Information about Asia and the Pacific Asia y el Pacífico

Chapter 2: Twenty Years after the Asian Financial Crisis

Luis Breuer, Jaime Guajardo, and Tidiane Kinda
Published Date:
August 2018
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Information about Asia and the Pacific Asia y el Pacífico
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M. Chatib Basri


A plethora of studies have covered various crises and countries, yet crisis remains relevant for academic inquiry and discussion. Kindleberger and Aliber (2011) and Reinhart and Rogoff (2009) have documented financial crises over the past several hundred years. Financial crisis is not unique to any one region; it occurs throughout the world. In Asia, we are familiar with the 1997–98 Asian financial crisis (AFC), which greatly affected Indonesia, Korea, and Thailand. The global financial crisis of 2008–09 had significant impacts on the United States and Europe. In 2013, a market panic known as the taper tantrum (TT)—not a financial crisis—hit five emerging market economies (termed the Fragile Five). It is thus important to compare crises and financial shocks and how the impacts on countries differ.

This chapter focuses on Indonesia. Before the AFC, Indonesia’s economy was lauded as a success story of structural transformation in East Asia (World Bank 1993). Its economy grew by an average of 7.6 percent per year from 1967 to 1996. Poverty levels fell significantly, from 54.2 million (40 percent of the total population) in 1976 to 34.0 million (17.5 percent) in 1996. The World Bank (1993) cited Indonesia as a member of the newly industrialized economies, together with Malaysia and Thailand. However, the AFC reversed the picture completely, hitting the Indonesian economy hard and leading to a political crisis that toppled Soeharto’s 32-year authoritarian regime. Hill (1999) referred to this as the strange and sudden death of a tiger economy.

Just 10 years after the AFC, Indonesia was faced with the global financial crisis. From a global standpoint, the global financial crisis was much larger than the AFC, but Indonesia weathered the global financial crisis relatively well because of its limited impact on Indonesia’s economy. This leads to the question, Why was Indonesia able to weather the global financial crisis so much better than the AFC? It did not stop there; in 2013, financial markets in emerging market economies were struck by the TT, resulting from the US Federal Reserve’s decision to end its quantitative easing policy. Together with four other countries, (Brazil, India, Turkey, and South Africa), Indonesia was classified as one of the

Fragile Five. It is interesting that in a relatively short period, Indonesia overcame this financial shock and extract itself from the Fragile Five group.

Studies of financial crisis in Indonesia are relevant because of their repetitive nature and their significant impacts on the Indonesian economy. Many studies have covered each crisis and the resulting shocks on Indonesia (Soesastro and Basri 1998; Hill 1999; IMF 2003; Pempel and Tsunekawa 2015), but no analysis has compared the AFC, the global financial crisis, and the TT.1 Why did the AFC affect Indonesia’s economy so differently than did the global financial crisis and the TT? How did the different policy responses to each crisis affect the economy? This chapter shows that reforms undertaken since 1998 are one reason for Indonesia’s relative resilience to the global financial crisis and the TT. Thus, these important reforms are also discussed.

This chapter is structured as follows: The next section examines the relatively limited impact of the global financial crisis and the TT compared with the AFC. The subsequent section discusses how reforms undertaken since 1998 improved Indonesia’s resilience to the global financial crisis and the TT. The following section analyzes the ways in which Indonesia’s economy is still vulnerable, despite improvements. The final section provides a conclusion and the way ahead.

Three Financial Shocks: Two Crises and One Market Panic

Economic crisis is not a new concept in Indonesia. Basri and Hill (2011) point to at least four major economic crises in the country. The first occurred in the mid-1960s. The crisis was entirely homegrown, consisting of a mild contraction and swift recovery. The second occurred in the 1980s, caused by external conditions (falling oil prices). It had a significant impact on economic growth but was also marked by a swift recovery. The third was the AFC, and the fourth was the global financial crisis. In 2013, the TT hit the Indonesian economy, but it did not result in a full-blown crisis. This chapter focuses on the two most recent crises—the AFC and the global financial crisis—as well as the TT.

How did each crisis affect the Indonesian economy? Figures 2.12.3 show the different impacts of the AFC, the global financial crisis, and the TT on economic growth, exchange rates, and inflation, respectively. The figures show that the AFC had a significant impact on the Indonesian economy. Economic growth declined deeply, the exchange rate against the US dollar collapsed, and inflation rose sharply. In contrast, the global financial crisis and the TT had practically no effect on economic growth or inflation, and they had only a limited impact on the exchange rate.

Why were the impacts of the global financial crisis and the TT so much smaller than those of the AFC? Several factors differentiate the global financial crisis and the TT from the AFC (see Annex 2.1).

Indonesia: GDP Growth, Quarterly

Source: Based on Basri and Hill 2011.

Indonesia: Rupiah/Dollar Exchange Rate, Quarterly

Source: Based on Basri and Hill 2011.

Indonesia: Inflation, Quarterly

Source: Based on Basri and Hill 2011.

Roots of the Crisis

The AFC was triggered by an exchange rate crisis in Thailand that then spread to Indonesia. It is important to ask, Was the crisis triggered solely by external factors, or did poor domestic economic fundamentals also play a role? It is interesting that before the AFC, Indonesia’s economic growth was relatively high, its budget deficit was relatively small (-0.9 percent of GDP), and the current account deficit hovered between 2 and 4 percent of GDP, which was relatively normal for the time. The contagion effect from Thailand had a huge impact on the Indonesian economy because of weaknesses in the banking sector. Soesastro and Basri (1998) show that there were problems in Indonesia’s economic fundamentals, particularly in the banking sector, which had high levels of nonperforming loans (NPLs) and short-term debt. The policy response that increased interest rates led to unforeseen increases in bad debt. Aswicahyono and Hill (2002) argue that the crisis in 1997–98 centered on financial markets, exchange rates, short-term debt, capital mobility, and political disturbances. Thus, when the financial crisis hit Thailand, the impact on the Indonesian economy was dreadful. The Indonesian economic crisis in 1998 was homegrown but not home alone.2

In contrast, the global financial crisis was almost entirely external, triggered by the US subprime crisis. The impact on Indonesia was only through financial and trade channels. Since Indonesia is relatively isolated from global financial and trade markets, the impact was limited. Total Indonesian exports as a share of GDP was 29 percent, much smaller than in Singapore (234 percent), Taiwan Province of China (74 percent), and Korea (45 percent).3Basri and Hill (2011) show that banks and the corporate sector were not highly leveraged, and Indonesian banks had nearly no connection to the troubled asset and financial markets in the United Kingdom and the United States.

