Executive Summary
The Indonesian financial system is dominated by well capitalized banks but remains relatively small. The financial system weathered well the series of global shocks and tighter financial conditions: capital buffers and liquidity coverage ratios remained well above the regulatory minima, and banks are highly profitable. State-owned banks play an important role in the banking system, while NBFIs have been growing rapidly but remain a small segment of the financial system.
Despite favorable macro-financial conditions, the financial system is exposed to multiple structural and cyclical risks. Cyclical risks, considering robust credit growth, are moderate, but credit risk is higher in pandemic-hit industries and highly leveraged corporations. Small banks have lower profitability with higher funding and operational costs. Structural risks to the financial system arise from an increase in banks’ holdings of government bonds and loans to State-Owned Enterprises (SOEs), which has tightened the “sovereign-bank-nexus.” Some of these loans are already restructured. Indonesia’s financial sector is also exposed to climate transition risks and is vulnerable to a range of climate-related natural disasters.
The results of bank solvency stress tests suggest that the overall banking sector is resilient to adverse macroeconomic shocks, although there are tail risks for small banks. Under an adverse stagflation scenario, capital losses were mostly driven by credit risk, followed by market and interest rate risks. To address residual credit risks, authorities need to collect and analyze additional data on Micro-, Small- and Medium-Sized Enterprises (MSMEs) and require banks to recognize Non-performing Loans (NPLs) on a timely and full basis and more intensely scrutinize restructured loans.
The overall liquidity position of banks is sound, but foreign exchange (FX) liquidity risks need to be closely monitored, and Liquidity Coverage Ratios (LCR) should be made mandatory for all banks. While all banks have enough liquidity to cover severe outflows, the liquidity stress test identified several bank-specific risks. First, some small and medium banks with higher reliance on wholesale and uninsured funding will face more challenges in meeting requirements. Second, the results signal FX liquidity shortfalls, albeit manageable at 0.7 percent of total assets. Third, there are funding concentration risks in small regional banks, driven by large interbank deposits and large funding from other banks and public entities. Finally, a combined corporate and bank FX liquidity stress test, focusing on a subset of the largest publicly listed corporates, indicate that banks have adequate FX liquid assets to cover severe FX debt rollover shocks for corporates. To mitigate liquidity risks, authorities should remove LCR exceptions for small banks and integrate corporate solvency and banks’ FX liquidity analysis to monitor salient FX risks.
The FSOL clarifies macroprudential policy (MPP) and improves policy synergies between the authorities in terms of data sharing and objectives. Bl and OJK’s systemic risk identification and analysis is broad and mostly sufficient, although there are data gaps related to households, corporates, and NBFIs. Bl’s MPP toolkit is very extensive and has the key tools needed to manage the current profile of macro-financial risks. MPP pursues a three-pronged strategy: (i) balanced and sustainable intermediation; (ii) financial system resilience; and (iii) promoting inclusive and green financing. Clarifying that safeguarding financial stability is prioritized, and explicitly distinguishing the tools which support financial system resilience would strengthen effectiveness, further enhance the clarity of communication, and facilitate decision making. As the credit gap continues to close, gradually shifting towards a more neutral MPP stance would help to contain the build-up of macro-financial risks. It is important to develop a framework for understanding and reducing systemic risk from NBFIs and their interconnections with the banking sector.
The BCP assessment shows that the authorities have made substantial progress in enhancing banking sector oversight and achieved good baseline supervision, although several areas for improvement remain. Since the last FSAP, the authorities have implemented the Basel III post-crisis reforms, enhanced the institutional set-up and regulatory framework by implementing the FSOL, and deployed innovative technologies for supervision. The authorities should enhance supervisory effectiveness by continuing to improve the risk assessment methodology, better integrating certain supervisory activities and intensifying scrutiny in assessing corporate governance and risk management practices. Strengthening the independence of the supervisor and providing clarity on primary supervisory objectives is important.
The financial safety net and crisis management framework for banks has improved but more needs to be done. This has been attained through the provisions in the FSOL and the authorities’ operationalization efforts. However, additional improvements are needed. The resolution framework should be further aligned with the Financial Stability Board’s (FSB) Key Attributes, including with regard to the bail-in tool, and financial conglomerates should be included in the crisis management and resolution framework. Authorities should not be providing liquidity assistance from the deposit insurance fund and thereby potentially delaying the resolution of weak banks.
Systemic liquidity analysis shows a structural surplus of liquidity with the frequency and maturity range of Bl’s interactions with banks leading to relatively easy management of liquidity by banks. The effort to develop and deepen financial markets is welcome but can only succeed if Bl reduces the scale of its interactions with the market. Consideration should be given to the potential needs of the NBFI sector as it grows in importance and may become systemically important. A smooth transition during the introduction of the primary dealer (PD) system in the money markets is important.
Climate risk analysis highlights potential vulnerabilities from climate-related physical and transition risks. To better monitor these risks, the authorities should further develop internal capacity and models for climate risk analysis, offer more detailed methodological guidance to financial institutions, improve data collection, and improve collaboration among government agencies on climate risk analyses.
Authorities made significant progress in addressing gaps in capital markets, insurance sector, market infrastructure regulation and supervision, but broadening and deepening financial markets and services is a multidimensional problem requiring concerted policy efforts. The legal and regulatory framework for insurance, capital markets, pension fund supervision and regulation are closely aligned with international standards. However, there are gaps which remain. In particular:
Time to market for securities issuance requires action, primarily by improving the effectiveness of the prospectus due diligence process.
OJK has made considerable progress in updating the insurance sector regulatory and supervisory framework and must continue its efforts.
The financial sector is in the early stages of addressing climate-related financial risks, with the related supervisory agenda quickly gaining momentum. Authorities should also strengthen the strategy, governance, and capacity for climate finance.
Elements of the financial market infrastructure (FMI) assessed demonstrate a high level of observance of international principles, with some areas for improvement.
The credit infrastructure does not fulfill its full potential, requiring concerted action, such as a national credit reporting system strategy and improved oversight framework.
Capital markets remain shallow, with systemic policy-level reforms necessary to support the accumulation of pension assets and long-term local currency financing.
Role of the state is significant and can be refined for impact, such as clarifying the objective of state ownership to help SOBs navigate tensions between stability and development objectives.
Indonesia: 2024 FSAP Key Recommendations
Indonesia: 2024 FSAP Key Recommendations
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Indonesia: 2024 FSAP Key Recommendations
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Macrofinancial Setting
A. Macrofinancial Developments
1. The FSAP took place against a backdrop of robust economic growth (Figure 1). Real GDP growth in 2023 was 5.0 percent, driven by resilient private consumption and investment. The 2022 surge in inflation abated by end-2023, with both headline and core inflation—at 3.0 and 1.8 percent respectively in April 2024—within Bl’s target band. Growth is expected to remain strong, at 5.0 percent in 2024, and at 5.1 percent in 2025 and into the medium term.
Indonesia: Macroeconomic Developments
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: Badan Pusat Statistik, Haver Analytics, IMF Information Notice System, IMF Commodity Prices Database, and IMF staff estimates.2. As Indonesia navigates a challenging external environment, policies have brought down inflation while maintaining credit growth to support the economy (Figure 2). After pausing its rate hiking cycle in January 2023 (225 bps between August 2022-January 2023), Bl undertook two 25 bps rate hikes in October 2023 and April 2024. These off-cycle rate hikes were intended to contain depreciation pressures on the rupiah transmitting to inflation—with external pressures in both instances coming from US monetary policy uncertainty and global dollar strength, along with geopolitical tensions. With the policy rate above the neutral rate, and in a context of a still negative but closing credit gap and contained financial risks, macroprudential policies have been kept accommodative, with liquidity and credit incentives helping to support credit. Credit growth has returned to pre-pandemic rates, even as the policy tightening has led to modest increases in lending rates. Bl ended Operation Twist in the second half of 2023, which consisted of selling short- to medium-term government securities to raise their yields and make them more attractive to foreign investors, while buying longer-maturity securities to flatten the yield curve. It has adopted a pro-market open market operations (OMO) framework, using the Bank Indonesia Rupiah Securities (introduced in 2023) to pursue money market deepening and the transmission of monetary policy, and to attract capital flows.
