Since Suharto in power until the mid-year 1997, the development of the Indonesian economy as a whole looks impressive. In general, macroeconomic indicators show growth rates and current conditions are very good. There was no sign of a worry for many people, especially for the government and monetary authorities. Macroeconomic indicators are intended include: economic growth, inflation rate, exchange rate, foreign exchange reserves and balance of payments.
The situation then changed dramatically in just one year, starting mid-year 1997 to 1998. The development of macroeconomic indicators turn, became very bad. The rupiah fell very sharply, economic growth becomes negative, very high inflation, balance of payments deficit is large, and depleted reserves running low. All the new party became aware that there was a crisis, financial crisis and the economic crisis. The crisis meets almost all criteria, or characteristics of a crisis which is known in economic discourse. These events can be regarded as the exchange rate crisis, banking crisis, financial crisis or economic crisis. In addition to a very broad scope that hit almost all sectors of the economy, events and conditions, take place in a prolonged period.
After a decade passed, a series of dramatic events that still retain a theoretical issue. Still there are differences of views on the main causes of the crisis, especially with regard to the weight of each factor identified. For example, if external shocks, particularly the effects of contagion from the regional crisis, which became the most important causative factor. Or, another question which is more internal, the fragility of economic fundamentals. If both are put forward together, then the debate leading to how the proportion of each. Another controversy is about crisis management efforts are not appropriate. Starting from about the delays, errors of action, up to cost too much.
General agreement only to the things that have been self-evident, namely the sequence and the sequence of events known as crises. In fact, the sequence of events does not necessarily mean causality or causal relationship. Meanwhile, following the dynamics take place in one after another even followed or occurred simultaneously. Depreciation of the rupiah against the U.S. dollar is very sharp, start a financial crisis that occurred soon after. Interest rates are high and increasing rate of inflation out of control, coupled with balance of payments deficit is growing. Monetary crisis followed by the banking crisis, just in a matter of months, because the banking industry could not bear the monetary and financial conditions that are so heavy. Simultaneously, and in a very short time, the crisis makes a great hit the real sector, thus creating the overall economic crisis. The economic crisis led to political crisis, which led to the fall of the Suharto regime.
Many experts argue that the crisis can not be separated from the unpreparedness of Indonesia’s financial system infrastructure in anticipation of the pressures that come from external or international markets. Among others indicated by the delay in reaction and proaksi various parties, including the monetary authorities. Later, acknowledged that there has been no resolution of the crisis procedure that is standard and acceptable to all parties. Some of the measures taken by the government, primarily by the monetary authorities at that time, some even considered an emergency.
For example, the tightening of liquidity as the government carried out measures to overcome the rupiah depreciation, instead giving further blow to the banking and real sectors. Closure of 16 banks on November 1, 1997, which is intended to restore confidence in the banks, which in turn resulted in the situation. Public confidence to the national banks became lower. Fears of the bank’s business license revocation, even though there is no deposit insurance program, causing public panic over the security of funds in the bank. Communities encouraged to make withdrawals from the bank deposits on a large scale, at least removing deposits from one bank to another is considered to be more convincing.
As a result, the liquidity position of banks have a very heavy pressure. Another pressure is given by the phenomenon of inflation. The issues of scarcity of supply of goods of basic commodities, causing the public expectations of higher inflation, accompanied by increased activities of speculation in the foreign exchange market. Can be understood if some banks that previously considered healthy and is a supplier of funds, hereinafter also affected, thus changing the position of a borrower of funds in the interbank money market.
Finally, almost all national banks facing liquidity problems in large numbers. Most banks had violated the provisions of the Minimum Necessary Giro (GWM) and having a negative balance on the account in Bank Indonesia gironya. Interbank loan funds, as a means of overcoming liquidity problems banks in the short term, offering a very high rate (up to 50%). Source of such funds was more difficult to obtain. Liquidity problems still continuing with the various pressures aftershocks. Increased exposure of rupiah of debt in the U.S. dollar against the bank, coupled with the increasing problem loans or nonperforming loan (NPL) due to the number of debtors who fail to pay (default). General conditions are fulfilled then the number of banks became insolvent (assets worth less than the value pasivanya).
Bank Indonesia (BI) which was originally, according to standard procedures, to help address the banking liquidity problems, to be overwhelmed. Because the amount of aid and assistance procedures became very unusual, BI requested government approval, even consulting with the Parliament, for the next steps. In this context, the technical term of Bank Indonesia liquidity assistance (BLBI). The amount of BLBI being poured to the banks, only in a few months, reaching nearly USD 150 trillion. This number is very large, given in 1997, the Gross Domestic Product (GDP) of Indonesia was Rp 627.7 trillion, and the acceptance of only Rp 112.3 trillion. Apparently, that big BLBI coupled with other steps, including the liquidation of some banks, still not able to withstand the crisis continues. The economic crisis eventually forced major changes in social and political fields, including the fall of the Suharto government.
Government post-Soeharto, Habibie era especially, run the program of macroeconomic stabilization through monetary and fiscal policies. Initial program is focused to address the most urgent problems in times of crisis, namely: reducing inflation pressures and exchange rate fluctuations. They attempt to become stable monetary conditions with signs of normal interest rates and the exchange rate is realistic, so you can help the revival of the business world. Simultaneously, the government made several steps in the field of fiscal consolidation through enhanced budgetary discipline by making savings on a variety of government spending. The government was also forced to make scheduling and adjustment to certain development projects.
In all these measures, efforts to restructure the banking restructuring and became a very important priority. Spending huge costs for it is also considered normal. The main consideration, monetary stability, a prerequisite for economic recovery, and that requires financial system stability. Stability of the financial system requires reform the banking sector, including the BI, the central bank.
A. Financial System Stability
The term usually refers to monetary stability in price stability in the form of currency rate stability. While understanding the financial stability leads to the stability of the financial institutions themselves, as well as market stability incorporated in the financial system. Can logically be understood that monetary stability can only be achieved with a stable financial system.
The stability of financial institutions especially the financial institutions significantly affect the overall financial system. In this context, institutional Bank Indonesia and national banks are the most important institution. Meanwhile, market stability meaning includes both capital markets and financial markets. The market is stable if it can be said market players were still believed to make transactions at price levels that are a reflection of economic fundamentals, as well as fluctuations or volatility of market prices are not extreme in the short term.
As part of the past learning and readiness to face or prevent the possible crisis, Bank Indonesia (BI) socialize term Financial System Stability (SSK) intensively. Nevertheless, the Bank acknowledged that SSK actually do not have standard definitions and accepted internationally. Various SSK understanding that there is more emphasis on understanding condition called unstable, ie at the time was dangerous and impede economic activity. Instability of the financial system can be triggered by various causes and turmoil. Often a combination of market failures, structural factors, and behavioral factors. The failure of the market itself can be sourced from external (international) and internal (domestic).
There are several definitions used SSK put forward by the BI. First, SSK is a financial system able to allocate financial resources and absorb the shock (shock) that occurs so as to prevent the disruption of activities of the real sector and financial system. Second, the SSK is a strong financial system and are resistant to various economic problems that remain capable of doing intermediary function, execute payments and a good spread of risk. Third, SSK is a condition in which the economic mechanism of pricing, allocation of funds and risk management function and sustained economic growth.
B. Bank Indonesia is getting stronger
The economic crisis put the Bank Indonesia (BI) as a central institution. Part of the spotlight is on the role of BI as an actor cause, or at least exacerbating the crisis. Some others, see BI as a victim of the crisis. BI also then expected to act as a major player in the recovery effort and rebuilding the economy of Indonesia.
Role in recovery efforts charged to BI is to maintain monetary stability, according to his capacity as monetary authorities, and was responsible for financial system stability, handling tasks related to banking and payment systems. This role should have been played since the beginning or before the crisis occurs. However, the Bank argued on the motion constraints due to the authoritarian regime, or by applicable law.
