Regions and Countries

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p. 7 of 15 BACK | NEXT Map Executive Summary I. Recent Economic Developments A. Growth, Employment, Savings, and Investment B. Fiscal Developments C. Monetary Developments and Prices D. Financial Sector Development E. External Trade and Balance of Payments II. Short and Medium-Term Economic Prospects and Policy Issues III. Corruption as a Challenge to Development Appendix

Country Economic Review - Indonesia : I. Recent Economic Developments

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D. Financial Sector Development

1. Banking Sector

27. Banks were There has been extensively restructureding and recapitalizedation of banks following the financial Ccrisis., This has allowed allowing progress in moving the banking system to become more stable greater stability and financially healthy. Initial steps have also been taken towards reduceing government ownership of banks and encourageing the recovery of lending to support economic activity. With respect to reducing government ownershipthe former, following some delays, the privatization of Bank Central Asia (BCA) was completed in early 2002, the sales process for of Bank Niaga has been initiated, and stock sale of the largest state-owned bank, Bank Mandiri, is scheduled in 2002. These actions are not easy with political opposition clearly present at every step.

28. The Government provided support to recapitalize state-owned and other selected banks throughout 1999 and 2000 to achieve a minimum 4% capital adequacy ratio (CAR). Following that, Bank Indonesia (BI) required all banks to meet a minimum 8% CAR by end-2001. Most of the 151 commercial banks achieved this target. Some of those that did not are being encouraged to merge with stronger institutions. BI has also focused on reducing the level of bank nonperforming loans (NPLs). Despite some concerns regarding the consistency of asset classification between banks, the overall bank NPL ratio has declined from 18.8% at end-2000 to 12.1% at end-2001.

29. The bBank recapitalization has left most of the largest banks with a substantial portion of their assets in Government recapitalization bonds, and loan portfolios substantially reduced following the transfer of selected NPLs⁵ to the Indonesian Bank Restructuring Agency. The loan-to-deposit ratio of all banks fell from over 100% in 1997 to only 36% at end-1999. Lending, however, recovered somewhat throughout 2001: bank credit grew 33%, albeit from a low post-crisis basis, and the overall loan-to-deposit ratio had risen to 45% by end-2001. Further progress may be difficult where many enterprise debts remain unresolved and the legal system does not provide an effective means of resolving NPLs.

2. Equity and Fixed-Income Markets

30. By the end of the first quarter in of 2002, both stock and bond markets improved, benefiting from the general political stabilization of political conditions and some sound economic policy measures. Policy actions, including the adherence to the IMF program of macroeconomic stabilization, privatization of BCA, and the Paris Club debt rescheduling, have helped reinforce a positive market perception despite notwithstanding the small slowing of growth in late 2001 and early 2002. While markets are were generally positive in the first few months of 2002, developments over in 2001 show the potential for volatility.

31. The stock market, suffered from the general political uncertainty in the first half of 2001, but received a small boost from the smooth political transition in July. The 11 September 11, 2001 terrorist attack events in the US, however, United States again sent the stock index down. By end-December 2001, the Jakarta Composite Index (JCI) had fallen by 6 percent% and the market capitalization was down by 15 percent% to $23 billion from a year earlier. Since early 2002, however, the stock market has rebounded. As of end-March 2002, the index JCI stood at 482 against 392 at end-December 2001, a gain of 23 percent%. Future, longer-term sustained strength will likely depend on the same issues that affect real investment, particularly progress in strengthening the legal and judicial system.

32. In the international bond markets, the sovereign bond spread over U.S. Treasury rates has fallen significantly, from 800 basis points (bps) in May 2001 to around 300 bps basis points in May 2002. Although many emerging markets showed reduced spreads over this period, Indonesia's improvement was quite strong. The scaling back of Indonesia's political risks has been very important. The peaceful transition of the Ppresidency was a powerful signal of increasing political stability. Bond markets also benefited from the Government's success in setting feasible budget targets and meeting them, despite political opposition to some unpopular actions such as reductions in fuel subsidies and privatization sales.⁶

3. Property Markets

33. In the property markets, assets prices have remained soft through in 2001 and early 2002. Vacancy rates in Jakarta fell through in 2001;, but however, with the office vacancy rate still quite high, rents are not likely to stage a significantly recovery this year. More positive news comes from reports of renewed property development in suburban Jakarta areas and smaller cities, particularly for new shopping centers.

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⁵The transfer of mainly category 5 (loss) NPLs to the Indonesian Bank Restructuring Agency was completed in 2000.
⁶Indonesia sovereign bonds are considered to have relatively low liquidity, and market developments must be interpreted cautiously.

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