Selected Issues paper on Indonesia was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on January 29, 2021.
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© 2021 International Monetary Fund
Title Page
INDONESIA
SELECTED ISSUES
January 29, 2021
Approved By
Asia and Pacific Department
Prepared By Eugenio Cerutti, Koki Harada, Agnes Isnawangsih, Purva Khera, Minsuk Kim, Tidiane Kinda, Robin Koepki, Rani Setyodewanti (all APD), Manasa Patnam (EUR), and Francisco Arizala (SPR)
Contents
INDONESIA’S GOVERNMENT BOND YIELDS AND NONRESIDENT PARTICIPATION IN GOVERNMENT BOND MARKETS
A. Nonresident Participation in Government Bond Markets
B. Exchange Rate Volatility
C. Determinants of Government Bond Yields
References
FIGURES
1. Government Bond Local Currency and FX Bond Yields
2. Local Currency Bond Yields During the COVID-19 Crisis
3. Nonresident Participation in Local Currency Government Bond Markets
4. Nonresident Participation in Total Debt Government Bond Markets During COVID-19 Crisis
5. Nonresident Participation in Local Currency Government Bond Markets During Episodes of Global Financial Stress
6. Issuance of Hard Currency Bonds During Episodes of Global Financial Stress
7. Exchange Rate Market Pressures
8. Exchange Rate Volatility
9. Impact of Nonresident Participation and FX Volatility on Local Currency Government Bond Yields
TABLES
1. Determinants of Local Currency Government Bond Yields
2. Determinants of U.S. Dollar Government Bond Yields
3. Determinants of Country Credit Risk and Currency Risk
APPENDIX
I. Data Sources
INDONESIA’S INFLATION DYNAMIC DURING THE COVID-19 PANDEMIC
A. Introduction
B. Inflation During the Pandemic: Phases and Drivers
C. A Disaggregate Analysis of Consumer and Producer Prices
D. Regional CPI Data Point to Broad-Based Disinflation with Some Geographic Differentiation
E. Producer Prices: Mining and Utilities in Deflation
F. Property Prices
G. Takeaways and Outlook
References
TABLE
1. Schematic: Drivers of Inflation during the COVID-19 Pandemic
APPENDIX
I. Data Sources
COVID-19 AND THE DECLINE IN BANK LENDING IN INDONESIA: WHAT CAN WE LEARN FROM PREVIOUS STRESS EPISODES?
A. Bank Lending Dynamics
B. The Role of Bank’s Characteristics in Bank Lending Dynamics
References
FIGURES
1. Estimated Impacts of Liquidity on Loan Growth
2. Estimated Impacts of Stress Episodes on Loan Growth
TABLES
1. Distribution of Liquidity Ratios Across Banks and Time
2. Funding for Lending Programs Schemes Implemented by Selected Advanced Economy Central Banks
3. Funding for Lending Programs Schemes Implemented by Selected Emerging Market Central Banks
4. Baseline Estimations
5. Public Versus Non-Public Banks
6. Robustness Check: Additional Control Variables
7. Possible Structural Change in Loan Growth
8. Possible Non-Linearity: Spline Estimations
IMPACT OF COVID-19 ON NONFINANCIAL CORPORATE VULNERABILITIES IN INDONESIA
A. Introduction
B. Financial Health Before COVID-19 Pandemic
C. Expected Impact of COVID-19 on Indonesian Firms’ Financial Health
D. Policy Implications
FIGURE
1. Foreign Currency Nonfinancial Corporate Debt in Indonesia
APPENDICES
I. Data Source
II. Methodology
FOREIGN EXCHANGE MARKETS AND INSTRUMENTS IN INDONESIA
A. Foreign Exchange Market in Indonesia: Recent Trends
B. Foreign Exchange Instruments Used by Bank Indonesia
C. Effects of FX Intervention Instruments on FX Liquidity and Forward Exchange Rate
D. Further Considerations on FX Forward Intervention Strategies
E. FX Intervention During Crises
F. Summary and Policy Implications
References
FIGURES
1. Foreign Exchange Market Developments
2. Foreign Exchange Funding and Market Liquidity
3. Foreign Exchange Swap—Hedging Needs and Rupiah Liquidity
4. Foreign Exchange Swap and NDF
5. COVID-19 Crisis: Cross-Currency Funding Rates and Hedging Cost
TABLES
1. Overview of Bank Indonesia FX Instruments
2. FX Intervention Instruments: Effect on FX Liquidity
3. FX Intervention Instruments: Effects on Forward Exchange Rate
DIGITALIZATION: A SAFE PATH TO A MORE INCLUSIVE RECOVERY IN INDONESIA?
A. Introduction
B. Opportunity for Digitalization: Gap in Financial Inclusion and Bank Financing
C. Recent Developments in Indonesia’s Digital Economy
D. Is Digitalization Helping Fill the Gap in Financial Inclusion and Access to Financing?
E. Economic Impact of Digitalization—Can Digitalization Support Indonesia’s Post-COVID-19 Recovery?
F. Key Challenges and Risks—Can Indonesia Safely Seize the Opportunities Brought by Digitalization?
G. Policy Priorities—What Policies Should Indonesia Adopt to Foster Digitalization and Manage Associated Risks?
References
BOX
1. Recent Policy Efforts to Support Integration of the Digital Economy and Finance: Before and During COVID-19
FIGURES
1. Financial Inclusion and Access to Formal Credit
2. Impact of COVID-19 Shock on Indonesian MSMEs and Households
3. Indonesia’s E-commerce Supported by Digital Payments
4. Marketplace Lending: Before and During the COVID-19 Pandemic
5. Digital Financial Inclusion in Payments
6. Access to Digital Credit
7. Indonesia’s Digital Readiness
INDONESIA AND CLIMATE CHANGE: RECENT DEVELOPMENTS AND CHALLENGES
A. Background and Recent Development
B. Indonesia’s GHG Emission Patterns and Paris Agreement Commitment
C. Policy Options for Climate Change Mitigation
D. Policies for Climate Change Adaptation
E. Conclusion and Recommended Policy Frameworks
References
BOX
1. Indonesia’s Energy Subsidies and the 2021 Reform Proposed by the Government
TABLES
1. Natural Hazard Risk Index
2. Indonesia’s Nationally Determined Contribution (NDC)
3. Impact of Carbon Tax, 2030
4. Effects of Carbon Tax on Cost and Employment