Finally, some roles are getting a new legitimacy according to the legislation, which leads to some important changes. One of the fundamental is about the independence of the BI. Decision makers in the post-Soeharto era turned out to vote keindependenan set of BI, the central bank. There was a belief that the level of economic fluctuations and variants will be better with that independence. As a supporting argument, put forward an empirical study to see the correlation between the independence of the Central Bank of the economic performance of a country. Shown that there is an inverse relationship between the independence of the average level and variance of inflation. Although these studies show is more correlation is not causality between independence with inflation performance.
In principle, the independence of the Central Bank can be seen on some things. First, the purpose and what functions should be performed by the Central Bank, whether a single goal such as the stability of the rupiah, or something else such as creating employment opportunities and equitable development. Second, the mechanisms and instruments and the freedom to set monetary targets. Are there other possibilities that could set a monetary target. Third, the appointment process and requirements change management ranks, especially the Governor of Central Bank as the most important figures, including the assignment of time each line of the leadership that is not the same, thus ensuring continuity (rotation). Fourth, the rules regarding missing or obligation to deposit the surplus back to the Central Bank, and there is no obligation to guarantee the bonds (debt) issued government.
Law No. 23/1999 it has given the Bank Indonesia (BI) a very strong guarantee to all aspects of the above. Independency is reflected among others, from the determination of only one goal of BI, namely to achieve and maintain rupiah stability. BI has the freedom to set goals and monetary instruments to be used in achieving the goal.
Independency can also be seen in the BI leadership selection process through the nomination process of the government (the President) to the Governor and Senior Deputy to the approval of Parliament, and the nomination by a Governor appointed by the President with the approval of Parliament for the Deputy Governor. Change of leadership also requires the existence of continuity through limiting the maximum number of deputy governors who can replace the 2 persons. There is also a protection against the BI leadership position (not terminated) unless that person resign, convicted of a criminal act, or remain absent.
The position of the independent BI is not without criticism. Some questioned whether the view of independence, the central bank had stood outside the government. In fact, there was a view that considers the BI has become a state within the state. This assumption appears partly because the Bank can make rules that bind all Indonesian citizens, and has settings (including source) own finances.
Many of those who highlight the fairness of the role and functions of BI compared with other institutions, especially with the government. Burden BI only one, namely to maintain the stability of the rupiah. While the government must carry out other functions which are many and severe, such as: achieving economic growth, creation of employment opportunities, create justice and equality, and poverty reduction. Sense of injustice in the distribution of economic management functions reinforced by the condition after the crisis, in which almost the entire burden of the cost of damage is very expensive banking up to Rp 1,000 trillion (including interest expense of bonds) should be borne by the government through the state budget. In fact, banking error itself is largely the responsibility of the BI. Certainly, the Bank joined the management made a mistake in banking, although it can be argued about the level of guilt.
Another thing that often triggers a sense of dislike for BI is more impression than the BI sejahteranya persoanalia other civil servants. Among others who used a good example: the BI office complex condition that is very expensive, salaries are relatively high, and facilities to employees and line management of excessive BI than any other government officers.
There are other issues more complicated the government’s relationship with the BI. Theoretically very possible that the difference between “interests” between the government and BI. In particular escalation, this issue empirically started happening, and potentially grow in the years ahead. Maintaining the stability of the rupiah as the goal of BI is often need to be done with monetary tightening. This, at least in the short term, may conflict with the goal of government is the creation of employment opportunities and economic growth.
More detailed discussion of the Bank of Indonesia is given in chapter 2. There will dijelasikan on principal matters contained in the Act-BI No. 23/1999 and amendments in the Law-BI No. 3 / 2004. Also presented briefly, some controversial issues such as: about independence, about BLBI and recapitalization.
C. Restructuring and banking reform
In early 1998, when the banking crisis was enough, in fact the government has taken several policies to immediately restore confidence in banking. The government guarantees the payment obligations of commercial banks to depositors and creditors at home and abroad (blanket Guaranty), and formed the National Bank Restructuring Agency (IBRA) to perform steps to restructure banks with problems. However, both these government policies were not sufficient. Precisely the banking crisis spread and lead to collapse of the national banking system.
Liquidity difficulties caused violations Giro Wajib Minimum (GWM) by almost all banks. Negative balance in the checking account at the Bank even been experienced by most banks. In fact, according to legislation, the BI and the government can impose sanctions to stop clearing them. However, government policy is to rescue, according to agreement with the IMF. The main reason, policies to close the bank is not a realistic option in a crisis that has spread to many aspects of (multidimensional). It is believed that if many banks closed in mass, then the situation could become worse.
The situation faced by the banks at that time regarded as an illiquid BI (liquidity problems), rather than insolvent (assets less than liabilities). If not provided assistance to the banks, there will be a rush (the withdrawal of funds on a large scale in a short time). In the rush conditions, the healthy banks would not be able to overcome liquidity problems without government assistance.
Another consideration, from the government and BI, is a matter of real sector and economic relations with foreign countries. In the real sector, it would stop clearing cut off most of the payment system so that commercial traffic would be stopped. Meanwhile, in the context of foreign trade, the government is worried that there distrust banks in foreign countries to banks in the country, because the trust did seemed to diminish. There is the assumption that imported goods could be threatened. Automatically interference occurs also with exports, because most products still require imports of raw materials is high, and depends on foreign payment mechanisms.
Finally, the government and BI do not close the option for the bank, although the move was a big cost. Imagined they were to the contrary, the country’s economic impossibility without a bank. Therefore, in the evaluation up to this time, the move quite right claimed by the government and BI. Often added to the argument that such a recovery phase current can not be achieved if the period before the crisis, the collapse of the banking system left, without saving action.
In such a context is, the distribution policy of Bank Indonesia liquidity assistance (BLBI) run. Should be added that from the juridical, BLBI distribution is not really a sudden policy created. The policy has been done long before the monetary crisis and have the legal basis of Law No. 1968 about 13 years and the Central Bank Law No. 7 years on Banking, 1992, as amended by Law No. 10 in 1998. Article 32 paragraph (3) of Law No. 13 in 1998 mentions “the Bank may also provide liquidity loans to banks to overcome liquidity problems in emergencies” while Article 37 paragraph (2) letter b Law Number. 7 in 1992 asserted “In the case of a bank experiencing liquidity problems that jeopardize the continuity of their business, the Bank may take other actions in accordance with the laws and regulations in force.”
BLBI term itself was only known from the date of January 15, 1998 as affirmed in the Government Letter of Intent (LoI) to the International Monetary Fund (IMF). In a letter signed by the Minister Ekkuin, the Government stated the importance of liquidity support (liquidity support) of BI to the banking system. Seen from this side, BLBI a government program (with BI) is known and recommended by the IMF. In fact, the policy became one of the terms (conditionality) is defined by the IMF for aid to Indonesia. In broad terms, the liquidity support is also included subordinated loans, emergency loans and liquidity discount facilities I and II. However, BLBI given at that time included only the liquidity assistance to banks to cover liquidity shortages, especially in the form: debit balances, SBPU facilities and special discounts, and the bailout in the context of foreign payment obligations.
With similar considerations, the post-Suharto government doing about the same thing, namely its policy of recapitalization. Merekapitalisasi government banks that meet the requirements that have an average capital adequacy ratio or the Capital Adequacy Ratio (CAR) below -25%. The move was expected to increase trust in the government, accelerating economic recovery, and restore the banking intermediary function.
There are important differences in terms of “bargaining power” (bargaining) BI, recapitalization policy when taken with the distribution BLBI previous run. Today, BI has a new status and position based on Law No. 23/99. Position BI becomes more independent, so that in operasionalisasinya, the government must follow, too many considerations and decisions of the BI. According to some observers, the BI tends even more strongly based. Whereas in BLBI policy, the government’s position was the more dominant.
