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RegulationsNovember 27 2009

Reform is a work in progress

Stable structure: Jakarta's central business district has experienced growth throughout the global economic slumpPolicy reforms in Indonesia's banking sector have transformed shareholding structures and foreign investors have scooped up local banks. But further change is needed to enable the country to cope with an anticipated economic explosion, say local bankers. Writer Michelle Price
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Reform is a work in progress

In the aftermath of the Asian financial crisis of the late 1990s the Indonesian economy was all but devastated, posting a 13.4% decline in gross domestic product (GDP) in 1998. Fast-forward 11 years and Indonesia looks, if not smug, then decidedly comfortable. Now south-east Asia's largest economy, Indonesia entered the global financial crisis from a position of swelling economic strength, which has shielded the country's banking sector from the recent crisis. If Indonesia's burgeoning banks are to effectively support the country's much-anticipated economic explosion during the next decade, however, consolidation will be required. Fortunately, regulatory developments and an influx of foreign investment are helping to pave the way for structural reform.

Although a weakening of commodity flows, a sudden and dramatic outflow of foreign equity investors and a 40% depreciation of the rupiah conspired to trigger a rise in Indonesia's sovereign spread at the end of last year, the country has since rebounded at lightning speed. Indeed, Indonesia is one of a handful of Asian economies that have continued to post economic growth throughout the global financial slump. Following GDP growth of 6.1% for 2008, the country's economic expansion is expected to fall to a respectable 4% for 2009, rising slightly thereafter to a solid 4.8% in 2010. While this represents a substantial decline in performance compared with previous years, it still puts Indonesia just behind its closest regional peers, China and India, to become the third-fastest growing economy in the G-20, according to the IMF. The country's rate of inflation continues its deceleration from a high of 11.1% in December 2008, falling to a 10-year low of 2.7% in July 2009 and stabilising at about 5% for 2010, according to IMF predictions.

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