The source of market panic from the TT was slightly different. The financial shock was triggered by tapering talk, aggravated by the current account deficit. Eichengreen and Gupta (2014) argue that the impact of the TT was greater in countries that experienced high currency appreciation and allowed their current account deficit to increase during the quantitative easing period. They also highlight that countries with relatively large financial markets experienced greater impacts. Thus, the impact of the TT resulted from a mix of external effects, compounded by a high current account deficit, leading to panic in financial markets. Efforts aimed at decreasing the current account deficit allowed Indonesia to cope with the market panic and prevented a full-scale financial crisis (Basri 2016, 2017).

Problems in the Banking Sector

As pointed out by Soesastro and Basri (1998), Hill (1999), Stiglitz and Greenwald (2003), and Fane and McLeod (2004), many banks in Indonesia were very weak in 1997–98. The banking sector was highly leveraged, the loan-to-deposit ratio exceeded 100 percent in 1997, and the ratio of NPLs to total loans was about 27 percent in September 1997.

IMF (2003) points out that vulnerabilities in the Indonesian banking sector were underestimated by the IMF and by policymakers. In addition, the decision to close 16 banks without considering the overall impact was devastating in dealing with the AFC in Indonesia. The closing of these banks led to bank runs, forcing Bank Indonesia (BI) to issue liquidity support. IMF (2003) also argues that this liquidity support led to a loss of monetary control, which, in turn, caused further drops in the rupiah. In January and February, the banking sector collapsed from bank runs, resulting from the panic triggered by the bank closure policy recommended by the IMF. The bank runs also encouraged capital flight, further harming the rupiah.

Nasution (2015) argues that there are four weaknesses in Indonesia’s financial system: undercapitalization in the banking sector; substandard banking regulations and supervision, particularly related to the capital adequacy ratio (CAR); lack of competition in the banking sector, which is dominated by state-owned enterprises; and the availability of cheap credit from state-owned banks, which acts as a disincentive for corporations to seek nonbank funding sources.

Banking conditions were vastly different in 1998 than in 2008 and 2013. In 2008 and 2013, financials were much healthier than in 1998, with NPLs at less than 4 percent, loan-to-deposit ratios at less than 80 percent and 90 percent, respectively, and the CAR at about 17 percent. These improvements were due to financial institutional reforms, particularly in the banking sector, implemented after the AFC (see Annex 2.2).

Exchange Rate Regime

One of the biggest differences between the effects of the global financial crisis and the TT compared with the AFC was the exchange rate regime. Before 1997, BI had a crawling peg system or managed floating exchange rate, in which the government made regular adjustments to the exchange rate. Depreciation was always maintained at 5 percent per year, promoting carry trade. Because depreciation was maintained at 5 percent, investors who borrowed from overseas faced no exchange rate risk. This led to an increase in short-term external debt (Figure 2.4). Nasution (2015) shows that BI did not have good data on short-term corporate foreign debt.4 Furthermore, short-term borrowings were used to fund long-term projects in nontrade sectors. This resulted in a double mismatch: both currency and maturity (Nasution 2015). When the rupiah could float, many companies experienced problems with short-term foreign debt, ultimately increasing NPLs.

Indonesia: Short-Term External Debt

(Percent of reserves)

Sources: IMF, World Economic Outlook, Haver Analytics; and author’s estimates.

The situation was different in 2008 and 2013. BI adopted an inflation-targeting regime with a flexible exchange rate after the AFC. As a result, economic agents had to consider exchange rate risk in their portfolio investment decisions. Some of them were also hedging their liabilities. Thus, exchange rate depreciation did not trigger a significant panic in the foreign exchange market as it did in 1998.

As for the TT, the flexible exchange rate helped Indonesia address the current account deficit. It should be noted that Indonesia could not use the exchange rate alone to solve the problem of external imbalances. The memory of the trauma from the AFC led to worries of the rupiah falling too steeply because many feared a repeat of the AFC. This scenario could work as a self-fulfilling prophecy, ultimately weakening the rupiah. To overcome this issue, policy credibility and good communication with business communities played important roles.

It is important to compare policy credibility and communication during the AFC with that during the global financial crisis and the TT. Exchange rate depreciation during the global financial crisis and the TT did not create a self-fulfilling prophecy, although the rupiah depreciated deeply against the US dollar during both episodes. The importance of policy credibility and good communication with business communities can also be seen in the situation in 2015. The Fed’s plans to normalize US monetary policy in 2015 put serious pressure on money markets. The rupiah weakened from Rp 12,500/US$ to Rp 14,700/US$, the stock and bond markets plummeted, and there were significant capital outflows. It is worth noting, however, that the rupiah depreciated by less than 10 percent in 2015, compared with more than 15 percent in 2013. The current account deficit and inflation were much lower than in 2013; however, the market perceived that Indonesia was riskier in 2015 than in 2013 (IIF 2015). Why? This chapter argues that communicating their policy response to business communities and financial markets in 2015 was challenging for the Indonesian authorities. In addition, policy credibility faced a problem because of fiscal risks looming from unrealistic tax targets in 2015 and 2016. This reinforces the argument of the importance of policy credibility and communication with financial markets and business communities.

Policy Responses

The government responded to the crises of 1998 and 2008 in different ways. The IMF recommended that BI respond to the weakening of the rupiah by raising interest rates during the AFC. Because NPLs were high, raising interest rates increased the probability of default, which led to the banking crisis. The banking crisis worsened the economy and encouraged capital outflows. This is consistent with Stiglitz and Greenwald’s (2003) argument that as an economy enters a deep recession, contractionary devaluation causes many firms to be distressed (see also Sachs 1997).

In contrast with the AFC, during the global financial crisis, BI responded by lowering the interest rate and ensuring that there was enough liquidity in the financial system. As a result, the probability of default was relatively low in 2008, and the impact of NPLs on the banking sector was also relatively small.