Indonesia: Credit Developments
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: CEIC Data Co. Ltd, International Financial Statistics, and Bank of International Settlements.3. Household debt to GDP remains low although recovering from the pandemic-era decline, and unemployment has fallen. However, with muted income growth and a persistent rise in informality post-pandemic, a severe shock leading to a rise in unemployment could undermine households’ capacity to repay debts.
4. Public debt also remains low (Figure 3), reflecting the commitment to preserving strong fiscal buffers, while the investor base for government debt has shifted towards domestic sectors. In 2023, Indonesia posted its first primary budget surplus in over a decade. Risks to debt sustainability are well contained, with public debt of 39.6 percent of GDP in 2023—already low compared to peers. The share of non-resident holdings of government debt fell sharply from about 38.6 percent at end-2019 to about 14.4 percent at end-2022 and has remained at subdued levels since then. This has reduced roll-over risks but has also tightened the sovereign-bank nexus. The sharp increase in banks’ exposure in early 2020 was subsequently partly offset by Bl’s purchases under a set of burden-sharing arrangements during the pandemic, and more recently by a pickup in nonbanks’ holdings, reflecting, inter alia, the recent rise in yields. However, banks remain the largest holder of government debt.
Indonesia: Public Debt and Sovereign Bond Yields
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: Bloomberg L.P., CEIC Data Co. Ltd, JP Morgan, Indonesian authorities, and IMF staff calculations.5. The authorities are gradually pursuing an ambitious de-carbonization agenda, requiring careful management of transition risks. During the energy transition phase, coal is expected to remain an important source of energy, including as further expansions in off-grid generation are underway to meet the needs of down streaming operations in remote locations. The banking sector’s exposure to such investments could pose transition risks.
6. Near-term risks to the outlook appear broadly balanced. Upside risks include stronger-than-anticipated growth in China, which could prop up Indonesian export growth; faster-than-expected disinflation in AEs leading to more frontloaded and/or deeper rate cuts by central banks would likely support a risk-on sentiment and help the growth momentum.
7. 1 Downside risks include persistent commodity price volatility due to supply and/or demand disruptions (e.g., linked to conflicts or trade restrictions) or an abrupt global slowdown or recession in Indonesia’s key trading partners (China, the US). Slower-than-envisaged AEs’ disinflation momentum resulting in higher-for-longer global interest rates, or a systemic financial instability episode (causing spikes in interest rates, risk premia, and asset repricing) could trigger capital outflows and disorderly market conditions. On the domestic side, a weakening of long-standing sound macro-fiscal frameworks could hamper policy credibility. Although a tail risk, a renewed pandemic, and the resulting health crisis and containment measures, would lead to a sharp reduction in consumption and investment, tighten financial conditions, and scar medium term potential output. Extreme climate events could disrupt infrastructure and supply chains, threatening growth, and financial stability.
B. Financial Sector Structure, Interconnectedness and Development
8. The financial system is relatively small (72 percent of GDP) and dominated by banks (Figure 4) but is less leveraged and highly profitable compared to peer countries (Figure 5). The credit-to-GDP ratio reached 31.4 percent by the end of 2023, yet it is still well below peer countries in the region. The size of the financial system reflects low financial inclusion, informality, and high cost of provision of services in rural areas. While the number of banks is high, most of them are small rural lenders. The top 10 banks, including four state-owned banks that constitute 43 percent of the banking sector, hold 66 percent of total bank assets. Nonbank financial institutions, such as insurance and finance companies, investment funds, and pension funds remain relatively small. FinTech lending companies are still a small portion of the financial system but exhibit significant growth (assets rising by 51 percent in 2022).
9. Domestic contagion risks are limited but require close monitoring. NBFIs have limited lending exposures with domestic banks but have significant investment in banks in the form of deposits and stocks (at around 14 percent of total NBFI investment). Finance companies generally rely on funding from banks. There are also forms of indirect contagion through large holdings of common assets such as sovereign and corporate securities by banks and NBFIs, with larger duration risk for NBFIs than banks.
10. The cross-border exposure of Indonesian banks is limited but has increased slightly since the 2017 FSAP. Direct inward spillovers from global banks are limited. Based on the Bank for International Settlement (BIS) data (locational banking statistics as of end-2022), the top exposures of Indonesian banks include the United States, Singapore, Japan, China, South Korea, Hong Kong, and Malaysia.
Indonesia: Financial Sector Structure
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: Bl, OJK, and IMF Staff.Note: Statistics above exclude rural banks, which stand at around 1410 banks and 1.7 percent of the total banking sector assets. Data as of 2023.Indonesia: Banking Sector Against Peer Countries
(2023 or latest available)
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: FSI, OJKand IMF Staff.Note: Liquid assets exclude central bank required reserves and include only cash and deposits.11. Foreign investors also stand out as large asset holders of nonfinancial corporates, mostly through direct investment in the capital markets, as well as significant holders of sovereign bonds. Large holders of government bonds include nonbank financial institutions, banks, and Bl (Figure 6). Given the presence of financial conglomerates in the local market, cross-sectoral linkage is an important source of contagion.
Indonesia: Interconnectedness and Contagion Sectoral Balance Sheet Matrix
(2022, Percent of GDP)
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: Bank for International Settlements, and Bank Indonesia.Financial System Interconnectedness
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: IMF BSA database, Bl, OJK and IMF staff.Note: The diagram represents bilateral exposures of the Indonesian financial system. The size of the nodes reflects log total claims. The thickness of the edges represents the share of claims in percent of the system-wide total claims.12. The banking sector’s profitability and capital buffers are high, asset quality ratios have not deteriorated due to loan forbearance measures, yet small banks2 are more vulnerable (Figure 7). Declining numbers of loans at risk,3 sustained high interest margins, and low funding costs improved banks’ profitability which is returning to pre-pandemic levels. The interest income is mostly driven by banks’ loans, followed by interest earnings from safe assets, i.e., deposit placements in Bl and investments in government bonds, despite lending rates steadily declining in the last two decades. Small banks are structurally less profitable due to high funding costs and operating expenses, especially local rural lenders, and therefore require higher capital buffers. RWAs density has declined since 2017 and is now aligned with regional peers at around 62 percent.
Indonesia: Banking Sector Developments
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: Bank Indonesia, OJK, and IMF staff.13. Banks have ample liquidity and FX exposures appear to be contained (Figure 8). LCR and NSFR ratios remained above minimum requirement, but banks’ liquid asset ratios have declined in 2022, driven by the recovery of loan growth and a higher minimum reserve requirement ratio. The level of dollarization is relatively low (around 17/18 percent of asset/liabilities), and FX net open positions stand at 1.5 percent of banks’ capital.