Meanwhile, recapitalization policy is actually a part of a broader program, a program of banking sector restructuring and improvement programs resilience of the banking industry. Programs to restructure the banking institutions include: government guarantees for commercial banks and rural banks (BPR), recapitalization, restructuring and recovery of banking credit banking intermediation function. Meanwhile, efforts to improve the resilience of the banking system focused on the development of banking infrastructure, improvement of banking management (good governance) and the improvement of system of regulation and bank supervision.
Completion of banking regulations aimed to improve banking practices are based on the precautionary principle in accordance with international standards. Improvements include fit and proper test, exit policy, Lending Limit (LLL), restructuring of loans, the assessment of productive assets, institutional banks, short-term funding, portfolio trading bonds and Islamic banks. Conditions exit policy is a policy improvement in handling problem banks more transparent by setting criteria for banks, which were categorized in a special oversight and corrective actions that must be completed within a certain period and the criteria to be transferred into the bank in Bank Restructuring under the supervision of IBRA.
In the framework of strengthening bank supervision, Bank Indonesia has been perfecting the supervision system which was originally focused on the compliance-based supervision extended to a risk-based supervision (risk-based supervision) and oriented to the front, which refers to international standards. In this regard, Bank Indonesia has placed regulatory power in order Supervisory On-site Presence in several banks. Meanwhile, to further enhance the capability of handling bank supervisors as well as specialized supervisory duties (Special Surveillance) has conducted training and preparation for the implementation of consolidated supervision.
Until the end of 2000, the basic policy that was taken on the result of advances in the performance of the national banking system. Bank capital in 1999 was negative has improved to reach Rp 53.5 trillion in December 2000, thus increasing the average bank’s CAR. Meanwhile, the collection of funds that banks have started to show an increase followed by an increase in credit distribution. At the same time, the ratio of non performing loans or NPLs improved to reach 18.8% in gross or a net 5.8%, which is caused by the transfer of non performing loans to IBRA, the restructuring of credit and new credit. Net interest margin (NIM) is negative in the year 1999 has improved to a positive amount of Rp 22.8 trillion in line with the positive spread is also supported by relatively stable interest rate funds. Car repairs, increasing the collection of funds and credit, repair NPL, and NIM is positive then continued in subsequent years.
However, the biggest challenge so far is not the restoration of the banking intermediary function. In the early years of the reform era, this is partly due to the still high risk factors and uncertainties, and credit restructuring process has not run completely. With limited credit, excess liquidity banks experienced more invested in the SBI, inter-bank assets and marketable securities other. Whereas in the past three years, the situation is getting better, but to be scrutinized whether enough effort optimal banking. Still also need to be criticized about the sustainability of performance improvement in the future of banking.
D. Indonesian Banking Architecture
On January 9, 2004, press release of Bank Indonesia officially announced the implementation of Indonesian Banking Architecture (API). Previously, for about a year since the BI launch the plan, discussion of the API for quite intensively in the banking industry environment. After receiving responses from various parties, BI finish drafting blueprints for the API in 2003. BI decided to implement in stages, starting in 2004 for a period of five to ten years later.
BI uses the term because it is considered banking architecture provides nuances are more comprehensive and broad about the banking structure is cooled until the time will come. There are many other terms that have a similar understanding with the banking architecture, and is often used in the analysis by the experts or observers banking. Term include: blueprint banking, banking landscape, banks stratification, and mapping banking.
BI said that the API is designed as a policy recommendation (policy recommendation) for the national banking industry in the face of all the changes that occur in the future, as well as the direction of policy (policy direction) that must be taken by the bank within a period long enough. In other words, the API is a blueprint of the order of the banking industry forward. The contents of the documents concerning almost all aspects related to banking, such as: institutional, structure, supervision, regulation and other supporting institutions.
With the API, BI expects the national banking industry, together with other stakeholders to know how the shape and form of Indonesian banking within the next ten years (from 2004). Described aspects of the API includes the regulation, supervision, institutional structures and some other important aspects. Knowledge of the API will make them all become much easier to do planning for their needs.
Need to be recognized that in principle the implementation of the API in Indonesia is very influenced by the international discourse on the topic. Discourse referred to is about the implementation of the global financial architecture that was initiated by the Bank for International Settlements (BIS). BIS is an international organization that initiates and facilitates cooperation between central banks of countries plus several international financial organizations. Discourse of the global financial architecture itself was developed since 1998. There is a strong desire for global financial stability can be maintained on an ongoing basis, which among other valuable lessons triggered by a crisis in the Southeast Asian region in the past. Banking crisis in Southeast Asia is also proved troublesome countries and lending institutions (creditors) at the time. Therefore, BIS will publish a vigorous serious attention to the importance of financial stability through global financial architecture.
Nevertheless, the need for banking for Indonesia’s banking landscape is still pros and cons can be debated by all parties. Especially by banks that had to conform to the provisions of most of legally binding (force). One of the main arguments for the lack of agreement is related to restrictions on “market forces” in determining the structure of the banking system is considered ideal and efficient for the economy.
About three years later since the announcement of the API as a blueprint of national banks, BI socialize Basel II implementation plans. Basel II is a guide or best practices, which include settings for capital banks. If the API is more emphasis on building national banks to be realized, then Basel II is one part of the regulatory framework (particularly on capital) in the development process.
Importance of setting a bank’s capital for easy understandable given the Bank is a company that runs the intermediary function of the funds received from customers. If a bank fails, the impact will be widespread influence customers and the institutions that holds funds or invested capital in the bank. If the bank’s operating scale large enough, would potentially create a national follow-up impact (domestic), can even influence the international market. In other words, rules of bank capital that serves as a buffer against the possibility of losses, so that customers trust the banking activities can be maintained.
As the API, the discourse of Basel II is also promoted by the BIS. Urgency about the capital for banks, BIS has made a special committee to constantly monitor and analyze developments in the world continuously. Committee known as the Basel Committee on Banking Supervision (BCBS) or the Basel Committee, which include formulating and disseminating a variety of guidelines or best practices banks, especially those considered to be executed by the central bank.
API and Basel II is generally recognized as a good concept by many parties, including banks. They can accept the concept of purpose in order to manifest a strong building, and the banking mechanism which guarantees financial stability but still provides an opportunity to grow for each bank. Who then questioned the two concepts are detailed rules, and the stages of implementation time.
Further details will be developed in Chapter V, which also includes a brief review of the implementation plan Bassel II in Indonesia. We also will look critically, some logical impact of the implementation of the API and Bassel II. In the case of the API is about the increasing foreign ownership in banks in Indonesia. In the case Bassel II is a matter of prudence (Prudent) that can inhibit excessive banking intermediation function, especially for distribution to small and micro businesses.
E. Banking Statistics: Some facts currently
How is banking after crisis, and then assisted in the restructuring by the government and Bank Indonesia? Can mostly be observed and assessed from various figures in the banking statistics. The figures on the number of banks and perkantorannya; share ownership; assets and capital; managed funds collected and disbursed credit; kredir quality, especially with problems (NPL); about profitability, the issue of efficiency and so on. Reviewed the following main facts alone.
Number of Banks office network, especially since the deregulation of banks listed in the October 1988 Package (Pakto 88) rapid development. Pakto post 88, the number of commercial banks continued to increase, dominated by the establishment of the National Private Banks (BUSN) Non-Foreign Exchange and Foreign Exchange BUSN, from 111 banks in the amount of office until 1957 the office reached its peak in late 1996, the bank’s 239 offices in 7314. However, after the banking crisis in 1997 the number of commercial banks continued to decline due to the liquidation by the Government, mergers, and self-Liquidation.