There were also different responses regarding financial stability. During the AFC, closing 16 banks without offering a sufficient deposit guarantee was a grave mistake. As mentioned, this resulted in bank runs. Indonesia’s experience during the AFC suggested that disruption and instability in the financial sector could lead to a severe crisis of confidence and that the cost of allowing such a situation to happen was much higher than the cost of preventing it. On the basis of this experience, during the global financial crisis Indonesia strongly supported immediate efforts to restore confidence in the financial sector. Furthermore, the government focused on anticipating changes in the financial sector rather than on structural adjustment. The government and BI prepared a financial sector safety net and crisis protocol—necessary steps when facing a financial crisis. Crisis control was focused on monitoring the financial sector. The government and BI ensured sufficient liquidity in the banking system and worked to maintain confidence in the banking sector by providing guarantees, increasing the ceiling for the guarantee on deposits from Rp 100 million to Rp 2 billion per account.5 They understood that the collapse of a bank or financial institution would trigger panic. Although Bank Century was relatively small and its interconnectedness was low, the government—particularly BI—felt that it was important to secure confidence in the market and thus the Financial System Stability Committee (Komite Stabilitas Sistem Keuangan, or KSSK) decided to bail out Bank Century in November 2008 (see also Basri 2015).6

The government applied countercyclical fiscal policy in 2008 through fiscal expansion and mitigated the impact of the financial crisis on the poorest segments of society by providing social safety nets.7 Indonesia introduced a stimulus package in 2009 worth about Rp 73.3 trillion (about US$6.4 billion) to boost the economy amid the threat of an economic downturn. The package was broken down into three major categories: income tax cuts, tax and import duty waivers, and subsidies and government expenditure. Aiming to stimulate household and corporate spending, almost 60 percent of the Indonesian fiscal stimulus was allocated to cover cuts in income taxes. To minimize the effects of the global financial crisis, the government cut the individual income tax rate from 35 percent to 30 percent and the corporate income tax rate from 30 percent to 28 percent (Basri and Rahardja 2011).

The policy response to the TT differed in some ways but was fairly similar to the response to the AFC. As mentioned, the primary issue was a high current account deficit. To overcome this issue, the government and BI applied a combination of expenditure-reducing and expenditure-switching policies. The combination of exchange rate depreciation and monetary and fiscal tightening helped stabilize financial markets in a relatively short period (Basri 2017). The Indonesian government cut fuel subsidies by increasing fuel prices by about 40 percent in June 2013; BI also gradually increased interest rates by 175 basis points (Basri 2016, 2017). The government also supported BI’s policy of letting the exchange rate follow market forces in the medium term, which had a positive impact.8 Government support was crucial, allowing BI to act independently.

The similarities between the responses to the TT and the AFC are interesting (expenditure-reducing policy, monetary tightening, and expenditure-switching policy enabled by allowing the exchange rate to float). Why were these steps effective during the TT but not the AFC? There are several possible explanations. First, the AFC was a financial crisis, while the TT was a market panic. It is true that if the TT had not been handled well, it could have led to a financial crisis, but the potential financial crisis was much smaller in scale. Second, unlike the AFC, in which a fundamental problem in Indonesia’s banking sector was exposed, the TT was aggravated by Indonesia’s high current account deficit. Thus, the combination of monetary tightening, budget cuts, and exchange rate depreciation worked well. In addition, banking conditions in Indonesia in 2013 were far better than in 1998, so a 175 basis point increase in interest rates did not have much of an effect on the banking sector. Furthermore, BI’s monetary tightening during the TT was minute compared with the nearly 60 percent increase in interest rates during the AFC. Third, fiscal rules allowed the government to implement an expenditure-reducing policy because the budget deficit could not exceed 3 percent of GDP. The government also had political reasons for cutting fuel subsidies, although the process was still quite difficult (Basri 2016). Fourth, short-term external debt, although increasing in 2013, was still relatively small compared with 1996 (Figure 2.4). In addition, as discussed earlier, economic agents had become used to the flexible exchange rate regime, thus they had diversified their portfolios and hedged their liabilities. Therefore, the currency depreciation did not create market panic.

Political Factors

The political crisis and change of government in 1998 made the economic crisis far worse compared with 2008 and 2013. Dire economic conditions led to a political crisis and encouraged a change of government; this political crisis then exacerbated the economic crisis (Basri 2015). One major difference between political conditions in 1998 and 2008 or 2013 was the level of confidence in the government. In 1998, confidence in the Soeharto government plummeted to its lowest point, producing pressure for political reform and demand for democratization (Schwarz 1999; Aswicahyono and Hill 2002; Bresnan 2005).

Why Indonesia Survived the Global Financial Crisis and the Taper Tantrum: The Role of Economic Reform

The aforementioned discussion shows that in addition to the different policy responses, improvements in fiscal, monetary, and banking conditions since 1998 helped Indonesia handle the global financial crisis and the TT relatively well. The inflation-targeting regime with a flexible exchange rate contributed greatly to Indonesia’s resilience to the global financial crisis and the TT. However, a flexible exchange rate must be supported by good corporate and bank balance sheets to avoid problems, because depreciation of the rupiah could increase corporate debt, which, in turn, could increase the risk of NPLs. It is important to discuss the principal reforms (Annex 2.2). This chapter focuses on the most important reforms that enabled the relative resilience of the Indonesian economy.

Banking Reform

As noted, Indonesian banks suffered from relatively high NPLs before the AFC. Banking reforms clearly improved the banking sector after 1998. Nasution (2015) reviews how Indonesia reformed the risky sector. The first reform was to supply emergency liquidity and purchase bonds to increase CARs in financially distressed banks. Poorly performing banks were closed or restructured.

The Indonesian Bank Restructuring Agency was established in January 1998 in response to the banking and economic crisis. It was established to administer the government’s blanket guarantee programs; to supervise, manage, and restructure distressed banks; and to manage government assets in banks under restructuring status and to optimize the recovery rate of asset disposals in distressed banks. The agency was criticized for being slow in implementing its tasks, for its lack of transparency, and for its alleged irregularities. During its six years of operations, there were seven heads.

Second, to cope with bank runs and to avoid panic, a banking safety net was created through a deposit guarantee, which was later expanded to a blanket guarantee in 1998 after the banking collapse. Third, supervision and institutions were improved. BI, which had been under the government and had limited authority, was made independent and given full authority over the banking system. Furthermore, a risk-management system for individual banks and a deposit insurance system were institutionalized (Sato 2005). These IMF reform initiatives were crucial to improving the Indonesian banking system after the AFC. Artha (2012) and Andriani and Gai (2013) show that BI’s independence has succeeded in lowering inflation rates. Since 2016, inflation has been decelerating, increasing investor confidence in the Indonesian economy. In 2012, reforms continued with the separation of monetary management from banking supervision. BI focuses on efforts to reach inflation targets set by the government, whereas banking supervision is managed by the Financial Services Authority (Otoritas Jasa Keuangan, or OJK). In addition, the Financial System Stability Forum was created to coordinate efforts between the Ministry of Finance, BI, OJK, and the Deposit Insurance Corporation (LPS).