Indonesia: Banking Sector Funding and Liquidity
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: Bank Indonesia, OJK, and IMF Staff.Assessment of Vulnerabilities
A. Financial Sector Vulnerabilities and Risks
14. The key vulnerabilities to the financial sector in Indonesia arise from:
Indonesia: Corporate Sector Developments
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: Capital IQ, IMF, Systemic Risk Tracker, and IMF staff calculations.1 Argentina, Brazil, China, India, Malaysia, Mexico, Philippines, Russia, South Africa, Thailand, and Turkey.Shocks affecting debt repayment capacity of NFCs, including their FX exposures (Figure 9). The corporate sector has been recovering from the pandemic, but pockets of vulnerability remain. While the corporate sector’s external debt has moderated over the past decade, their external and FX debt remains a significant proportion of their total debt, estimated at 37 percent and 51 percent in 2022.4,5 SOE construction firms have seen an increase in leverage and a sharp decline in ICR over the past decade, reflecting their role in a public investment push, and a limited number of SOEs are in default. As discussed in the 2024 Indonesia Article IV Staff Report, while the share of listed firms which are zombies have declined recently, it remains above pre-pandemic levels and above regional peers.6
Banks’ exposure to corporates, large SOEs and MSMEs is high. Bank lending to large corporates and MSMEs is at about 40 percent and 20 percent of total loans, respectively. MSME and SOE loans also account for a high share of restructured loans, at about 25 and 17 percent of total corporate loans. COVID-sensitive and structurally weak sectors, such as the construction, accommodation, processing, and wholesale industry, also carry higher NPL ratios.
Forbearance measures may have delayed NPL recognition.7 This underscores the importance of a timely and full recognition of NPLs and intensified scrutiny on restructured loans. Scrutiny could be further strengthened by the expiration of the OJK’s forbearance program in March 2024 and a well-defined bank forbearance policy aligned with the concept of borrowers’ viability going forward. Such efforts will also limit the risks of zombie firms persisting, which may otherwise hamper macroeconomic performance (2024 Indonesia Article IV staff report).
Structurally weaker small banks, given their higher funding costs and lower portfolio diversification. There are notable variations of capital and profitability across banks depending on their size and business model. This is reflected in wider distribution with fatter tails in various capital, NPL and profitability indicators for these groups (Figure 10).
Tighter sovereign—bank nexus. The increase in banks’ holdings of government bonds has tightened the nexus between the sovereign and banks (Figure 11). To reduce the impact of rising interest rates on mark-to-market losses, banks rebalanced their portfolio by shifting the portion held in fair value to amortized cost (43 percent of debt securities). The average duration of sovereign debt securities held by banks is around 3.5 years and those for corporate securities is around 2.4 years. Concentrated bank lending to state-owned companies further intensifies the sovereign- bank nexus. Banks’ exposure to SOE loans is high at 7 percent of total loans, and is higher for state-owned banks at 8 percent. Importantly, 40 percent of the top 20 corporate loans of the state-owned banks are granted to SOEs, suggesting concentrated SOE lending.
Indonesia is exposed to climate change physical and transition risks. Indonesia is vulnerable to natural disasters, such as floods, droughts, tropical cyclones, and landslides (Figure 12, panel 1), having experienced almost 300 climate-related natural disasters over the past 3 decades— affecting more than 16 million people (Figure 12, panel 2). With global temperatures rising, the severity of such events is expected to rise. Indonesia is also exposed to risks from the transition toward a carbon-neutral economy. Primary energy supply is heavily dominated by fossil fuels with coal alone fueling more than 50 percent of electricity generation. Indonesia is also a major exporter of fossil fuels—according to the US Energy Information Administration (EIA)8 it was the world’s largest exporter of coal and the seventh-largest exporter of liquefied natural gas in 2020 (Figure 12, panel 3). Transition risks could in turn affect Indonesia’s banking system, which is heavily exposed to carbon intensive firms (Figure 12, panel 4).
Indonesia: Bank Variation by Size and Ownership
(In percent)
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: Bank Indonesia, OJK, and IMF staff.Note: KBMI1 denotes banks with a core capital of up to IDR 6 trillion; KBMI2 denotes banks with a core capital of between IDR 6 trillion to IDR 14 trillion; KBMI3 denotes banks with a core capital of between IDR 14 trillion to IDR 70 trillion and KBMI4 denotes banks with a core capital of more than IDR 70 trillion. Out of four banks in KBMI4, three are state-owned banks.Indonesia: Bank-Sovereign Nexus
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: Bank Indonesia, OJK, and IMF staff.Indonesia: Physical and Transition Risks
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: EM-DAT, IEA, IMF Climate Change Dashboard, Verisk Maplecroft, and IMF staff calculations. Note: Panel 1 shows the Verisk Maplecroft Climate Change Vulnerability Index which evaluates the susceptibility of human populations to the impacts of climate extremes and changes in climate over the next three decades. The index score is presented on a scale of 0–10 were 0 represents highest risk and 10 represents lowest risk. The risk categories in the map are: extreme (red, score 0–2.5), high (orange, score 2.5–5), medium (yellow, score 5–7.5), low (green, score 7.5–10)B. Risk Analysis Framework and Macrofinancial Scenarios
15. The FSAP assessed systemic risk in Indonesia using several scenarios and a comprehensive set of quantitative tools (Figure 13). Using supervisory and commercial data, the FSAP performed banking sector solvency, liquidity, interconnectedness, corporate sector solvency and system-wide liquidity analysis. Contagion analysis explored risk transmission channels among banks and between nonbanks and banks. Climate risk assessment was done jointly with the World Bank.
Indonesia: Approaches to Systemic Risk Analysis
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Source: IMF staff.16. Scenarios featured severe realizations of key risks. The baseline scenario follows the October 2023 WEO projection (Figure 14). The two adverse scenarios9 are complementary as the stagflation scenario entails a structural change of the domestic economy whereas the recessionary scenario features a transitory and cyclical shock with a quicker rebound:
The stagflation scenario entails a resurgence of COVID-like lockdown in the first year compounded by the escalation of geopolitical tensions with resulting disruptions in trade, remittances, FDI and financial flows, leading to persistently high inflation, lower global demand, and a decline in commodity prices. Monetary policy responds by tightening, which reduces domestic consumption and asset prices, raising firms’ cost of funding and unemployment rate.
The recessionary scenario features a global, synchronized recession triggered by both global and idiosyncratic risk factors leading to systemic financial instability with sharp swings in risk premia, a fall in domestic demand and asset prices, and rising unemployment rate. Monetary policy responds by relaxing policy rates. (See also the Risk Assessment Matrix in Table 5.)
Indonesia: Macroeconomic Scenarios
(In percent unless otherwise noted)
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Source: IMF staff.C. Results of Risk Analysis
Banking Sector Risk Analysis
17. Results of the scenario-based bank solvency stress test confirms the sector’s resilience to severe macroeconomic shocks, while revealing a higher impact on small banks (Figure 15). In the baseline scenario banks maintain strong capital positions. Large state-owned banks outperform small banks with strong capital accumulation supported by high profitability. Small banks10 are affected by lower interest margins and higher operating cost, initial effect from credit11 and market losses and an increase in RWAs due to balance sheet growth. Under the stagflation scenario, the fully loaded CET1 ratio12 declined by about 5 percentage points. The capital impact under the recession scenario appears to be more benign as CET1 ratios decline on average by 2.6 percentage points. Under both adverse scenarios, only a small number of banks (9 in the stagflation scenario and 6 in the recession scenario), fall below the CET1 hurdle rates,13 with the asset share ranging from 2.9 to 7.4 percent of total banking system assets, and capital shortfall from 0.2 to 0.3 percent of GDP.14 The capital declines under the adverse scenarios are mostly driven by credit losses, followed by market and interest rate risks, and RWAs due to rising credit risks.
18. Sensitivity tests reveal that (Figure 16):
The impact on CET1 capital ratios of a potential credit deterioration of the restructured loans is so far broadly contained but warrants close monitoring as the OJK’s forbearance measure unwinds.
Banks are resilient under the simultaneous default of the top five corporate loans, however large exposures to state-owned companies appear to be higher for state-owned banks.
A 400-basis point parallel upward shift of interest rates on top of the stagflation scenario leads to an additional capital depletion of about 1.7 percentage points.
