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Asia-PacificMarch 1 2012

Indonesia's finance minister strives to keep growth story going

Indonesia was one of only a handful of major economies to carry on growing throughout the financial crisis and is now looking at reaching 7.5% growth by 2014. What is behind this impressive performance? Brian Caplen interviews Indonesia’s finance minister, Agus Martowardojo, to understand the country’s economic polices as well as its new system for bank regulation. Mr Martowardojo is The Banker’s Finance Minister of the Year 2012, global and Asia-Pacific.
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Indonesia's finance minister strives to keep growth story going

Q: How is Indonesia’s economy progressing?

A: For the past 10 years we have had a really good economy, the budget deficit has never exceeded 3% and the total debt-to-rgoss domestic product (GDP) ratio has come down from  80% in 2001 to 25% in 2011. In Indonesia we have often suffered with relatively high inflation but last year it came down to 3.7%.

In 2012 we expect Indonesia can grow between 6.5% and 6.7%. Last year we grew 6.5% and for the past seven years we mostly grew more than 5.5%. Even in 2009, when there was a global crisis, we still grew at 4.5% even though all other countries were in difficult situations. There were three [major] countries that still grew – China, India and Indonesia. In general we believe we can reach economic growth of 7% to 7.5% by 2014

Q: But you must be impacted by the negative external environment with large parts of the global economy struggling?

A: In January the International Monetary Fund made some changes to its 2012 growth forecast. Originally it thought the global economy could grow at 4%, it then reduced its estimate to 3.3%. It is true that the global crisis can impact Indonesia but in Indonesia we are quite lucky in that we still have a good domestic economy and we can increase [public sector] investment if we want to. Even though the multilaterals predict growth of 6.1% to 6.2% in 2012, while we are budgeting for 6.7%, the government’s plan is to focus on infrastructure and that will help growth. We need to make sure we maintain a good domestic economy and focus on high-quality government spending.

Q: Economists often criticise Indonesia for having subsidies, particularly for fuel. Are there plans to reduce subsidies?

A: We plan to reduce subsidies and also target them better. If we continue to provide general subsidies, the non-target groups still enjoy them, but if we can target them better their impact is more beneficial. We plan to start this programme in Java and Bali and then extend it in stages to the whole of Indonesia. At the same time as reducing our subsidies in fuel and electricity we also want to promote the use of clean energy.  

Q: Are the benefits of Indonesia’s growth being equally shared by all of its population?

A: We want Indonesia to have strong, balanced and sustainable development and growth that is both equitable and also improves the social welfare of the people in the country. That is really a challenge for Indonesia, and for the past 10 years we have promoted the development of the regional economy and fiscal decentralisation. We currently allocate about one-third of our total budget to the regions and with that we believe we can have growth with equity.

Agus Martowardojo Brian Caplen

Indonesia's finance minister, Agus Martowardojo, receives The Banker's award for Finance Minister of the Year, global and Asia-Pacific, from editor Brian Caplen

Q: Do you plan to reduce government debt as a percentage of GDP still further?

A: By 2014 we would like to achieve a debt-to-GDP ratio of 22% and to decrease the budget deficit so that we are close to a balanced budget. We will continue to decrease our fiscal deficit, which is planned to be 1.5% in 2012. Our main strategy for maintaining a healthy fiscal position is to optimise revenues from taxes and natural resources and to ensure that government spending is of a high quality.

The tax take [from] GDP is about 11% and we plan to increase it to 12.7% in 2012 and this does not include revenue from natural resources and from regional governments. We would like to continue to improve this ratio so that we reach 16% to 18% in 2014. In Indonesia one of the challenges is that there is a large informal economy so we need to educate the people so they are aware of and comply with all the tax regulations.

Q: Indonesia is introducing a new regulatory structure for the financial sector known as the OJK? How will this work?

A: We have been planning to centralise the regulation of banks, non-banks and capital markets and to establish a new financial services authority [OJK] since the Asian financial crisis hit us back in 1997-98. We now have a special law to create this structure.

We have learned lessons from the advanced countries and have put this all into effect when we finalised the OJK law. Under this system, the Ministry of Finance has to release the capital markets and non-bank financial institutions supervision, and the central bank has to release the banking supervision to this project.

When we have formed the OJK it will be managed by nine commissioners with two of the nine representing the Ministry of Finance and the central bank. The other seven will be appointed as independents so they will not be part of the government or the central bank.

Q: But doesn’t the central bank need information on the health of the financial system to carry out monetary policy?

A: We will allow the central bank from time to time to audit systemic financial institutions by way of the OJK, as to make monetary decisions [it will] need to understand the systemic risk. Obviously if it now has to depend on the OJK, it will need more information and so in the OJK law it is allowed to audit the systemic institutions, but [only] for making central bank decisions on monetary policy, not for issuing opinions on the health of the financial institutions. Financial health issues will be supervised by the OJK. For the OJK’s part, if it surveys the capital market, the commercial banks or non-bank financial institutions, it will share the result regarding the condition of the financial institutions with the central bank and also the Indonesia Deposit Insurance Corporation (LPS)

In our OJK law we have also established a financial stability forum led by the Ministry of Finance and representing the Ministry of Finance, the central bank, the OJK and the LPS. If there is a challenging financial situation it will be reviewed in the forum and, if it is a systemic issue, we will make a decision about whether to save an institution and if so then the central bank will support it. But if we decide to liquidate it then the LPS will do the payments for the third-party funds.

Q: When will the OJK be functional?

In Indonesia one of the challenges is that there is a large informal economy so we need to educate the people so they are aware of and comply with all the tax regulations

Agus Martowardojo

A: We are now in the transitional period. We will have the nine commissioners appointed by July 21. By the end of 2012 we will move the capital markets supervision to the OJK and by the end of 2013 we will move banking supervision to the OJK. By 2014 we will have the full operation up and running.

Q: How is Indonesia’s banking sector faring?

A: It is very healthy and that is because we learned from the 1997-98 crisis. Currently in Indonesia we have 130 banks and the banking system has a capital adequacy ratio of 17%, non-performing loans on a gross basis are below 3% and we have credit growth of 25% and good profitability in terms of return on investment and equity. In general we have a healthy banking industry. In Indonesia we do not allow banks to go into derivatives or high-risk transactions and that helped protect the banking industry during the 2008-09 crisis.

Q: Indonesia’s sovereign debt is now investment grade. How do you feel about that?

A: We have waited for this for the past 14 years and with that credit rating improvement already our sovereign bond pricing has gone down by 1% – from 6% to 5% for rupiah issues and from 4% to 3% for dollars. We are now one of six countries in the G-20 enjoying positive economic and financial conditions.

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