With these reforms, Sato (2005) shows that financial institutions and banking supervision changed drastically. The banking sector, which was severely damaged by the AFC, survived the crisis through the banking sector rescue program, but lending activity declined as a result of the stringent risk management efforts required in the reforms. Also, saving the banking sector was quite expensive at Rp 658 trillion (Sato 2005).

Table 2.1 shows that the ratio of loans to total assets decreased significantly, whereas claims on the central government (government bonds) increased sharply as a result of the recapitalization program (capital injection), which was valued at Rp 658 trillion (52 percent of GDP) in 2000. In line with the bank recapitalization program, the government closed 38 banks and took over 7 private banks in March 1999. This program was financed through the issuance of Rp 430.4 trillion in government bonds in 1999–2000. This recapitalization was heavily criticized because the state bore the burden of private debt. The 2001 bank soundness program targeted a CAR of 8 percent and an NPL ratio of less than 5 percent. In 2002, net NPLs had fallen to less than 5 percent.

TABLE 2.1.Commercial Banks’Main Indicators, 1996–2013
No. of commercial banks1239222208164151145141138130124120120
Total assets (in percent of nominal GDP)72.884.379.871.877.870.965.860.350.346.749.551.9
Total loans (in percent of nominal GDP)5560.25120.521.32122.721.925.426.431.434.5
Loan-to-deposit ratio (percent)104105.7853637.33843.243.566.374.683.689.7
Loan to total assets75.671.563.928.527.329.634.536.350.456.663.566.5
Claim on government/total assets20.20.20.13443.639.335.730.218.917.48.68.9
Capital/total assets9.68.8−12.9−
NPL ratio (gross)3,49.319.858.732.818.812.
NPL ratio (net)3,511.
Sources: Modified from Sato (2005) and Bank Indonesia; Otoritas Jasa Keuangan; CEIC Data Co. Ltd.; IMF, Financial Soundness Indicators; and author’s calculations.Note: NPL = nonperfoming loan.

Commercial banks only (excluding rural banks).

Claim on the central government consists mainly of government bond injected for banks’recapitalization.

Values for 1996-98 arefortheend-of-fiscal-year period (end of March 1997 to end of March 1999).

Gross NPL Ratio = NPLs/Total Outstanding Loans × 100.

Net NPL Ratio = (NPLs - Reserves)/Total Outstanding Loans × 100.

Sources: Modified from Sato (2005) and Bank Indonesia; Otoritas Jasa Keuangan; CEIC Data Co. Ltd.; IMF, Financial Soundness Indicators; and author’s calculations.Note: NPL = nonperfoming loan.

Commercial banks only (excluding rural banks).

Claim on the central government consists mainly of government bond injected for banks’recapitalization.

Values for 1996-98 arefortheend-of-fiscal-year period (end of March 1997 to end of March 1999).

Gross NPL Ratio = NPLs/Total Outstanding Loans × 100.

Net NPL Ratio = (NPLs - Reserves)/Total Outstanding Loans × 100.

In addition, BI adopted the Basel Core Principles for Effective Banking Supervision. BI further implemented CAMELS supervision in 2005.9 In 2003, BI became a member of the Bank for International Settlements (BIS), which requires BI to be disciplined in following BIS standards, giving confidence to investors.

Fiscal Reform10

Since the AFC, the Indonesian government has taken several steps to improve its fiscal structure, and Indonesia has therefore succeeded in maintaining a relatively low budget deficit. Despite the criticism of the IMF’s recommendations for Indonesia to apply tight fiscal policies during the AFC, in the long term these requirements have made Indonesia more fiscally cautious. Therefore, Indonesia’s fiscal position was stronger entering the global financial crisis. This fiscal caution is reflected in State Law No. 17 in 2003, which limits Indonesia’s budget deficit to 3 percent of GDP and government debt to less than 60 percent of GDP.

Indonesia entered the global financial crisis in better fiscal shape than did many countries in Asia, or even the United States and Europe. Figure 2.5 shows that the budget deficit as a percentage of GDP continuously declined. The primary balance has been in surplus since 2000, posting deficits only since 2012. The government’s success in maintaining the budget deficit at less than 3 percent of GDP since 2000 ensured that the government-debt-to-GDP ratio consistently decreased (Figure 2.6). Basri and Hill (2011) show that one major issue faced by Indonesia after the AFC was a government debt-to-GDP ratio of about 90 percent, which was a result of the government’s taking over corporate debt and the banking collapse in the AFC. Thus, macroeconomic stability in the early 2000s was extremely tenuous. However, the government’s ability to maintain a low budget deficit improved its fiscal position.

Indonesia: General Government Budget Balance

(Percent of GDP)

Sources: IMF, World Economic Outlook, and author’s estimates.

Government Debt

(Percent of GDP)

Sources: World Bank, World Development Indicators, IMF, World Economic Outlook.

Basri and Rahardja (2011) point out that after the AFC, the government budget process in Indonesia changed in several ways. First, full democratization has meant that Parliament plays a significant role in the budgeting process. The Indonesian state budget law introduced in 2003 solidifies interactions between the government and Parliament in the budgeting process.11 Parliament’s involvement has also evolved. Instead of merely endorsing the central government’s proposed budget, Parliament is now actively involved in the deliberations on and modifications to the macroeconomic assumptions and in approving or rejecting the budget, proposed by all government agencies, line by line.

The budget process can be lengthy and sometimes contributes to the delay in government spending. The budget process requires all line ministries to perform multiple consultations with the Ministry of Planning, the Ministry of Finance, and Parliament. Changes in budget assumptions, uncertainties in interpretation of new rules in government procurement, and low capacity in line ministries for developing working programs minimizes iterative consultations and often contributes to delays in spending (World Bank 2009). On the other hand, the government is challenged to balance the need to spend quickly against the need to have transparent and accountable budget reporting.