Indonesia: Results for the Solvency Risk Stress Tests
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Source: IMF staff.Note: Foreign branches are not subject to capital ratio requirement and thus excluded in the results, nii = net interest income, nti = net trading income, nfci = net fees and commission income, II = loan impairment, res = residual, oci = other comprehensive income, div = dividend, acjl = credit impairment for AC securities, ac_mkt = fairvalue impact on AC securities, rwa = risk-weighted assets.Indonesia: Results from Sensitivity Test Analysis
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: OJK and IMF staff.19. Banking sector liquidity risks remain low due to high LCRand NSFR ratios, however funding concentration in small banks appears to be significant (Figure 17). While systemwide LCR and NSFR ratios are high, they are not collected and monitored for small banks, which are not subject to these requirements. Funding concentration varies across banking groups, with regional banks more exposed to large funding withdrawals from financial corporations and public entities.
20. Cashflow liquidity analysis confirms overall resilience of the banking system to severe liquidity shocks over the short-term horizon. At the individual bank level, the share of assets of banks experiencing liquidity shortfalls appears to be small at only 0.2 percent of total assets up to 30 days. The banks with negative counterbalancing capacity are mostly small- and medium-sized banks. The size of the liquidity shortfall relative to total assets is also small at only around 0.3 percent.
21. Outflows are mainly driven by wholesale deposits from corporates, banks, and NBFI entities, and more so in the uninsured segments. For total currency, deposits from corporate entities and NBFIs contribute to about 6 and 4 percentage points of the changes in the CBCs as a share of total assets, followed by undrawn credit lines and retail deposit at 3.5 and 2.2 percents, respectively (Figure 18). Uninsured deposits, subject to a higher outflow rate, contribute to about 9 percentage points of the CBC changes across all deposit types, higher than insured deposits at about 1.3 percentage point.
Indonesia: Result for the Liquidity Risk Analysis
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Source: IMF staff.22. FX Liquidity shortfalls are broadly contained due to limited FX exposures on banks’ balance sheet. The system-wide post-shock CBCs remain positive up to a 3-month horizon. At the individual bank level, the share of banks facing liquidity shortages is 47 percent if measured by total asset by the 3-month horizon. However, the size of CBC shortfall remains manageable at 0.7 percent of total assets. Limited dollarization of around 12 percent of loans and 15 percent of deposits helps. Nonetheless, the higher share of banks experiencing liquidity strains underscore the importance of continued monitoring of foreign currency liquidity conditions to promptly identify potential liquidity gaps across all banks over the short- and medium-term horizon.15
Indonesia: Contribution to Change in CBCs
(In percent of total asset)
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Source: IMF staff.Note: 1 = Beginning CBC, 2= Other Maturing Mutual Fund, 3= Maturing secured lending, 4= Maturing loans, 5= Inflows from derivatives transactions, 6= Interest income, 7= Other contractual inflows, 8= Own securities issuance due, 9= Due secured borrowing, 10= Securities owned by Bank obtaining after secured borrowing due, 11= Customer deposits – individuals, 12= Customer deposits – Nonfinancial legal entities – Qualifying SMEs, 13= Customer deposits – Nonfinancial legal entities – Other entities, 14= Other deposits and unsecured borrowing, 15= Outflows from derivatives transactions, 16= Interest expense, 17= Undrawn committed credit/liquidity lines, 18= Other contractual outflows, 19= CBC flows, 20= Ending CBC.23. The potential contagion through domestic or cross-border exposure channels appears limited, albeit with a high heterogeneity across different types of banks (Figure 19). The domestic interbank positions are small, especially compared to banks’ capital. The SOBs are the least vulnerable to inward spillovers, yet due to their size exhibit the highest contagion effect. The cross-border analysis reveals an interconnection between the Indonesian banking sector and the global banking system, particularly with Asian economies, such as Singapore, China, Japan, Hong Kong, and the United States, but contagion is still limited due to limited cross-border exposures and small size of the Indonesian banking system.
Indonesia: Results for Interconnectedness and Contagion Analysis
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: Supervisory data, Bank for International Settlement, and IMF staff calculations.Note: The Index of vulnerability is the percentage loss at a single institution due to the default of all other institutions. The index of contagion corresponds to the average percentage of loss of other banks due to the failure of a given bank.Corporate Vulnerability Analysis
24. Corporate vulnerabilities have declined since the pandemic, but vulnerabilities remain. Debt-at-risk, measured by debt held by firms with ICR less than 1, is estimated to have risen from 13 percent in 2019 to 35 percent in 2020, before declining to about 19 percent in 2022. Small firms have higher shares of debt-at-risk than larger ones. Simulations point to significant deterioration in debt servicing capacity under the recession and stagflation scenarios, with debt-at-risk rising by 10 and 14 percentage points respectively (Figure 20). With cash buffers for at-risk firms already at low levels, such a shock could impair corporates’ capacity to service their debt.
Indonesia: Current Corporate Cash Buffers; Debt at Risk in Stress Scenarios
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: Capital IQ and IMF staff calculations.System-Wide FX Liquidity Analysis
25. Indonesian corporates have significant amounts of FX debt, yet the systemwide liquidity analysis highlights overall resilience to an FX liquidity stress. As of end-2022, Indonesian corporates had about 161 billion USD of external debt, 30 billion of which was short-term, and an additional 59.5 billion USD of domestic borrowing in foreign currencies.16 NFCs hold about 52 billion USD in FX deposits in the domestic system, indicating significant sectoral capacity to meet external rollover pressures for short-term debt by drawing on domestic liquid assets. At the same time, the banking system’s FX CBC stood at over 40 billion USD, indicating significant scope to meet corporate deposit outflows.
26. The stress tests on corporate FX debt service vulnerabilities point to significant systemwide and institutional resilience, especially if pockets of strain are managed by redistributing remaining FX liquidity. In the stress test, firms experience FX debt rollover shocks, which they must meet through a combination of FX revenue, offshore and/or domestic FX, and IDR deposits. Some firms have FX shortfalls after exhausting their FX incomes and deposits (Figure 21, left). However, except for the most extreme scenarios, there remains enough FX liquidity in the banking system to close such gaps through new financing (Figure 21, right). Some smaller banks may face FX liquidity shortfalls in severe to extreme shocks.
Indonesia: Systemwide FX Liquidity Stress Test Based on proportional shock to NFCs’ FX debt
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: Capital IQ, company annual reports, Bl, and IMF staff calculations.Note: Scenarios assume various percentages of NFCs’ short-term or total outstanding FX debt needs to be refinanced within 1 -month. The assumed pecking order is NFCs first use estimated monthly revenue (haircut of 50 percent), then domestic FX deposits, then domestic IDR deposits, with any remaining gap reported as an FX shortfall (e.g., left chart for scenario with 100 ST debt needing to be rolled over). For banks, assume zero FX liquidity inflow to increase counterbalancing capacity over the stress period. The right chart reports, for each stress scenario, whether enough FX CBC remains in the banking sector to meet NFCs’ shortfall through potential new loans.Climate-Related Risk Analysis
27. Under current climate conditions, the financial stability implications from physical risk appear modest. In the case of Indonesia, the main drivers of capital losses of banks due to physical risk shocks are a decline in growth and asset prices following the shock, and to a lesser extent the reaction of interest rates. While the economic damages across scenarios can be severe, the impact on the banking system is generally modest, with capital ratios declining by a maximum of about 2 percent in the most severe compound earthquake and flood scenarios (Figure 22, panel 1). However, the analysis does not capture geographical heterogeneities in the estimation of the macroeconomic and financial impact, which could also result in heterogeneity of impact among banks. Especially banks with regionally concentrated loan portfolios could be vulnerable to regionally concentrated shocks.