There are 130 banks according to data from the BI at the end of December 2007. However, precisely the number of offices continues to increase into 9697 the office, indicating a better ability to serve customers. Number of Banks Persero of 5 banks with 2765 offices; BUSN as much as 35 foreign exchange banks with 4711 offices; BUSN of 36 Non-bank Foreign Exchange with 778 offices; Bank Pembangunan Daerah (BPD) of 26 banks with 1205 offices; Bank Mixture of 17 banks with 96 offices ; and as many as 11 foreign banks with 142 banking offices. Noted that the office of Foreign Banks and Bank Mixture of the most rapid growth.
Public confidence in the banking system successfully restored, if seen from the growth of assets and Third Party Fund (DPK), which successfully collected. Public Bank’s assets grew rapidly in recent years. The total number of assets, during the years 2002 to 2007, growth averaged more than 10% every year, so that the total assets as of December 2007 amounted to Rp1.986, 5 trillion. DPK is successfully collected also continues to increase, although the rate of growth began to slow down, deposits at commercial banks as of December 31, 2007 has reached Rp1.510, 8 trillion.
On the other hand, public funds collected by the banks that had channeled back in the form of loans is also likely to increase for several years. Figures Loan to Deposit Ratio (LDR), which compares the amount of loans to deposits collected and expressed in percentage, had improved in recent years. However, during the year 2006, LDR again deteriorated, and gradually improved again in 2007. Although improved, the number LDR still fluctuate in the range of 65%, which means the banking sector intermediation function of a state that has not been optimal. Still very large funds that should be a “fresh blood” for the real sector, if successfully channeled to productive activities. In fact, the BI rate securities interest rate Bank Indonesia (SBI), which tend to be followed by bank lending rate, continued to decline.
Credit risk pressures faced by banks improved in 2007, after a year had increased during 2005 and 2006. A few years earlier, the credit risk gradually decreases significantly. This is indicated by the rise and fall of the ratio of non performing loans (NPL).
Banking profitability is relatively stagnant in the last three years, only slightly improved, after a few years earlier continued to increase. The main cause is the increased operational costs, in addition to increased efficiency that has begun to be more severe. This is reflected in the figures Return on Assets (ROA) and Operating Expenses to Operating Income (BOPO). ROA ratio is calculated from the profits of which go compared to total assets. While BOPO Total expenses divided by total operating income.
ROA of 0.9% (in 2000) improved to reach 3.5% (in 2004), then decreased to 2.56% (in 2005), and a 2.64% (2006), and 2.78% ( 2007). While BOPO slightly declined in 2006 and 2007, after it was increased in the year 2005. About ROA and BOPO development will be discussed in more detail in chapter 7.
Meanwhile, capital adequacy ratio or the Capital Adequacy Ratio (CAR) of banks are also relatively stable over the years. After a very high increase in 2001, and high enough in 2002, declined slightly in 2003, then in subsequent years is relatively stable in numbers safe. CAR as of November 2007 was 20.3%. Addition was quite high, most of it is the core capital (Tier 1). Thus, in terms of capital, banking Indonesia looks quite solvable at risk. Such conditions, in theory, actually support for greater credit expansion.
Description and more complete data on the development of banking statistics are given in chapter 7 and chapter 8. In the second chapter, the interpretation and the things that are “behind the numbers” will also be noted. Among them is the matter of profitability, efficiency and credit problems. We also need to discuss examples of which are micro, on the condition of the bank group or individual banks.
F. About this Book
Description of the book is largely descriptive, explaining that details the problems could be more understandable, especially for readers unfamiliar with the ins and outs of banking. Description is given with respect to things that are rule or regulation. Sources of data and definitions that are the main laws that apply, and various documents and publications of Bank Indonesia. If the other is not, then the various definitions, rules and data in this book comes from the BI. Thus, some are very technical description, because it’s meant to be. For readers wanting a more general understanding of the applicable banking regulations, such sections can be skipped.
Discussion of the terms or statistics are analytical, but with a simple explanation. Certain banking terms presented in such a way that is more easily understood by readers who have not quite familiar with these terms. While statistics on a more modest show, but rather discussed in depth in the verbal description. There is, indeed, some statistical data showing more complex, intended for readers who want more in-depth knowledge. Part of these statistics can be spent only for those readers who need more general understanding.
In each chapter actually been given a critical discussion, with different portions according to the topic. However, a comprehensive critical review of Indonesia’s banking sector is given in Chapter VIII. Repeated and deepen some things that are discussed in each chapter. Critical reviews can be referred pencermatan things behind the statistics and read the combination of numbers. Can also be against the policy, the argument numbers and theoretical reasoning for the conditions that chance to happen.
Critical understanding of chapter VIII expanded again with other views expressed are especially different from the government and monetary authorities. Be worthwhile to look at other arguments, including a radically different, in looking at today’s banking problems. Thus, banking policies in the future should consider many things, not solely from the perspective of banks. Moreover, if only for the sake of a group of people in “the bank’s business”.
This book is basically aimed at the Indonesian economic policy makers, particularly those related to banking. More generally, as an input in the policy making process. This means includes anyone who has a concern. Every Indonesian citizen has the right to participate in determining the direction of the management of this country. Especially for those who can directly affect the means, the executive and legislative lingukungan, in the center and the regions. Banking problems can not simply handed over entirely to the ranks of decision makers at the Bank Indonesia. At least, there is good control process with transparency all the basic arguments of the main policies adopted BI.
This book has a simple message, the bank management should be managed not for the benefit of the loan sharks (rent seekers), which has too many receive subsidies. But managed for the benefit of the Indonesian nation, which is directed to increase the maximum benefit of the people.
Posted by AWALIL RIZKY at 19:57 Links to this post
People’s Government Debt strangle
People’s Government Debt strangle
(Chapter I of my book and Nasyith Majidi)
Book title: People’s Government Debt strangle
Author: Awalil Rizky and Nasyith Majidi
Publisher: E Publishing, Jakarta, 2008
Government of Indonesia to pay debt of Rp 118 trillion, and interest debts amounting to Rp 79.5 trillion in 2007. Meanwhile, the Indonesian government debt is still unpaid as of December 31, 2007 was approximately Rp 1,400 trillion, equivalent to USD 148.25 billion. About 40 percent classified as foreign debt, and another 60 percent called the domestic debt.
Is the total debt payments worth Rp 197.5 trillion was considered large? Beratkah for the state budget too? Would then be bad for the national economy as a whole? Does position (stock) of government debt will be reduced or precisely the opposite? If you tend to grow, what is planned to never “solved”?
Some parties will directly answer these questions with a very critical tone. The answer is more or less as follows: payment of government debt burden is too large and burdensome state budget; conditions have been extremely narrow fiscal space, so that “direct role” of government to stimulate the economy become smaller; government became increasingly unable to provide adequate public services for people most; in the meantime, the stock of government debt is almost impossible to reduce the debt management policy is currently executed.
The government itself does have an answer or explanation that is clearly different from the view of the critical parties. The government, among others brought up the importance of payment of the debt burden for the state of financial management credibility (which in this case is considered to reflect the national economy) in the eyes of the world, or more appropriately called the international market. The burden is heavy indeed recognized by the government, it can still be managed carefully, with fiscal sustainability as a key concept. One of his reasoning, increasing the debt burden will be offset by an increase in government revenue, the expected faster. If you could be realized, the nominal payment of the debt burden is rising, but the proportion of government revenue will decline. A similar argument (but slightly more theoretical) are given in the link between the stock of government debt to national income. In ordinary language, the increased spending would not be a problem if incomes rise faster (viewed from the side of the government alone or the national economy as a whole).
There are various other explanations from the government to strengthen the view that the debt has not become a big problem now and in the future. Most of the actual arguments are “indirect” and filled with assumptions. Other than that it has been mentioned above, often dikemukan that the government (state) precisely will be more effective if it plays an indirect role in the economy. As if there will be a blessing in Disguise from the government budget difficulties, which would even make the economy more efficient and grow faster. Governments in the past, with big spending and too much a role in economic dynamics, assessed has distorted the economy.