In addition, the format of the government budget has undergone fundamental changes. In 2000, the government changed the fiscal year from April 1 to March 31, and in the subsequent year, from January 1 to December 31. However, more important is that the Indonesian government adopted the international standard of the IMF’s Government Finance Statistics system for its budget report. In 1999, Indonesia finally allowed its budget to reflect deficit or surplus and implemented a series of rearrangements in the budget items. The current budget format also clarifies sources of financing for government spending, such as privatization, government debt, and foreign loans, which previously were all treated as “development revenue.” Since 2001, the central government budget has also included “balancing funds” to anticipate the decentralization of authority to local governments. After the introduction of State Law No. 17 in 2003, in 2005 the central government implemented a unified budget system that collapsed routine and development expenditures and changed sectoral budget allocations to functional allocations by line agencies.12

Monetary Reform

Indonesia has also improved its monetary framework since the AFC. Before the AFC, BI operated under the guidance of the central government through the Monetary Board, which comprised the Minister of Finance, several other cabinet members, and the BI governor. BI kept a heavily managed exchange rate regime, with currency depreciation fixed at 5 percent. Monetary policy operated through the issuance of BI securities geared toward limiting credit growth and achieving an inflation rate of less than 6 percent. However, inflation averaged 8.4 percent during 1990–97, one of the highest rates in Asia, contributing to a real appreciation of the rupiah and a widening current account deficit, which was financed with short-term external debt.

The heavily managed exchange rate regime maintained before the AFC contributed greatly to the depth of the AFC. To protect its international reserve position, BI let the exchange rate float in August 1997 when the economy was experiencing large capital outflows. The rupiah depreciated by 95 percent against the US dollar in 1997 and by 73 percent in 1998, while inflation rose to 58 percent in 1997 and 20 percent in 1998. To address these issues, and as part of the financial agreement with the IMF, BI introduced a soft inflation-targeting regime with a monetary target in 1998. In addition, BI was given formal independence in 1999, which allowed it to pursue its objectives and increase confidence in the economy. As a result, average inflation declined to about 8 percent in 2000–04, while the exchange rate stabilized.

BI adopted a formal inflation-targeting regime with a floating exchange rate in 2005, in which BI explicitly announces the government-set inflation target to the public, and monetary policy is geared toward achieving the target. At the operational level, the monetary policy stance is reflected in the setting of the policy rate to influence money market rates and, in turn, the deposit and lending rates in the banking system. Changes in these rates will ultimately influence output and inflation. BI has also been reforming its monetary operations to enhance the transmission of monetary policy, including by switching the policy rate from a nontransactional rate to the transactional seven-day reverse repo rate, combined with a narrowing of the interest rate corridor in 2016. BI launched reserve requirement averaging in July 2017, with a one-month transition period to ease liquidity shortages of smaller banks. These reforms have paid off in greater price stability, with inflation remaining close to target, averaging 5 percent in 2010–17 and close to 3 percent in early 2018. Central bank credibility has also improved as reflected in the stabilization of long-term inflation expectations at near 4 percent in 2017–18.

Institutional Reform

Corruption and cronyism exacerbated the effects of the AFC (IMF 2003). IMF (2003) also points out that short-term debt was underestimated, and weak risk management in the banking sector, resulting from cronyism and corruption, was not addressed quickly enough. Weak risk management was reflected in high loans to parties connected to the bank including management, bank owners, and their families, with no project feasibility studies having been conducted.

IMF (2003) states that although the IMF identified vulnerabilities in the banking sector, it misjudged the extent of the relationship between bank owners and politicians. Furthermore, several reforms were not implemented because of resistance from vested interests with direct ties to the halls of power. For example, in November 1997, under recommendations from the IMF, the government and BI decided to close 16 troubled banks, one of which has particularly strong political connections. That bank then appealed and won its case, reopening and changing its name (Soesastro and Basri 1998). This case demonstrates the resistance to reform from vested interests with strong political ties. Corruption and cronyism, particularly when credit was given without proper risk assessment, made the banking sector vulnerable.

To deal with corruption, Indonesia formed the Anti-Corruption Committee (Komisi Pemberantasan Korupsi, or KPK) in 2002. Although the fight against corruption is far from over, there have been improvements and successes. Basri and Hill (2011) show that actions initiated by the KPK have resulted in many legislators and senior officials’ firing and imprisonment. The judiciary has also undergone significant changes; it is now autonomous, unlike under the Soeharto government. Nevertheless, corruption is still pervasive in the courts. Commercial law is very commercial in the real sense because judges are bought off, which ultimately results in legal and corporate uncertainty (Butt 2009). Although it is true that the KPK has had some notable victories, antireformists have resisted KPK’s move to combat corruption. At the regional level, corruption is still widespread, although LPEM (2006) has shown a decrease in the level of harassment visits and bribes in some regions.

More Stable, Yet Still Vulnerable

Although a variety of reforms have been conducted, Indonesia remains vulnerable to external shocks. The TT, for example, showed the Indonesian economy’s vulnerability to financial shocks. These market panics did not cause a full-blown crisis but did precipitate turbulent times. In addition, as mentioned earlier, the Fed’s discussion of plans to normalize US monetary policy in 2015 put serious pressure on Indonesia’s financial market. The situation improved when the Fed increased interest rates by only 25 basis points and Japan and Europe initiated negative interest rate policies. However, with a recent trend of recovery in the US economy and the widening of the US budget deficit because of the administration’s tax policy, there is a risk of capital outflows from Indonesia because the Fed could raise the interest rate higher than what financial markets expect. These two examples show how vulnerable Indonesia’s financial markets are to an external shock.

The main source of this vulnerability originates in Indonesia’s dependence on portfolio financing to fund its current account and budget deficits. In Indonesia, panic is usually triggered through the government bond market because of the relatively large role played by foreign holders in funding the government deficit. When a shock occurs in the United States, as happened during the TT or with the Fed’s rate normalization, bond market investors withdraw their investment portfolios, which then triggers turmoil in financial markets. Therefore, it is important for Indonesia to develop its domestic local bond market by attracting long-term funds, including pension funds and insurance.

As for the current account deficit, Basri (2017) argues that a large current account deficit is not necessarily a bad thing, if it is financed by long-term and productive foreign direct investment (FDI) to export-oriented sectors. However, a large current account deficit may increase a country’s vulnerability if it is financed by portfolio investment, as in the Fragile Five countries. These vulnerabilities might make portfolio investors nervous, inducing them to withdraw their portfolios from the respective countries. Edwards (2002) points out that a large current account deficit should be a concern, although he argues that this does not mean that every large deficit will induce a crisis. There is no clear threshold on the current account deficit that will cause panic in financial markets, but lessons from the TT show that money markets are affected when the current account deficit exceeds 3 percent of GDP and is financed by portfolio investment. Of course, this differs between nations. Basri (2017) argues that countries such as India have been able to run much larger fiscal and current account deficits than has Indonesia. Perhaps this is the result of India’s macroeconomic history and capital accounts. India was not affected by the AFC, so the market was less jittery, and India’s capital account is also less open than that of Indonesia, so capital does not exit so quickly.