28. The FSAP analysis also considered hypothetical scenarios under future climate conditions representative of medium/high emissions pathway.17 Climate change has the potential to worsen the frequency and severity of physical risk events. The distribution of extreme events under future climate change conditions by the middle of the century was considered, based on evidence in the available literature. Under these hypothetical scenarios the impact on the banking system could be more substantial, especially for compound scenarios (Figure 22, panels 2).
Indonesia: Results for Climate Change Physical Risk Analysis
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Source: IMF staff calculations.29. Climate-related transition policies could have implications for the financial sector.18 Indonesian banks have sizable credit exposures to economic sectors vulnerable to transition (Figure 21, panels 1 and 2). The analysis suggests that default risks of firms in transition-sensitive sectors increase substantially only in the NDC+ scenario with a very ambitious carbon tax (US$200/tCO2 by 2040). In this scenario, the probabilities of default in some carbon intensive sectors increase by up to 700 basis points by 2030 (Figure 23, panel 3). In the other, less severe scenarios, the impact appear to be small (Figure 23, panel 4).
Indonesia: Results for Transition Risk Analysis
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
Sources: IMF and WB.30. The analysis and results should be regarded as exploratory and interpreted with caution given the uncertainty associated with the scenarios and modelling approach. Both the transition and physical risk analyses are subject to various assumptions and data and model limitations. Further analysis and better data are needed to explore the sensitivity of the results. While the analysis relied on standard stress testing methodologies, it is not a standard stress test and is not focused on quantifying capital needs of the financial sector given the various challenges and the exploratory nature of the exercise.
31. The climate risk analysis highlights potential vulnerabilities from climate-related physical and transition risks. To better monitor these risks, the authorities should further develop internal capacity and models for climate risk analysis, improve data collection, offer more detailed methodological guidance to financial institutions, and enhance the collaboration among government agencies on climate risk analyses.
Financial Sector Oversight
32. The OJK is responsible for microprudential as well as conduct supervision of the financial sector, while the Bl focuses on macroprudential policies for the banking sector. Given the structure of the financial system in Indonesia—the presence of financial conglomerates and the push towards financial deepening and innovation—the change in the supervisory architecture by enacting the Financial Sector Omnibus Law (FSOL) in 2023 is intended to achieve more effective oversight of the entire financial sector. Maintaining financial system stability is a shared responsibility among the Financial System Stability Committee (FSSK) members (the MoF, Bl, OJK, and LPS).
A. Systemic Risk Oversight and Macroprudential Framework
33. The FSOL clearly defined the objectives of Bl and OJK and delineated macroprudential and microprudential responsibilities at the sectoral level. Bl has macroprudential responsibility for the banking sector while OJK has some sectoral powers for nonbank sectors. The designation of systemic NBFIs is with OJK. Both authorities assess the system and sectoral interlinkages. FSOL mandates OJK as the authority dealing with the NBFI sector. It will be important to strengthen the framework for nonbank financial institutions as financial deepening occurs, financial innovation accelerates, and the nonbank sector grows in importance and becomes more interlinked.
34. Systemic risk analysis is in line with international practice despite some data gaps that remain. Bl uses indicators developed by the BCBS to examine potential vulnerabilities to the financial system. There are data gaps in the corporate sector analysis, however the authorities are supplementing limited data with surveys and outreach to industry organizations. Bl and OJK conduct a joint stress test—both top down and bottom up. OJK is developing methods to analyze interlinkages between sectors.
35. During the COVID-19 pandemic Bl relaxed many of its macroprudential measures; in contrast to many countries, Indonesia has not yet reverted to its pre-pandemic stance. The macroprudential intermediation ratio and liquidity ratio are now at pre-pandemic levels, but LTV limits are still accommodative. To support the recovery and inclusion, Bl introduced the liquidity incentives and inclusive financing ratio, although the latter is a structural tool. (See Figure 24). The actions to boost credit have mainly been targeted at priority sectors—which are determined by several factors including the authorities’ assessment of sectors’ positive spillovers to the rest of the economy (e.g., to employment)—and MSMEs. The credit gap continues to close and bank lending standards—as measured by the lending standards—are looser than before the pandemic.
36. Most large banks hold considerably higher capital and liquidity levels than is required by regulation—suggesting many of the macroprudential measures are not binding for these institutions—and the accommodative stance does not pose near-term risks to financial stability. Banks hold large levels of capital, which at an average of over 25 percent of Tier 1, is well above minimum requirements and add-ons required by Pillar 2. On average banks are holding around 20 percent of their assets as government securities when the required ratio is 5 percent. While the LTV limit is currently relaxed to 100 percent, banks have expressed limited appetite to lend at this level.
Indonesia: Bl-Macroprudential Policy Tools
Citation: IMF Staff Country Reports 2024, 272; 10.5089/9798400286438.002.A001
1 We note that the “directed credit tools” are considered by Bl to be part of their macroprudential toolkit hence their inclusion here.37. Macroprudential policy should primarily focus on resilience and financial stability. Macroprudential policy pursues a three-pronged strategy: (i) financial system resilience; (ii) balanced and sustainable intermediation; and (iii) to promote inclusive and green financing. Inclusion and growth are not usual objectives of macroprudential policy—which should be focused on reducing sources of systemic risk or financial imbalances. Bl have argued that all parts of their strategy build financial stability in the long run—but this is an indirect effect of the policies of directing credit to specific sectors. Recent communication of macroprudential policy has focused on growth and credit supply. To an extent this reflects the conjuncture, as the economy is recovering from the pandemic and aligned with the policy stance of Bl. Bl has stated that in the early stages of the recovery it has adopted a policy mix whereby monetary policy is aimed at preserving price and exchange rate stability while its other instruments—including macroprudential policy in the context of contained financial risk—are pro-growth.
38. Bl should remove the inclusive financing ratio and the liquidity incentives from the macroprudential tool kit. To the extent that it is constrained in the medium term by the legal objective for macroprudential policy at Bl to promote inclusion and growth—with the long-term goal of improving financial stability, Bl should consider separately grouping these two instruments to better clarify their primary function of promoting growth and inclusion, e.g., as “sustainable economic growth tools.” Such a re-classification would be in line with Bl’s remit and policy mix where monetary, macroprudential and payment system tools work together to provide sustainable economic growth. The role of macroprudential policy in this overall Bl remit should be limited to ensuring that these policies have safeguards or considering how these tools could help financial stability -for example by enhancing diversification in the banking system.
39. Given the large toolkit, Bl should think strategically about how to use its tools and how frequently it wishes to adjust them. While Bl’s current policy is applied to the financial cycle in all its stages, frequent adjustments to manage time-varying risk can be costly and less effective if they are seen as temporary. Currently Bl is researching the merits of a positive cycle-neutral rate for the CCyB—at the same time it should also consider using other instruments in a more preemptive manner. A more strategic use of the toolkit will increase the effectiveness and lower the potential economic cost—in terms of inclusion and growth—of building a resilient financial system. This is very timely with the plan to develop macroprudential policies with the FSOL mandate.
B. Banking Sector Supervision and Regulation
Conventional Banks
40. OJK has made substantial progress in updating its regulatory and supervisory frameworks since the last FSAP in 2017. The OJK has strengthened its regulatory framework, implementing the Basel III post-crisis reforms. The recently enacted FSOL enhances the OJK’s institutional set-up, powers, banking regulations and supervisory framework. OJK has developed supervision capabilities and deployed innovative technologies (SupTech), particularly the automation of data collection and processing, to achieve greater efficiency in banking supervision.