Explanation government often justified by economists mainstreams, because it was made by some of those who work for the government. The economists from major universities (through study or research institutions) only give “input” to the government to regulate the load current to optimal. It means that the load is evenly distributed and measurable increases from year to year, and with the minimum cost possible. One of the cool technical term borrowing is optimal, which is usually accompanied by recommendations to the government’s debt reprofiling moderate load.
General public seems to be easier to understand the arguments of the parties who are critical of this problem. Therefore, the government debt can not be just a matter of economics, but politics has always been a major theme. Issue of government debt and its burden can be said to be latent, often appeared side by side with most major problem in this country. For example, when fuel prices will be raised, some of the direct “remembered” with debt problems. Similarly, the discussion of the budget for the Poverty Program, which is less widely known even if some large enough to be financed by foreign debt.
A. Various Perspectives on Government Debt
In everyday conversation often heard the expression that the debt was a matter of course, who later became the problem is how to pay for it. The same applies to the government as a country is indebted, where the problem will be more felt and the attention of all parties, when the obligation to pay the load up on the budget heading. The problem becomes more serious, when the mortgage payments (principal repayment) of debt and interest costs reach a level that exceeds the relevant state budget surplus. In simple logic, the burden of debt should be paid from the budget surplus, the excess revenue was used for prior purchases.
If that happens, spending more than revenues, then the amount owed will never be diminished. Stock of debt could not be repaid in terms of a zero value. What can be done is to dig a hole lid. Debtor countries pay their debts to one lender with the new debt from the other party. Often too, they pay the debt to the creditor equal to the new debt back, with the new requirements also. This kind of phenomenon is common in Indonesian government finances in recent decades.
The condition of government debt is planned even more or less remained so in the future. The official concept referred to as fiscal sustainability, which means the debt transaction only needs to be maintained so that the Indonesian government is still able to pay its expenditures, even minimalist. Sometimes expressed a desire for a little lower debt position (especially foreign debt), or at least hold its speed to stagnate. Such commitment is in fact only work for one or two particular years, then increased again significant.
Theoretically, we can compare the management of government debt with a debt management business. In the case of corporate debt, the amount and the growing debt burden is justified if supported by economic calculations of other variables. Among them are: increased profits, asset growth, the optimal liquidity, asset quality is good, and so on. In fact, the debt portfolio is often necessary in a healthy growing business, because non-technical considerations such as the credibility of the company. For example, a company that went public and has often issued debt securities (bonds) but is able to meet its obligations properly, it will have a double advantage. Both of the ease of business development funding sources, as well as the trust of other parties (such as suppliers and customers).
Apparently, the government and most economists see the government’s debt problem with the perspective that puts the same state business. Government debt is viewed in the context of the overall state economy, but the outlook is much influenced by the science of financial management course. Stock and debt burden compared with variables such as: the level of Gross Domestic Product and its growth rate, condition of balance of international payments and foreign exchange reserves, the development of government revenues and expenditures, and so on.
Sometimes there are explanations that adds another variable such as unemployment, inflation, and the condition of low-income people or poor. His vision led to the need for the government still owed. In order to still be in debt, then the old debt needs to be managed (to pay) according to the deal. If not done so, then all variables were said to be even worse.
Of course, such a perspective is opposed by the very critical that suggested “solution” is more radical on the remaining debt (outstanding). Some others who were more moderate, but also do not agree with the way the government debt management, encourage efforts to negotiate a more serious threat to the creditors.
In general, from the viewpoint of economic theory, government debt does not mean good or bad. Economic theory, as usual, just explain in positivistic on government debt. For example, in a macro review, discussed the impact of government debt to the allocation of resources of the national economy. While regular reviews to focus on microeconomic financial capacity of government in addressing the debt burden.
In fact, government debt is not only an economic problem (let alone finance it), but socio-political dimension thick. This political dimension becomes increasingly important in countries with debt mostly sourced from overseas. Consideration will owe and management requirements often touched the psychological and ideological aspects.
Regardless of the extent of the problem dimensions, the problem has started since taken the decision to get into debt in the economic calculations. Economically rational consideration what is the reason for debt, as well as technical calculations of how to determine the magnitude of each type of debt is taken. For example, whether to increase revenues in the future, which means that is productive. Or to meet emergency needs that can not be postponed for the survival of the state or some people. What is the reason for selection of several karakteritik certain debts, such as: matter what type of currency, the lender, length of repayment, interest rates, and so forth.
The next problem is related to how the debt funding is managed. Having obtained the funds, whether the use and the way management is planned in accordance with the previous considerations. Problem of consistency and discipline according to this plan is important because the disbursement of funds generally take a few steps and the gap is long enough. The urgency is to evaluate the whole process of the debt itself, including its planning.
Thus, the issue of government debt should be examined from the planning to the management. It could be, his decision was wrong from the start because of the wrong considerations in the economic calculation of debt planning. Which most suspects are in bad debt management, although planning is acceptable. Planning the government’s own debt at least had reason to debt load and ability to pay calculation.
B. Reasons for Government Debt
The government in any country today borrowing transactions or debt. The main cause is the government spending tends to increase. Increased expenditure can not always be offset by revenues, so the budget deficit to be something unusual happened. There are several policy options to address the budget deficit, such as: printing money, sell assets to the private sector (privatization) and debt. Thus, financing the deficit through debt is one reasonable option. The condition is experienced by most industrialized countries, as well as by almost all poor countries and developing countries. Of course there are differences in the nominal amount, and the debt portion of the overall budget (or national income) between the respective countries.
Almost all countries have a debt that funds derived from foreign and domestic. This means that there are foreign creditors and domestic creditors viewed from the side of debtor countries (the debtor). Portions vary between countries. Government debt in the industrialized countries are generally sourced from within their own country. Governments of poor countries rely more on foreign sources. Meanwhile, countries are developing a combination of both.
Historically, most government debt of poor countries and developed initially derived from abroad. Government foreign debt was later followed by the debt used to economic actors outside the government or private parties. While from the creditors, who often started giving large amounts of debt is the government’s advanced industrial countries and international financial institutions non-commercial. Private lenders party (although it has been more involved earlier) tend to give the debt on a scale that followed the direction of the two types of creditors earlier.
There are many reasons for the debt transaction viewed from the side of both parties, the debt and which debts. In simple logic, conditions that must be fulfilled for debt transaction the debtor is a party in need of funds and the lenders who have funds. From the debtor, the main causes of those needs is the government spending tends to increase and often exceeds its acceptance. From the creditor side, there are funds available, and most of it was intended to lend. Regardless of opinions about the philanthropic goals, the release of funds clearly have their own economic calculations (such as optimizing profits).
In the discourse of economic theory is often advanced beyond a reason why the deal can and should happen. Analysis carried out on about government spending tends to increase in many countries, so understood the pattern. For example, in the fact that government spending will increase dramatically during the war. Another focus is the analysis of the origin of funds and institutional lenders. For example, found that the abundance of funds from international financial institutions (commercial and non commercial) in the mid-1970s until the 80s was the result of the oil industry, which is often called the petrodollar.
One of the special attention in economic theory is the existence of foreign debt (ULN) of poor countries and the countries of the developing (NSB). For the record, almost all the ULN from the NSB in its infancy (typically about a decade) is the government debt. Explanation of the available theoretical emphasis on internal factors of debtor countries, regarding the reason (consideration) of economic necessity ULN. Among the most often cited are: the limited foreign exchange constraints, to increase the supply of domestic savings, and the need for technical assistance.