Basri, Rahardja, and Fithrania (2016) show a strong correlation between investment and imports of capital goods and raw materials in Indonesia. The higher the economic growth is because of increases in private or public investment, the higher is the current account deficit. Thus, Indonesian short-term economic growth is always constrained by the current account deficit. When external shocks occur, as during the TT in 2013 or fears over the Fed’s rate hikes in 2015, capital outflows from portfolio investment spike and the rupiah weakens significantly. To address the issue of capital flow volatility, Indonesia should continue to use fiscal, monetary, and macroprudential instruments.

If the current account deficit is financed by FDI, particularly for export-oriented sectors, the risk of capital flow volatility is relatively small. To stimulate economic growth while maintaining macroeconomic stability, efficiency and productivity must be improved so that the same investment will result in higher economic growth. Another option is for FDI to center on export-oriented manufacturing sectors. Basri (2017) recommends that Indonesia focus on improving productivity, promoting economic deregulation to increase efficiency, improving human capital, developing infrastructure, and improving governance.

Conclusion and the Way Forward

The aforementioned discussion shows that the global financial crisis and the TT had much smaller impacts on the Indonesian economy than did the AFC. For several reasons, Indonesia was more successful in overcoming the global financial crisis, which was far bigger in scale than the AFC. The global financial crisis was completely external, originating from the US subprime crisis. Because Indonesia’s economy was well insulated, with a relatively small share of total exports to GDP, the impact of the global financial crisis was limited. In addition, as Basri and Hill (2011) note, banks and the corporate sector were not highly leveraged, and Indonesian banks had nearly no connection to the troubled asset and financial markets in the United Kingdom and the United States. In addition, the banking sector was in a much better position than it was in 1998.

The AFC, however, can be traced to the weak banking system in Indonesia. The inappropriate monetary policy response and handling of the banking sector exacerbated the crisis, leading to bank runs and capital outflows. During the TT, the financial panic was mostly due to the pressure on the current account deficit. Although the TT was driven by the Fed’s plans to unwind its quantitative easing, high current account deficits made the Fragile Five countries, including Indonesia, vulnerable. The government’s and BI’s response was another decisive factor. The policy response to the global financial crisis was in stark contrast with the handling of the AFC—BI cut interest rates, and the government introduced a fiscal stimulus package.

Another important factor that helped Indonesia remain relatively unscathed from the global financial crisis and TT was the series of reforms implemented since 1998. Banking reforms, particularly those related to prudent banking regulations and oversight, reduced vulnerabilities in the banking sector. BI’s change to an independent authority and its adoption of an inflation-targeting regime with a flexible exchange rate since 2005 also had a positive impact on lowering inflation and increasing investor confidence in the Indonesian economy.

Post-AFC fiscal reforms also improved Indonesia’s fiscal condition, which enabled the country to cope with the financial shocks in 2008 and 2013. The fiscal rules adopted by Indonesia since 2003 allowed the authorities to implement a countercyclical fiscal policy response during the global financial crisis. These fiscal rules also reduced the government’s debt-to-GDP ratio from about 90 percent in 2000 to less than 30 percent in 2016, boosting investor confidence.

The flexible exchange rate also helped Indonesia deal with financial shocks. However, it should be noted that Indonesia could not use the exchange rate as the only shock absorber. Trauma from the AFC led to fear that the rupiah would fall too steeply; many feared a repeat of the AFC. This worked as a self-fulfilling prophecy, ultimately weakening the rupiah.

Indonesia’s experience shows that macroeconomic policy should not rely on only one policy instrument. For example, overly high interest rates create the risk of increasing bad debt in banks, which, in turn, encourages capital outflows. Overly restrictive fiscal policy will disrupt welfare programs and economic growth, whereas allowing the exchange rate to weaken could lead to panic and fears of a repeat of the AFC. Therefore, the combination of expenditure-reducing and expenditure-switching policies, along with macroprudential policies with continued market guidance, were appropriate steps at the time. This chapter also emphasizes the importance of policy credibility and good communication with business communities to mitigate market panic.

Political factors also play an important role. A stable political climate and consistent institutional reforms helped Indonesia weather financial shocks. The political crisis and fall of the Soeharto government in 1998 exacerbated the economic crisis. The dire economic conditions led to a political crisis, and the dynamics of the changing political climate likewise worsened the economic crisis. The political conditions in 1998 differed from those of 2008 and 2013, for example, in the level of confidence in the government. During the AFC, confidence in the government reached its lowest point.

This chapter shows that Indonesia’s economy is at present much more resilient than it was in 1998. However, Indonesia’s financial sector remains vulnerable because it depends heavily on nonresident financing, particularly the portfolio market. The current account deficit can tolerate to a certain limit. If the current account deficit continues to be financed by export-oriented FDI, the risk of capital outflows will shrink. However, the situation will be more difficult if the current account deficit is financed by portfolio investment, particularly short-term debt. Vulnerabilities in the Indonesian financial sector are also exacerbated by large foreign holdings of government bonds. Overdependence on external financing increases risk in emerging markets, as Reinhart and Rogoff (2009) argues. In the future, Indonesia must strive to increase its domestic savings and develop domestic financing resources.

Annex 2.1. Indonesia: Crises and Financial Shocks

The following table shows a comparison of the effects of the Asian financial crisis, the global financial crisis, and the taper tantrum.