41. OJK achieves good baseline supervision; building supervisory capacity and enhancing the supervisory framework is contributing to achieving higher supervision standards. OJK’s risk methodology is structured, incorporates key banking risks, and allows for granular analysis of risk, risk management processes, corporate governance, earnings, and capital. A transition to an enhanced supervisory framework by improving the risk assessment methodology and its application, and better integrating certain elements (i.e., ICAAP, stress testing, D-SIBs, and recovery plans) will enable the achievement of greater effectiveness in banking supervision. Namely, this will allow the OJKto i) examine banks’ evolving business models to identify changing risk profiles early; ii) intensifying scrutiny in assessing corporate governance and risk management; iii) focus more attention to assessing a bank’s risk culture, model governance and stress testing; and iv) effectively mitigate the risks associated with related party transactions and potential sources of concentration risks.
42. OJK’s existing powers do not extend to require banks to report information regarding non-financial and unregulated entities within the broader group structure particularly relevant to financial conglomerates. OJK’s has limited powers to collect data on unregulated entities within a group. The FSOL will enhance OJK’s ability to collect the information, understand the complete structure of a group, monitor how risks are managed, and take actions.
43. It’s 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 as well as reinforce OJK’s independence. The primary legislation gives OJK broad objectives, including a clear commitment to financial stability, financial sector development, credit growth and consumer protection objectives. The recently enacted FSOL introduced several new responsibilities for the OJK and strengthened its powers, such as for banks’ recovery, mergers and acquisitions and investigation. While the OJK prioritizes safety and soundness as its primary objective in banking supervisory practice, the primary legislation should make this explicit to minimize ambiguity and potential conflict between objectives. It is also important to enhance the independence of OJK from Government interference (an Ex-officio member, typically Vice-Minister of Finance, is part of the Board of OJK Commissioners). Additionally, legal protection for supervisors is crucial to carry out their roles effectively.
Islamic Banks
44. The banking system in Indonesia is a dual banking system, with Islamic banking growing in significance. As of July 2023, the share of Islamic banking assets of the total banking assets is 7.3 percent with a year-on-year growth rate of 13.6 percent. The 2023 Law regarding Developing and Strengthening of the Financial Sector established a clear obligation on Islamic banks to comply with Shariah.
45. The focused review of Islamic banking regulation and supervision found that:
Better coordination of regulation between Islamic banking and conventional banking is needed.19
Finalization of the Shariah governance regulation is important to clarify oversight accountability on Shariah governance implementation and effective management of Shariah non-compliance risks.
Use of profit and loss sharing Shariah contracts needs further clarification and coherence, to address Shariah risk, operational, conduct and Displaced Commercial risks, and treatment of Profit-Sharing Investment Account (PSIA) upon liquidation/resolution.
C. Financial Integrity (AML/CFT)
46. The Financial Action Task Force (FATF) 2022 assessment of Indonesia’s anti-money laundering and combating the financing of terrorism (AML/CFT) regime found that the legal framework is strong, and the overall effectiveness is mostly moderate. The assessment revealed a large majority of the FATF 40 Recommendations receiving “Compliant” and “Largely Compliant” ratings (6 Recs and 29 Recs, respectively), while all the Immediate Outcomes (IOs) of effectiveness were rated “Substantial” and “Moderate” (4 IOs and 7 IOs, respectively).
47. The 2022 mutual evaluation report (MER), highlighted areas requiring improvement to enhance effectiveness. The MER identified the need for the authorities to: i) strengthen risk-based supervision (RBS) of non-financial sectors as not all reporting entities were subject to this supervisory approach, ii) take a more robust approach on imposing sanctions for non-compliance issues identified to ensure they are fully dissuasive, iii) apply targeted financial sanctions for terrorist and proliferation financing related activities, an area identified continue to implement targeted financial sanctions without delay, and iv) continue to maintain accurate and updated ultimate beneficial owner (UBO) information.
48. The authorities, together with the FATF, established an Action Plan designed to address areas needing improvement. Indonesia became an FATF member in October 2023. Although commitment in implementing the action items was noted, going forward the authorities should continue to deliver and implement the necessary measures to further strengthen the overall effectiveness of Indonesia’s AML/CFT regime.
Systemic Liquidity, Financial Crisis Management and Resolution
A. Systemic Liquidity Management
49. Bl uses liquidity management to implement exchange rate policy and safeguard rupiah and financial market stability. Indonesia, in common with most countries in the current conjuncture, has a structural surplus of liquidity—i.e., reserve money claims of the commercial banks on Bl exceed demand, such that Bl needs to conduct Open Market operations (OMO) to drain excess liquidity.
50. Through the stressed COVID period and now, in the transition to ‘normalization,’ market liquidity appears to have been well managed and delivers on Bl’s goals. The framework has relied in the context of a bank-dominated financial sector, on the ability of all banks to be able to interact frequently and directly with Bl. Planned market developments will inevitably change the context and disrupt this framework, pointing to the need to address some infrastructure weaknesses and bolster the ability of the authorities to respond to any future liquidity shocks. As the NBFI sector grows in importance, the authorities will need to ensure that liquidity management by this sector is well supported, including by regulatory, tax and legal infrastructures, and that an appropriate safety net structure is in place. Against this background, Bl will need to work with OJK and the government to preserve market stability in the transition to a more market-driven system.
51. The domestic money market, government securities market, and foreign exchange (FX) market are not fully developed, and there is some market segmentation. This helps to explain Bl’s frequent and broad interaction in the markets—in rupiah and FX, and across a range of maturities—both to deliver stability, to handle larger transactions that cannot be undertaken in the market, and to offset market segmentation.20 Bl has introduced a Primary Dealer (PD) system in the conventional money markets in 2024:Q1. Given the introduction of the Primary Dealers system, Bl needs to ensure (i) that the disruption associated with the changes is minimized by appropriate sequencing (and addressing technical issues such as those inhibiting the use of repos); and (ii) that the implications of this for other policies—notably short-term exchange rate stability—are fully taken on board.21
52. Bl will need to reduce the frequency and breadth of its interactions with the market in both rupiah and FX to achieve its market development goals. Importantly, this will involve a substantial reduction in the current ability of most banks to manage rupiah liquidity and FX positions via direct access to Bl’s OMO.22 Some elements of market segmentation—between the conventional and the Islamic sectors—will inevitably remain, while other aspects of segmentation could persist for some time.
B. Crisis Management and Financial Safety Net
53. Since the last FSAP, Indonesia’s financial safety net and crisis management framework for banks has improved significantly and agencies have operationalized their resolution and crisis management powers. The institutional framework relies on clear mandates and powers of the safety net agencies which coordinate their responsibilities in the Financial System Stability Committee (KSSK). Legal protection for management and staff of all safety net agencies has been strengthened. The authorities are in the process of finalizing provisions for implementing FSOL amendments through regulations and guidelines. Recovery and resolution plans as well as resolvability assessments have been finalized for all domestic systemically important banks (D-SIBs) and are subject to regular updates.23 Agencies conduct system-wide crisis simulations on a regular basis.
54. The resolution framework could be further improved to minimize risks to public funding. In principle, the framework gives the authorities a wide range of powers and tools to resolve a failing institution. However, certain powers could be misused to not let unviable banks fail and instead provide inefficient open bank assistance. For example, liquidity support granted to a bank under recovery by LPS raises questions of moral hazard; dilutes primary responsibilities of management and owners; and creates overlaps with OJK’s supervisory mandate during the recovery phase. Banks with liquidity needs should instead rely on Bl’s Emergency Liquidity Assistance (ELA). Solvency support by LPS for banks in resolution in the form of temporary capital placements pose considerable risks to the balance sheet of the deposit insurance system (DIS); can generate conflict of interests between LPS’s responsibility of running the DIS and its role as owner/creditor of its deposit-taking member institutions; and brings competition concerns vis-a-vis other privately-owned institutions. Therefore, such participation should be foreseen only as a last resort and subject to other safeguards (e.g., after shareholders and creditors have been fully written off).