Explanations for first and second reason is related very closely. In general, the discussion begins with the assumption that the state is owed is considered to have a gap in the two main variables of the economy. First, the gap between the supply of savings needs, the so-called savings gap (savings gap). Second, the gap between the availability of the need for foreign exchange, foreign exchange, called the gap (foreign-exchange gap). The second gap requires additional financial resources from abroad, whether in the form of aid or debt. Of course, the source of the most widely available is in the form of debt.
As for an explanation of why these two, namely increasing supply of domestic savings, given the emphasis on different sides. Given pressure associated with the theory of economic growth, which takes stock of a certain amount of savings in a growing from time to time. ULN can be instantly increase domestic supply of savings, as a result of the increasing rate of economic growth. If the first reason above is on the cover, then the second reason is emphasized by the next (which happens immediately) from tertutupinya gap. Reasoning, there is economic growth that enhances the ability of domestic saving. In the end, is expected to need for aid and foreign debt will decrease by itself, after the domestic resources more adequate.
Furthermore, there are explanations about the reasons for the usual technical support accompanies ULN. The reason is associated with about transfer of technology, including modern management, which is expected to take place between the giver and the recipient of loan debt. The creditors, both developed countries and international private sector, is assumed to have the technological capabilities needed by the debtor. Some technology transfer is also required in the transaction, among others, to ensure the possibility of debt payments in the future, through increased production capacity of debtor countries. There is an optimistic view in this discourse, which saw the need for both parties (creditors and debtors) to place the transfer of technology.
The third reason for this is the need for poor countries owe to the NSB abroad. Still required an explanation of how the actual amount of debt required by a country. Economic theory, especially economic development, are interested in analyzing the amount of foreign debt is optimal.
Theoretically, the amount of the debt must be determined based on the absorptive capacity of recipient countries. In practice, the donors and creditors themselves that determines how much and in whatever form given. Philanthropic reasons may only apply to contributions (grants) or the debt of countries and international institutions. In the end, remains the biggest reason is commercial. The majority of lenders will want the benefits of the transaction piutangnya debt. As a business transaction, various types of risk is always at hand. For example, the calculation of the absorptive capacity of debtor countries often missed, so the debt given too much.
In the case of Indonesia’s foreign debt, almost all the theoretical reasons mentioned were used as justification by the government and economists. Starting from about the limitations of foreign exchange constraints, increasing domestic savings supply, the need for technical assistance, up to how much the necessary ULN and what sectors are prioritized.
Like many other developing countries, in the early stages of withdrawal ULN, the government became the main perpetrators. The government actively negotiating with the creditors, and manage directly ULN. Along with the ULN was indeed there is little assistance grants. Some are claimed ULN or half-aid assistance, because the payment terms are considered mild or low-cost. In the next stage, the domestic private sector contribute to important actors in the transaction ULN. The description of the arguments need ULN, along with counter arguments from the parties who do not agree will be further discussed in chapter 2. ULN history and Indonesian government debt will be discussed in more detail in chapter 3.
As mentioned, all countries today have foreign debt. Only the quantity and composition different. In developing countries, governments tend ULN more. Among its private debt ULN are also guaranteed by the government (publicly guaranted), so that in the analysis, sometimes treated the same as government debt. With the development of financial markets (money markets and capital markets) a country, usually also take advantage of government debt from domestic sources.
The main reason for the existence of domestic debt (UDN) is the need to finance the budget deficit. Budget deficit occurs because government revenues less than expenditures. In fact, the functions of government should be run, which requires a fee. In addition, governments are often expected to have a direct role in stimulating economic growth. This role can be done through government spending such as capital expenditure or investment. Finally, UDN is considered to have a reasonable economic reasons.
UDN government among others consists of: the withdrawal of direct debt, usually from domestic financial institutions; and obtained from the issuance of bonds or debentures. At this time, almost all of the Indonesian government UDN Bonds (SUN).
Current position of the UDN (SUN), the Indonesian government has exceeded precisely ULNnya portion (approximately 60 versus 40). However, when scrutinized further ULN and UDN definition for the case of the Indonesian government debt (in chapter 4), it remains the source of funds from abroad to more.
Similar to the ULN, UDN position of the Indonesian government is known as a specific date. While current figures of debt, withdrawals and payments, recorded in the government budget. The Indonesian government plans record debt transactions in the Budget Revenue and Expenditure (Budget). Whereas its realization could be seen in the Central Government Financial Report (LKPP), formerly of the State Budget Execution (PAN). In accordance with the law, the government also reported its debt position on a regular basis, particularly in the debt management directorate site Ministry of Finance.
In fact, some of the flow of money associated UDN Indonesian government is also recorded in the balance of foreign payments. There are some of the SUN which is expressed in nominal value of currency (denominations) of rupiah, but owned by non-residents (off Shores). Purchase SUN inflows resulted in a balance of international payments, which were recorded in the capital account. In addition, the government also issued SUN U.S. dollar-denominated. When published, almost all of these types SUN purchased by non-residents. In the process, because it can be traded, at any time it can be owned by Indonesian citizens. SUN U.S. dollar-denominated sometimes treated as a ULN in the recording. This will be discussed further in chapter 4.
C. Foreign Debt Position Indonesia
One form of capital transactions in the international economic relations today are very large value is an international debts. In the transaction, a resident of a state debt or loans from non-residents. Residents who owed (debtors) are here included government and private sector. While the non-residents who borrow (lender) was varied, such as other governments, private companies of other countries, international institutions (which are considered non-commercial), and commercial financial institutions (bank and non-banking).
Transaction international debts of a country recorded in the balance of international payments, both lending and payment. Recording is the flow (flow), scale (nominal) in a certain time frame. Can be ascertained from the balance of payments, capital flows with respect to Foreign Debt (ULN) during a certain period, such as: one quarter, one semester, and one year. In terms of debt, no mortgage payments and the withdrawal of new debt. In terms of receivables, there is acceptance of debt repayments, and no new lending.
Accumulated transaction of foreign debts, from time to time, establish the position of a country ULN. At one time, for example, December 31, 2007, can be known and the debt position of the country’s debt position. Thus, the data are inventory or stock (stock).
In the case of countries like Indonesia, which used to be the focus of analysis is the position ULN (external debt outstanding). Once again for the note, ULN Indonesia’s position is the net result of current or accumulated ULN for many years. The following description further illustrates the meaning with examples of numbers that are happening in the case of Indonesia.
Since 1970 until the early 90’s, Indonesia began to accept the likely currents ULN increasing each year. The rate of increase then decrease, nominal still growing, but the percentage growth is smaller than the previous year. It has also happened in a couple of years, that growth is negative, the current ULN received during the year is lower than the previous year.
On the other hand, since the late 70’s, current ULN payment of principal and interest payments tend to rise to this moment. The reason is the previous debts have to start being paid. During the period 1970-2006, is estimated to have drawn ULN was more than USD 200 billion. Repayment of debt, not including interest payments, has reached USD 75 billion. Please note that the use of currency United States dollars (USD) only a habit of recording. While real transaction using too many foreign currencies other, so they require conversion calculation for the purposes of recording.
ULN position Indonesia in early 1970 amounted to USD 2.52 billion, including the Old Order ULN of USD 2.1 billion that have been rescheduled through the Paris Club in 1970, but does not include the debt legacy of Dutch colonial rule. ULN position increased to a $ 20.9 billion at year-end 1980 and reached the highest position, USD 150.89 billion at the end of 1999. Within the government ULN increased from USD 2.52 billion in early 1970, amounted to USD 6.6 billion at year-end 1980, and to $ 75.87 billion at year-end 1999. While private ULN, which almost no in 1970, to $ 14.3 billion dollars in late 1980, then reaching the top, USD 83.56 billion dollars at the end of 1998.