Annex Table 2.1.1.Indonesia: Comparison of the Effects of the Asian Financial Crisis, the Global Financial Crisis, and the Taper Tantrum
Asian Financial CrisisGlobal Financial CrisisTaper Tantrum
Monetary policyVery tight; Bank Indonesia greatly increased interest rates; deposit rates soared to 60 percent at the peak of the crisis; liquidity squeezeBank Indonesia lowered interest rates by 300 basis points from 9.5 percent to 6.5 percent Sufficient liquidityBank Indonesia increased interest rates by 175 basis points from 6 percent to 7.75 percent
Fiscal policyInitially targeted a budget surplus, then revised to allow a large budget deficitImplemented a fiscal stimulus; budget deficit grew, and taxes were reducedTightened by cutting fuel subsidies
Banking healthWeak banking regulations; NPLs were at 27 percent, and LDR was above 100 percentRelatively tight banking regulations NPLs were at less than 4 percent, LDR was at 77 percent, and CAR was at 17 percentRelatively tight banking regulations; NPLs were below 4 percent, LDR was at 90 percent, and CAR was at 17 percent
Response to bankingClosure of 16 banks, resulting in a bank runIncreased deposit insurance from Rp 100 million to Rp 2 billion per account
Policy focusStructural reform through liberalization, dismantling monopolies, and licensingMaintain a relatively open trade regimeMaintain a relatively open trade regime
Exchange rate regimeManaged floating; Economic actors were unaccustomed to exchange rate risk and did not hedgeFlexible; economic actors were accustomed to exchange rate riskFlexible; exchange rate was allowed to depreciate in line with market forces
Source: Based on Basri 2015.Note: CAR = capital adequacy ratio; LDR = loan-to-deposit ratio; NPL = nonperforming loan.
Source: Based on Basri 2015.Note: CAR = capital adequacy ratio; LDR = loan-to-deposit ratio; NPL = nonperforming loan.

Annex 2.2. Indonesia: Policy Frameworks, 1998–2008

Monetary and Finance

  • Bank Indonesia (BI), as a lender of last resort, provided liquidity assistance in late 1997 and early 1998. In addition, the government instituted a blanket guarantee program for all bank liabilities to combat further erosion of confidence in the banking system.
  • In November 1997, the government entered into a financial agreement with the IMF. At the end of 2003, IMF loan commitments had been fully disbursed. The loan was paid back by 2010. The end of the IMF program also ended the government’s opportunity to reschedule its bilateral external debt through the Paris Club and commercial external debt through the London Club forums. In response, some policy adjustments were made, including debt swaps, improved debt management, the creation of an Investor Relations Unit, and enhanced legal aspects of foreign debts.
  • The Indonesian Bank Restructuring Agency was established in January 1998 in response to the banking and economic crisis. It was established to administer the government’s blanket guarantee programs; to supervise, manage, and restructure distressed banks; and to manage the government’s assets in banks under restructuring status and to optimize the recovery rate of distressed banks’ asset disposals. The agency was criticized for being slow in implementing its tasks, for its lack of transparency, and for its alleged irregularities. During its six years of operation, there were seven heads.
  • In August 1998, Indonesia launched a framework for the voluntary restructuring of external corporate debt, known as the Indonesian Debt Restructuring Agency. The Jakarta Initiative Task Force was launched in September 1998 to provide technical support for debt restructuring and to administer the out-of-court debt workout framework, particularly those workouts involving foreign lenders.
  • In line with the bank recapitalization program, the government closed 38 private banks and took over another 7 in March 1999. This program was financed through a government bond issuance of Rp 430.4 trillion during 1999–2000.
  • The government offered bond exchanges in November 2000 to boost the bond secondary market and improve recapitalized banks’ liquidity. Regulations on government bonds were issued to increase investor confidence. The government also started issuing short-term notes in 2001.
  • In July 1998, BI changed the Sertifikat Bank Indonesia auction from interest rate to quantitative targets (base money) and widened participation from primary dealers to all banks, brokerages, and the public to increase competition and transparency. An inflation-targeting framework was formally adopted in July 2005 to replace the monetary target. Under this framework, BI explicitly announces the government-set inflation target to the public and monetary policy is geared toward achieving the target. At the operational level, the monetary policy stance is reflected in the setting of the policy rate to influence money market rates and in turn the deposit and lending rates in the banking system. Changes in these rates ultimately influence output and inflation.
  • Efforts to absorb excess liquidity were enhanced with foreign exchange sterilization policy. The foreign exchange reserve accumulation policy plays a large role in maintaining confidence in the rupiah and preventing banks from using their excess liquidity for speculative purposes.
  • The blanket deposit guarantee successfully restored public confidence in the banking industry. However, the excessive scope and nature of the guarantee created moral hazard for both bankers and depositors. To address this problem and instill a sense of security among depositors, the blanket guarantee was subsequently replaced by a limited guarantee system. In September 2004, the Indonesia Deposit Insurance Corporation was established as an independent institution to insure depositors’ funds and actively participate in maintaining stability in the banking system. It began operations in September 2005.
  • A bank soundness program established in 2001 targeted a minimum capital adequacy ratio of 8 percent and a nonperforming loan ratio of less than 5 percent. To increase banks’ resilience, BI implemented 25 Basel Core Principles for Effective Banking Supervision. Furthermore, BI implemented CAMELS13 supervision in 2005.
  • BI officially became a member of the Bank for International Settlements in September 2003, which enhanced investors’ confidence in Indonesia.
  • In 2004, the Indonesian Banking Architecture was launched and the blue print for development of Islamic Banking was issued.
  • With the April 2005 policy package, BI increased the intensity of foreign exchange intervention, raised the maximum interest rate under the guarantee scheme on foreign exchange deposits, and tightened measures on banks’ net open positions. Furthermore, BI and the government also agreed to establish a mechanism for dollar-demand management in Pertamina.
  • With the July 2005 policy package, state-owned enterprises were required to repatriate their export revenues. Regulations limiting rupiah transactions and provision of foreign exchange credits by banks to nonresidents were issued to reduce speculation. Furthermore, bilateral swap arrangements and Asian swap arrangements with the Association of Southeast Asian Nations plus Japan, China, and Korea were signed to complement international reserves. These various policy packages were reinforced by the August 30, 2005, policy package that provided a swap hedging facility for foreign loans, infrastructure investment, and export activities; initiated a short-term swap facility in foreign exchange intervention; prohibited margin trading; and intensively monitored non-underlying foreign exchange transactions by banks.
  • Banking policies were placed within a comprehensive, systematic working framework established by the January 2006 and October 2006 policy packages in response to the slowing economy and to improve banks’ intermediary function.