55. Legal changes are needed to further align the safety net framework with international standards and best practice. A further alignment of Indonesia’s resolution framework with the Financial Stability Board (FSB) Key Attributes could be accomplished by introducing resolution objectives, explicit powers to remove impediments to resolution detected in resolvability assessments, and a limited role for courts to review resolution decisions. A major gap, given the importance of financial conglomerates in the sector, is that the resolution powers are not applicable to them and these groups are not covered through recovery and resolution plans. In general, resolution plans could become more effective when drafted by the resolution authority, not the banks. In line with the International Association of Deposit Insurer’s (IADI) Core Principles, LPS should work on reducing the payout timeframe to seven working days and limit set-off arrangements. Deposits from financial institutions and the government should be excluded from the scope of coverage. The implementing regulation for potential primary market purchases (and later sales) of government bonds by Bl during future financial crises—as allowed for by the FSOL, should be in line with international best practices to minimize risks to central bank independence and price stability. Safeguards include ensuring that any such purchases are made voluntarily at the initiative of the central bank.24
Financial Sector Development
56. Broadening and deepening financial markets and services is a multi-dimensional problem requiring concerted policy effort. Financial depth is increasing but remains below peers, and access to financial services can further improve. To broaden and deepen the financial sector, the authorities will need to focus on shortcomings and bottlenecks in existing regulation as well as alleviating intermediation and competition constraints. Furthermore, policy will need to facilitate the emerging objectives of green growth and resilience.
57. The credit infrastructure needs to be strengthened. A credit reporting system strategy and improved oversight framework are needed, as the legal and regulatory framework is fragmented and insufficient. Alternative data and innovative credit scoring require a strong regulatory framework. Approving the draft secured transactions law, based on UNCITRAL, would address the current law’s main deficiencies. The collateral registry faces several challenges, and the simplification of the registration process is a priority.
58. The regulators have adopted a balanced position of harnessing the potential of digital financial services (DFS) and fintech whilst mitigating risks. More broadly, the elements of the financial market infrastructure assessed demonstrate a high level of observance of international principles, with some areas for improvement. To increase development impact, the digital public infrastructure should be strengthened by expanding (direct) access to the fast payment system and building on the National Standard for Payment Open API for a comprehensive approach to open finance. OJK should continue strengthening the regulatory and supervisory approach to alternative financing models to ensure business resilience and consumer/investor protection. Authorities should develop adequate cooperation arrangements for the regulation and supervision of information technology-based financial services, consistent with FSOL
59. Capital market remains shallow, with systemic policy-level reforms necessary to support long-term local currency financing. The government securities markets are relatively well-developed, but the corporate bond and equity markets remain shallow. The long-term investor demand is critical, but the domestic investor base remains weak. Policy clarity and action are needed on gradual removing the minimum government asset holdings for local institutional investors and allowing some overseas diversification by public pension funds.
60. The role of the state is significant and can be refined for development impact. State-owned Banks’ (SOB) partial private ownership drives a commercial orientation; they are highly profitable, have strong financial positions, and are regulated as conventional commercial banks. Clarifying the objective of state ownership would help SOBs navigate tensions between stability and development objectives. Amendments to the MSME-focused business loan program have increased its complexity, and some elements should be reviewed. State-owned guarantee institutions appear to play a limited role and their role may require adjustments.
61. Authorities should strengthen the strategy, governance, and capacity for climate finance. Authorities should establish a robust climate information system, update reporting requirements, introduce a regulatory green taxonomy, and develop a centralized database on climate information and sustainability reporting. State-owned financial institutions and schemes should be explored to mobilize climate finance. The further development of insurance markets could provide financial protection for sovereign and sub-sovereign entities, MSMEs (including agriculture), and households.
Authorities’ Views
62. The authorities welcomed the FSAP’s comprehensive assessment of the continued resilience of the financial system and strong financial policy frameworks. As also observed globally, authorities noted that sovereign-bank nexus increased because of the pandemic policy. Banks’ holdings of domestic sovereign bonds increased because of the overall increase in banks’ risk appetite during pandemic. However, post-pandemic, banks’ risk appetite improved significantly which is reflected in high credit growth and decreased in sovereign bonds holding. They disagree that loans to SOEs are contributing to the tightening of the sovereign-bank nexus as exposure remains small. They agreed with the team that the risk from sovereign-bank nexus is still limited as shown in the FSAP solvency stress test and healthy fiscal condition as well as improved debt repayment capacity. The authorities also noted that the combined result of corporate and bank FX liquidity stress tests indicates that banks’ liquidity remains sound.
63. The authorities broadly agreed with the systemic risk assessment yet noted that the asset quality framework is adequate and effective. Authorities stated that banks’ asset quality is well-managed and the NPL Ratio in Indonesia is low, along with a decreasing Loans-at-Risk ratio and improving ratios of restructured loans. Banks also maintain high loan-loss provisions to mitigate potential cliff effect in credit risk; they are also required to report their financial conditions granularly, including their NPL positions, every month via the Integrated Monthly Bank Report in a complete manner within a specified due date. Moreover, despite relatively higher NPLs in pandemic-hit sectors, the loan concentration to pandemic-hit sectors (construction; accommodation & food and beverage; textiles, textiles product and footwear industry) only accounted for less than 9 percent of total loans in December 2023, suggesting low concentration risk in these sectors. Authorities also agreed that the solvency stress test results confirmed banks’ soundness.
64. The authorities welcomed the assessment of the macroprudential regulatory and supervisory framework. They stressed that the ultimate objective of macroprudential policy is, very clearly, to address financial system stability. Based on the amendment of the Law on Bank Indonesia (as stipulated in the FSOL), the objectives of Bl are to achieve the stability in the value of Rupiah, to maintain payment system stability, and to contribute in maintaining Financial System Stability in order to support sustainable economic growth. The authorities underscored that the FSOL clarified and strengthened Bl’s macroprudential mandate to support financial system stability through a three-pronged strategy of (i) maintaining financial resilience by mitigating risk propagation from interconnectedness and contagion; (ii) managing balanced and sustainable intermediation to tackle procyclicality; and (iii) supporting financial inclusion. These strategies aim to address potential sources of systemic risks pertinent to the domestic context, particularly as an emerging country. Furthermore, the framework is particularly relevant in the domestic context, as evidenced by its support of the financial sector’s stability during the pandemic, aligning more closely with the broader context of emerging markets than the narrower definition provided by the IMF.
65. The authorities also welcomed the thorough assessment of the Financial Market Infrastructure (FMI), systemic liquidity management framework and the significant progress on strengthening the crisis management and resolution frameworks, yet they noted that the approach in designing the resolution plans should consider country circumstances and resource constraints, including fiscal (deficit). They greatly valued new insights on the FMI assessments and commendatory report on payment system (BI-RTGS) and commit to further enhance its framework consistent with FSOL provisions. On the crisis management, while recognizing international best practices, they emphasized that the approach in designing crisis management and resolution frameworks should also consider country-specific circumstances, crisis experiences, and differences in legal regimes. The authorities now focus on strengthening the implementation of the FSOL to ensure credibility in policy development as well as governance in exercising authorities’ mandates. When it comes to purchasing government bonds by Bl in the primary market, authorities agree on the importance of safeguards for Bl. In this relation, safeguards of purchasing government bonds in the primary market will be enacted in an MoU between Bl and the MoF. During the COVID-19 pandemic era, purchase of government bond in the primary market by Bl has been stipulated in Law No. 2 Year 2020 and reiterated by Law No. 4 Year 2023 (FSOL), which was implemented by enactment of the Joint Decrees between Bl and the MOF. The measures were used only under a crisis and were targeted, time bound, and transparent. Authorities believe that the timing for the new MoU between Bl and the MoF would also be best when the President declares a crisis condition (in other words the timing remains undetermined). In this regard, future exercise of this mandate by Bl will follow several safeguards that will be determined in the event of crisis condition. This practice had been applied during the COVID-19 pandemic era (enacted in the joint decrees between Bl and the MoF).