Position ULN Indonesia, the government and private, on March 31, 2008 is of USD 145.47 billion. Its composition is as follows: the position of the government ULN USD 87.50 billion; position of private ULN EUR 57.97 billion (see table 1.1). In the government ULN include dollar-denominated SUN. Please note that the ULN-Owned Enterprises (SOEs) are categorized as a private in the table, following the custom of BI and under the laws currently in force. The position of state-owned non-bank ULN as of March 31, 2008 was USD 3.35 billion, and the position of the Bank Persero ULN was USD 1.95 billion.
Table 1.1 describes the profile can be said or Indonesia ULN structure in terms of debt owners, who distinguishes between the government and private ULN. Seen that the share of government debt is approximately 60.15% of the total ULN. Portion will be enlarged (63.79%) if we enter a state ULN, both banks and non banks. However, understanding the government sector in the table is in the sense that the central government and local governments.
ULN profiles can also be seen from the repayment period. Short-term ULN is defined as the period of repayment up to one year; while ULN medium and long term is the repayment period of more than one year. Based on the time period, short-term ULN position is still relatively low, most of Indonesia ULN medium and long term.
ULN short-term positions is only about 6% of the total ULN. Most of these short-term ULN ULN is private. Short-term ULN precisely the largest private-owned by private non-financial institutions, or companies in the real sector. It was indeed related to their needs (such as supplier credit). Generally short-term debt has fixed interest rates and are not commercial.
D. Indonesian Government Debt Profile
We have already mentioned that the foreign debt (ULN) ULN Indonesia consists of government and private ULN. ULN addition, the Government still has a domestic debt (UDN). To further recognize the profile of government debt, we first need to distinguish the hierarchy of the government sector in Indonesia in the context of debt problems. This is done because in everyday use (even the news media) often unclear about the meaning of the word government.
According to the Directorate General of Debt Management Department of Finance of the Republic of Indonesia (2007), the government sector (Public Sector) consists of general government (General Government) and other government sectors (Rest of the Public Sector). General government divided between the central government (Central Government) and local governments (Local Government). Other government sectors which is a distinction between the financial sector (Financial public sector) with non-financial sector (Non-financial public sector). While the financial sector itself consists of central banks and other financial sectors.
The interests of this distinction with regard to the available statistical data for a particular sense is more continuous and transparent. In the past, there are many different data, and frequent tidal consistent, though issued by the same agency. At least in the last few years, in accordance with the mandate of the Law, these data begin to be more consistent and accountable.
One of the data in question is about the central government debt (Central government debt). Which is not included in this data include debt held by Indonesian banks, local governments, and SOEs. Data other than government debt the central government presented a separate addition to regular data availability, the share of central government debt is the largest of the public sector, more than 90 percent. Impact on the state budget is also directly, so the analysis of the central government debt data is most often performed, and representative as the overall government debt profile.
In recent years, there was again little change, where the external debt of local government require a more stringent approval and even controlled by the central government. Of course berdampaknya also on accountability. Various publications of the central government debt data was often include local government ULN into it, as shown in the Financial Memorandum and the Draft State Budget 2008. In this book, if not other is the government debt is such a notion.
Government debt position as of February 29, 2008 is USD 155.29 or equivalent to around 1400 trillion rupiah (converted with the exchange rate then). The debt comes from various sources, which can also be interpreted from various parties (creditors). There are classified as foreign loans (41.43%), which consists of: Bilateral Loan (21.90%), the Multilateral loans (12.22%), export credit (7.28%), Commercial Credit (0, 03%) and leasing (0.01%). Some form of loans classified as State Securities (58.57%), which consists of Government Bonds (SUN) foreign currency denominated (so far only in U.S. dollars) and the rupiah-denominated. The details can be seen in table 1.2 (the book)
However, please note that the grouping of government debt is often not presented in a way, where foreign currency-denominated SUN categorized as foreign loans. Similarly, bilateral loans category, which in several publications, some amount of commercial loans in the category along with most of the form of export credit loans and leasing.
Profile of government debt could also be observed on the basis of its currency denomination. Foreign debt in the table 1.2 that are expressed in U.S. dollar is actually comprised of various currencies. Understanding of this profile takes into account the risk in exchange for interest payments and debt repayments. For example, we have to pay the debt burden in the Japanese Yen, while the foreign exchange which we have happened to the American dollar, the U.S. Dollar exchange rate and Japan would affect the calculations. The problem becomes more complex because there are some currency-denominated debt which, however, it is with our foreign exchange earnings.
Further explanation about each type of debt in the table 1.2 and related profiles denomination will be given in chapter 4. We also will see some differences in government debt data, because of different definitions in some cases. Will be discussed also the development of its position in recent years.
E. Indonesian Government Debt Burden
The main problem of the current government debt and the future is the burden of repayment, repayment of principal and interest. Flowers such as interest for foreign loans and bond coupons to the State, is not the only cost of debt. There are other costs associated with the procurement of foreign loans, including: commitment fee, management fee, and cost / insurance premiums. As for UDN, in more specific terms, the actual cost of debt for the Government is the yield (yield) obtained SUN investors. In this case, the yield SUN is an advantage for investors who already take into account the amount of the coupon and the market price of the SUN. SUN yield movements in the opposite direction (inversely) with the price. That is, if the yield falls in line with reduced expectations of inflation and interest rates, the market price of SUN will rise, and vice versa.
Has become customary to use the term burden of debt each year by adding the principal repayment of debt costs. For the purposes of analysis, understanding the cost of debt is reduced as the debt interest to be paid in that year. For the central government, the debt burden immediately visible in the Budget. Burden of debt interest payments (ULN and UDN) each year appear as debt interest payments post within the central government spending, while the burden of principal repayment into the financing section.
Figures UDN main installments of “hidden” in the subheading net financing through SUN. Say hidden because the figures shown are the net result of new issuance SUN SUN reduced by repayment. Sometimes the paid SUN has not only matured but have not yet bought back by the government (buybacks). Can also be done directly exchange the old series with new SUN series as offered (debtswitch).
Meanwhile, ULN installment stated in rupiah denomination, according to the exchange rate at time of payment. Number assumed in the Budget exchange rate, and calculated the actual realization of the report (PAN and LKPP).
In the 2007 budget, planned total central government debt amounted to Rp 171.59 trillion. Consists of: principal repayment of debt amounting to Rp 86.50 trillion (USD 54.83 ULN mortgage and repayment UDN trillion Rp 31.67 trillion) and debt interest payments amounting to Rp 85.09 trillion (USD 26.66 ULN flowers and flower trillion UDN Rp 58.42 trillion). Total debt payments is 23.73% of total state revenues are planned for the year. However, the realization (from LKPP, still tentative) is not exactly like that. Debt repayment was increasing, but the payment of interest more precisely smaller (see table 1.3). This can happen because it is made possible by the regulations concerning state financial mechanisms, and some interest costs are paid in accordance with the level that actually happened.
One of the most “flexible” to change is the principal debt repayment plans in the country (SUN). Budget 2007 includes a number of SUN net amount of Rp 40.61 trillion, meaning the difference from the published (new debt) with a paid off. Not overly technical binding (although there are procedures approved by the House), because usually SUN who paid more than the amount maturing in question, including the repurchase (buyback) or exchange (debtswitch) certain SUN. Emphasized by the State Budget 2007 was the need to close the deficit financing through the net for SUN. In fact (including a revised budget in the implementation of the budget year), in the year 2007 published SUN worth Rp 117.15 trillion, and that paid Rp 60.06 trillion worth. Thus, SUN net in 2007 was Rp 57.07 trillion (larger than the planned budget).
In Budget 2008, scheduled debt payments total central government is Rp198, 14 trillion. Consists of: payment of debt principal for Rp106, 6 trillion (ULN installment Rp59, 66 trillion and the repayment of USD 47 trillion UDN) and debt interest payments for Rp91, 54 trillion (ULN interest Rp28, 74 trillion and the interest UDN Rp62, 80 trillion). Total debt payments is 26.02% of total state revenues are planned for the year. However, its realization is still going we wait.