Legal and Institutional

  • To reinforce legal and institutional structures during 1998–99, the government issued the bankruptcy law and the antimonopoly law, revised banking regulations, revised the Central Bank Acts, established a commercial court, and developed a capital flow monitoring system.
  • Real-time gross settlement was started in 2000 to improve the noncash payment system. Using the real-time gross settlement system, banks across Indonesia can transfer funds quicker without local clearing and with less risk.
  • Anti-Corruption Committee (KPK) was created in 2002 to eradicate corruption. So far, it has engaged in significant work revealing and prosecuting cases of corruption in government bodies and the Supreme Court.
  • Within the framework of supporting financial system stability, BI established a Financial System Stability (SSK) Bureau, initiated steps to form a financial safety net, and completed the Indonesian Banking Architecture as a concept for the future structure of the banking industry to be implemented starting in 2004.
  • Government Act No. 24 of 2002 provides a legal basis for the government to issue state debentures to fund state budget deficits and cover short-term cash shortages and provides legal assurance to investors.

To facilitate the development of the government bond market, BI adopted the Scripless Securities Settlement System. To develop the repo market, the Capital Market and Financial Institution Supervisory Agency (Badan Pengawas Pasar Modal dan Lembaga Keuangan, or Bapepam-LK) developed a master repo agreement that could be used as a standard. Bapepam-LK also issued policies to reduce risks of industrywide crisis and failure of individual mutual funds. The mark-to-market pricing concept was implemented in 2005.

  • To improve the investment climate, the government issued Presidential Decree No. 29 in 2004 concerning the Management of Foreign and Domestic Capital Investment Through a One-Stop Service System. In addition, to reduce red tape, the Capital Investment Coordinating Board issued a decree concerning revocation of the delegation of authority to provincial governors or heads of districts for approval of capital investment. The government also sought to strengthen legal certainties on several crucial problems through implementation of the 2004 Law on Industrial Relations Disputes Settlement.
  • Presidential Instruction No. 67 of 2005 aimed to accelerate infrastructure construction through coordination between the government and corporations.

Capital Flows

  • To protect the stock of international reserves, the authorities moved from a managed to a free-floating exchange rate regime in August 1997.
  • Starting in 2000, all commercial banks were required to report their foreign exchange activities monthly. Nonbank financial institutions are required to report their foreign exchange activities the following year.
  • To reduce speculation in the foreign exchange market, the authorities regulated rupiah transactions by nonresidents and applied on-site supervision to the main foreign exchange banks in 2001.
  • The Asian Bond Fund was established in 2003 to minimize short-term foreign debt dependency and to support capital market development in Asia.
  • In 2003, Indonesia signed bilateral swap arrangements with Japan, Korea, and China, which were part of the Chiang Mai Initiative launched in 2000. Bilateral swap facilities are one source of precautionary financing.


  • The government allowed imports of heavy machinery and used computers to increase exports. It also lifted the import ban on printed materials with Chinese characters to attract investors from Taiwan Province of China, Hong Kong SAR, and Singapore. Antidumping tariffs for wheat flour were implemented to protect the domestic industry, while import tariffs for raw materials and machinery components were reduced to support the domestic machinery industry.


  • The government increased fuel, transportation, and electricity prices to reduce subsidies in 2000. At the same time, cigarette and import tariffs, civil servant salaries, and the minimum wage were raised.
  • Several measures were implemented in 2001 to raise revenue including (1) increased the value-added tax rate from 10 to 12.5 percent, (2) increased tobacco retail prices, (3) targeted a dividend payout ratio of 50 percent for state-owned enterprises, and (4) settled receivables from local governments with budget surpluses.
  • Measures were also introduced to lower expenditures: (1) expedited civil servant mobility process from central to regional governments; (2) reduced subsidies by increasing fuel, gas, electricity, water, and transportation prices; (3) focused on development expenditure; and (4) allocated funds from sharing and general allocated funds as planned.
  • On the financing side, the government tried to maximize proceeds from the sale of assets from the banking restructuring program and privatization and used some of those proceeds to reduce its external debt (asset-to-bond swap and cash-to-bond swap).
  • Regional autonomy, implemented in 2001, created an opportunity for regional governments to receive a larger and fairer portion of financing and to extend their tax bases. However, overlapping regulations issued by the central and regional governments have created uncertainty among investors and businesses.
  • Government Regulation No. 23 of 2003 restricts state budget and regional budget deficits to a maximum of 3 percent of GDP in the current year. Central and district government debt is restricted to a maximum of 60 percent of GDP in the current year.
  • Presidential Instruction No. 3 of 2006 established harmonization of central and regional government regulations; a series of reform programs for customs administration, taxation, and industrial relations; and support for small and medium enterprises and cooperatives.

Sources: Bank Indonesia Annual Reports.


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1Basri and Hill (2011) and Basri (2015) compare the effects of the AFC and the global financial crisis, but not the TT, on the Indonesian economy.
2The author thanks the former governor of the Central Bank of Indonesia, Soedrajad Djiwan-dono, for this term.
3This refers to the total exports of goods and services in national accounts as a percentage of GDP
4Bank Indonesia (BI) has taken measures in recent years to improve the data on short-term corporate foreign debt, including through the mandatory quarterly reporting to BI on the implementation of the principles set forth in the 2014 regulation concerning the “Implementation of Prudential Principles in Managing External Debt of Non-Bank Corporation.”
5IMF (2003) shows that providing a blanket guarantee during a crisis is more effective than a limited deposit guarantee, but the government feared a repetition of the BI liquidity support case.
6The decision to bail out Century Bank had political implications. Some political parties felt that the bailout by Minister of Finance Indrawati and Vice President Boediono was a mistake because it was not based on solid information and because it harmed the country.
8BI’s policy of allowing the exchange rate to float made the nondeliverable forward and spot rate converge, and in February 2014, the Association of Banks in Singapore switched to Jakarta Interbank Spot Dollar Rate (JISDOR) as the reference exchange rate, replacing the nondeliverable forward.
9CAMELS is a rating system that bank supervisory authorities use to rate financial institutions based on six factors: capital adequacy, assets, management capability, earnings, liquidity (also called asset liability management), and sensitivity (sensitivity to market risk, especially interest rate risk).
10This section draws heavily from Basri and Rahardja (2011).
11Law Number 17 of 2003 on State Finances.
12An example of the implications of this restructuring is that the budget for the “national defense” sector has been transformed into a budget to execute work programs under the Ministry of Defense. Meanwhile, development expenditures, which, under the old format, consisted mainly of capital expenditures, have been merged to different expenditure items including capital, material, personnel, social, and other expenditures.
13CAMELS = capital adequacy, assets, management capability, earnings, liquidity (also called asset liability management), and sensitivity (sensitivity to market risk, especially interest rate risk).

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