Indonesia: Structure of Financial System, June-2023
Indonesia: Structure of Financial System, June-2023
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Indonesia: Structure of Financial System, June-2023
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Indonesia: Selected Economic Indicators, 2022–27
Indonesia: Selected Economic Indicators, 2022–27
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Indonesia: Selected Economic Indicators, 2022–27
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Indonesia: Financial Soundness Indicators, 2020–24
Indonesia: Financial Soundness Indicators, 2020–24
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Indonesia: Financial Soundness Indicators, 2020–24
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Indonesia: Macroeconomic Scenarios Used in Stress Test
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Indonesia: Macroeconomic Scenarios Used in Stress Test
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Indonesia: Macroeconomic Scenarios Used in Stress Test
(In percent)
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Appendix I. Implementation Status of 2017 FSAP Recommendations1
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Appendix II. Banking Sector Stress Testing Matrix
Banking Sector Stress Testing Matrix
Banking Sector Stress Testing Matrix
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Banking Sector Stress Testing Matrix
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See the World Economic Outlook of January and April 2024.
Small banks are defined as those classified under the KBMI1 and KBMI2 groups. KBMI1 denotes banks with a core capital of up to IDR 6 trillion; KBMI2 denotes banks with a core capital of between IDR 6 trillion to IDR 14 trillion; KBMI3 denotes banks with a core capital of between IDR 14 trillion to IDR 70 trillion and KBMI4 denotes banks with a core capital of more than IDR 70 trillion. Out of four banks in KBMI4, three are state-owned banks. Banks can also be classified based on ownership, into state-owned banks, regional banks, private banks and foreign branches.
Loans at risk are defined as the sum of NPLs, restructured loans and special mention loans.
Estimates shared by Bl.
To mitigate potential adverse impact stemming from short-term shocks in FX markets, Bl implemented prudential regulations on NFCs’ offshore borrowings by requiring firms to maintain a minimum hedging of 25 percent of the negative balance between FX assets and FX liabilities with a maturity period of up to 3 months and between 3–6 month from the end of quarter, and a liquidity ratio of at least 70 percent of FX assets to FX liabilities that shall mature within 3 months from the end of quarter.
The definition of zombie firms follows Albuquerque and Iyer (2023), and is based on three balance sheet indicators that aim to capture firms likely in financial distress and persistently unprofitable: (i) ICR below one; (ii) leverage ratio above the median firm in their industry; and (iii) negative real sales growth. To qualify as a zombie firm, the three criteria have to be met for at least 2 consecutive years.
The pandemic-era forbearance measures were removed at end-March 2024.
The stress scenarios are hypothetical simulations of severe conditions, not representing forecasts. These scenarios typically assume no policy beyond adjustments to the policy rate, to assess the system’s vulnerability to various shocks. The severity in terms of impact on a real GDP growth of the stagflation (recessionary) scenarios is closely aligned with a 5 percent Growth-at-Risk estimate, implying 15 (14) percent or 2.6 (2.4) standard deviation shock to real GDP growth relative to the baseline, and 6 (5) percent decline relative to the starting point over a two-year horizon.
There are some small banks that already had negative profits and high cost to income structure at the starting point of the stress test which contributed to additional losses across all scenarios.
The exercises identified gap between the actual impairment and the estimated impairment based on NPL flows via the back-testing approach, hence the team made a starting point adjustment by allocating the gap into each portfolio based on their NPL share for each bank, constantly over the 5-year horizon. See technical note on systemic risk analysis for further details.
Defined as capital ratios in absence of transitional arrangements.
CET1 hurdle rates are bank specific and composed of minimum CET1 ratio (4.5), plus capital conservation buffer, bank specific D-SIB buffer and Pillar II surcharge. Banks are allowed to use capital conservation buffer under stress.
The scenario-based stress test considers a full repricing of the securities booked under the Amortized Cost category. Without such effect, the aggregated CET1 ratio under the adverse scenario would be improved by about 120 and 30 basis points in the first year and over the five-year horizon, respectively, without significant changes in the number of failing banks.
Currently, the Bl does not accept collateral denominated in FX to provide FX liquidity to banks. There are however several alternative options for the banks to receive needed FX liquidity from the market, such as FX money market, FX repo transactions, and FX swap transactions. Besides that, banks could also issue bonds in FX.
Aggregate statistics shared by authorities, based on datasets of listed and non-listed firms.
The modelled scenarios were designed to correspond to climate conditions under a medium-to-high emissions pathway. Due to differences in the emissions pathways used in modelled estimates from the literature, it was not possible to directly use model results for a consistent set of representative concentration pathway (RCP) scenarios. Instead, results were estimated for a medium-to-high emissions pathway (broadly consistent with RCP6.0 or RCP7.0) using the estimates from the scenarios used in the available literature.
Following the scenario design of the Network for Greening the Financial System (NGFS) database and the World Bank’s Country Climate and Development Report (CCDR), the FSAP considered three main transition scenarios for Indonesia:
Redirection of electricity & fuel subsidies. Elimination of electricity and fuel subsidies, with no additional energy and land policies. Government consumption is assumed constant. Two alternative uses of the savings from elimination of subsidies are considered. Firstly, the savings is used to compensate the households at the bottom 40 percent of the income distribution. Secondly, the savings are used to finance a rise in public investments.
Nationally Determined Contribution (NDC). This scenario includes all pledged policies, even if they have not been implemented yet. This includes, the elimination of electricity and fuel subsidies, energy policies, land policies and a carbon tax that reaches US$40.00/tCO2eq by 2040. Energy policies includes the Green RUPTL (Electricity Supply Business Plan). Land policies include forest and peatland restoration measures that have potential benefits in terms of reduced losses due to fires and improved health impacts. The carbon tax is applied to all sectors and greenhouse gas emissions except for agriculture. The tax is gradually phased in. Revenues from the carbon tax are used for investment-including in low-carbon equipment. It is assumed that replacing stranded fossil fuel assets accounts for 25 percent of the new investment.
Nationally Determined Contribution Plus (NDC+). This scenario includes all the actions from the NDC scenario, but with a much higher carbon tax rate, reaching US$200/tCO2 by 2040. This is a more ambitious scenario that would involve higher net costs for Indonesia. To help compensate for the costs, a sensitivity analysis is added to this scenario with an increase in foreign investment that is equivalent to 1 percent of GDP throughout the projection period (NDC+ FDI).
The focused review of Islamic banking regulation and supervision in Indonesia was carried out against the five additional core principles (CP) specific to Islamic banking in the Core Principles for Islamic Finance Regulation (Banking Segment) (CPIFR). These principles serve as a supplement to the Basel Core Principles (BCP). The financial regulation and supervision framework for the Islamic banking sector must be compliant with the BCP, alongside the mentioned five principles specific to Islamic banking.
Market segmentation can weaken monetary policy transmission, increase market reliance on the central bank, and inhibit market efficiency.
Bl conveyed the responsibilities for liquidity provision to PD banks, which Bl is actively monitoring.
In accordance with the BPPU 2025, Bl has already initiated a reduction in the frequency and maturities of its OMO.
With the issuance of FSOL, recovery and resolution plans are now required for all banks.
Tobias Adrian; Christopher J. Erceg; Simon T Gray; Ratna Sahay “Asset Purchases and Direct Financing: Guiding Principles for Emerging Markets and Developing Economies during COVID-19 and Beyond,” IMF, October 2021.
Based on responses received from Authorities, with IMF staff assessment reflected in bold.