Just because Budget submitted in August, usually with a debt of data per month in June, so long as the discussion (about three months) often have no change. In addition, the House could have wanted a change, though rarely is essential for the post of debt. Changes also very likely to occur in the middle of the implementation of the national budget, through the mechanism of budget changes. For the year 2008, has been running for two months, the government has proposed Budget-P (as of this writing set Revised). Especially for the post of debt, proposed a significant increase. There will likely Revised II in this budget year.
Actually, for more control over the debt burden in the future, the Government and the Parliament has issued Law Number 17 Year 2003 on KeuanganNegara. The government also has issued Government Regulation Number 23 of the “Control Total Cumulative Deficit Budget of the State, and the Budget of the Region, And Total Cumulative Loan Central And Local Government”. The law and the law made them set the size of the deficit of the General Governments maximum of 3 percent of GDP and the size of the debt ratio to GDP General Governments maximum 60 percent.
Target for the debt ratio from the General Governments to GDP does not exceed 60%, seems not difficult to achieve. Even in the wake of the crisis and the beginning of course, the total ULN ratio (government and private) to GDP figures still showed 48.5% and 60.3%. Naturally, if for the year 2008, the government set a 34% rate as a target ratio of government debt over GDP.
For the record, most economists recommend a safe ratio to the total ULN to GDP is 25%. Meaning, if you only consider the government ULN, the figure should be smaller. Remember that the numbers still GDP denominator.
To understand the condition of the heavy debt burden now, we have to look at debt developments since the New Order government. During that period, Indonesia began a debt position as one of the main pillar of state economic management. The concept is said to be used is a balanced budget policy. In practice, the government puts foreign debt as a component shortage cover.
At the time Indonesia had abundant good fortune of oil boom, there is an opportunity to change this condition in the budget policy. However, foreign debt is still a major component of revenue in the government budget. Apparently, the more precisely the creditors lend enthusiastic, seeing “ability to pay” Indonesia from the oil. In this context, most likely the view that ULN did not result in the growth of domestic savings means that is true. Put simply, with an abundance of the ULN Indonesian economy to be “spoiled”, and did not try very hard to make the accumulation of domestic capital for investment.
In short we can say that the current burden of ULN mostly due to the Suharto government’s decision. During the period 2001 – 2007 precisely ULN payments greater than the withdrawal, although still not too large, so the government’s position had decreased ULN. Currently, there is a commitment to reduce the government’s position ULN. Efforts by the government is to pay for the discipline, and as far as possible the withdrawal hit a new ULN.
At first glance, it is a good step. However, we must remember that the interest payments with the current and next few years is a pretty heavy burden for the state budget and the economy of Indonesia. Indirectly, the people at large will bear the heavy burden. Tax revenue, let alone acceptance of natural resources, should be a means to increase the maximum benefit of the people. Their rights were taken away to pay some debt burden, which is not fully enjoy.
Meanwhile, the government’s position had ULN decline, was balanced by the UDN has increased. Post-Soeharto administration was responsible for part of this step, with suggestions or recommendations from the IMF.
UDN improvement is almost entirely through the issuance mechanism SUN. This policy is seriously done to begin to change the structure of government debt. The reason, UDN more controllable and do not make the economy ULN serentan if his position is very large.
Considered domestic debt can be settled by the government without having to rely on a helping hand or the generosity of the international creditors. UDN also be guaranteed by the funding source of the sale of assets handed over by the conglomerates as a substitute for debt issuance facility. Please remember about the 650 trillion initial SUN was related to the program of Bank Indonesia liquidity assistance (BLBI) and bank restructuring program. The issue of domestic debt is also believed to be addressed by the government to postpone interest payments, or by rearrangement of maturity (reprofiling).
However, the new SUN continues published last few years. The official explanation is to finance the government budget deficit. Ironically, one of the main causes of the deficit that was published earlier SUN (plus the burden of government ULN still large). SUN Ephoria with U.S. dollars denomisasi also need to watch out, because it would directly conflict with the government’s determination to reduce ULN. In other words, the SUN is still a burden the state budget in the future.
Note that the UDN ULN or government will have an impact on the management of government finances. There are a few things have happened and are still predicted to take place in the years ahead. One of them, the state budget is expected to become increasingly difficult fiscal stimulus for economic growth, as some have spent large enough to pay the debt burden.
Another aspect of the government’s efforts to change the debt profile, so that UDN greater than ULN still need to be observed. Some SUN currently only has one owned by a non-resident (off-shore). Similarly, if viewed ownership of the current SUN mostly in financial institutions, particularly banks, which began to be privatized. In practice, privatization is more likely that the purchase by foreigners, even if partially performed by subsidiaries Indonesian legal entity. Bonds are first given to “help” means that it will benefit the banks. Cermatilah that there will be transfer of profits in times to come.
In the calculation, after entering the element of external risk, UDN considered less burdensome for the government than the ULN. But the view that the burden is still heavy, and the possibility of profits transferred to happen, such a profile changes will not mean much. Plus a tendency to increase the dollar-denominated bonds, which is obviously quite heavy interest burden, create ULN reduction in total will be hampered. What has changed is the profile of creditors, from members of the CGI to financial institutions internationally, and even pension funds of an American state. A clear advantage before money or foreign currency cash in the debt. Experience the New Order can be repeated, dig a hole lid, and keep future generations will suffer the consequences.
F. About Book
Some of the contents of this book is descriptive, explaining the ins and outs of government debt. Readers are expected to know and understand some important aspects of the problem. Among other things: how much debt the central government today, in the form and what kind, to anyone who owes the government, how the history of the formation of the debt, and what heavy burden to be borne in the future.
Description descriptive almost entirely from official sources (government and Bank Indonesia). Both of debt management policy is implemented, as well as about the numbers reported. General reasoning on the issue is presented as simply as possible. Examples of general reasoning referred to include: current debt position (date specified) is the result of accumulation of debt transactions (withdrawal, payment and removal) before; the burden of debt each year is the principal plus interest repayment during the year, by keeping in mind that there are other costs; the debt burden must be borne by the receiving countries, both from tax and non tax if the principal repayment of debt is smaller than the acceptance of new debt, the total government debt to be increased.
In addition to descriptive descriptions, the reader will be invited to conduct the analysis. Analysis carried out on various aspects, ranging from arguments to debt, debt management, up to about the burden of debt. There is an important review of the common arguments are discussed in the discipline of development economics. There is a brief review of the cases some countries. There is a fairly detailed search of the history of the Indonesian government debt, especially since the New Order period. And the more emphasized the analysis of the profile of government debt at the time of writing. Analysis of the debt profile is logically continue to bear the debt burden now and in the future.
The order of discussion is as follows. After this overview will be discussed on the economic theory of government debt (chapter 2). Who primarily want to explain the reasons (justification) the theoretical need for government debt, and then linked with empirical facts that occurred. Also described a general assessment of the costs and risks Indonesian government debt, and is equipped with the theoretical perspective of theoretical solutions.
Chapter 3 describes a brief history of the Indonesian government debt, from the Old Order era until now. Followed by a fairly detailed description of the profile or the structure of government debt is now Indonesia (Chapter 4). Understanding of the profile allows us to calculate the debt burden to be borne by the government (ultimately charged to the people) Indonesia’s current and future (chapter 5).
Chapter 6 connects the conditions described in the previous chapters with the government policies (especially the government of SBY) in debt management. The conclusions drawn in the end the book is quite simple, namely: the existence of current debt and debt management policy at the official declared the government debt is a heavy burden on the Indonesian economy ever.
Economically, we are not unable to pay the debt burden. Indonesia still has natural resources and population are many. The problem is the heaviest burden borne by ordinary people, who do not even understand why there is too much debt and the burden of it.
The author proposed the hypothesis that IS GOVERNMENT DEBT strangle RAKYAT INDONESIA