general business environment - monetary policy sri adiningsih mm ugm course material

7/27/2019 General Business Environment - Monetary Policy Sri Adiningsih MM UGM Course Material

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Monetary Policy

Sri Adiningsih, Ph.D.

The Role of Monetary Policy

Monetary Policy

Monetary System

Economic Activity

Interest rate, Credit, & Money


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Objective of Monetary Policies: Internal balance External balance

Internal Balance Maintain price stability

Hight economic growthFull employment

External Balance Balance of payment is balance (BOP)

Indonesia is an open economy, internal and external balancesare important

Monetary Policies: demand management monetary targetry

Demand management is done throughmanaging the demand of good and servicessuch that at non inflationary level.

Monetary targetry or managing the value ofmoney supply or interest rates.


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Monetary Policy Instruments:

Open Market Operation Reserves requirement Credit selection Moral suasion

MONETARY POLICY IN INDONESIAOld Regime period

monetary policy was direct monetary authority tightly controlled the monetary sector bank were extended hand from the State state budget deficit was financed by loan from Bank Indonesia the inflation became uncontrollable (reaching 635% in 1966) the economy condition experienced a stagnation

New Order period

Promulgated stabilization program through a balance budget policy money circulation was controllable Encouraged investment (both foreign & domestic) UU PMA & UU PMDN Banking operation UU no.14 of 1967 (Banking Laws) and

UU no.13 of 1968 (Bank Indonesias Laws) Inflation rate under control declined (635% in 1966 to 10% in 1969)

and even just 2,5% in 1971 stability program success


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Environment before deregulation

low level of monetization (ratio of money supply to GNP) banking network has not been well-spread banking technology has not been develop capital market has not been developed

The constraint can result in a less effective monetary policy. the structure of supporting means of monetary policy in the form

financial and non financial institution still inadequate

financial sector dominated by bank assets in monetary sector dominated by 6 State Banks, even

though shows a declining trend by the deregulation policy.

MONETARY POLICY

The world economy slackened in 1981/1982

limited government funds: oil prices adjustment policies: devaluation, project scheduling and

banking deregulation of June 1,1983 (Monetary Reform1983)

Monetary and financial reforms in June 1983

state bank were permitted to set some depositand lending rate (except priority programs)

Credit ceiling removed launched open market operations


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Promulgating October 27, 1988 package: reduce minimum reserves from 15% to 2% easing to open new bank or branches easing requirements to set up new foreign exchange

banks BUMN funds could be invested in private banks and

non banking institutions

Led to accelerated growth of number of banks, assets,resources mobilization, more diversified product & greaterservice, & efficiency

Resulted several problems: mismatch (maturity problems),loan pricing, supervision, legal and accounting problems

Bank Indonesia responded with new policies of supervision in1991:

Capital Adequacy Ratio (CAR) 8% Net Open Position 20% Prohibition lending for securities trading Minimum experience requirements for bank directors Staff training and minimum soundness before opening

new branches


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Indonesian Crisis

the collapse of the exchange rate:Rp2500/USD Rp15000/USD

economic contraction: 7.8% (1996/97) -13.2% (1998) the $22 billion reversal of private capital flows, from

inflows of $10 billion (1996/97) to outflows of $12billion (1997/98) is nearly as large as total net capitalflows in the entire decade to 1985-95

the price of Indonesias key export, oil, has fallen to $13a barrel, its lowest level in real terms in 30 years

enormous political changes are taking place

BANKING RESTRUCTURING

IBRA established in January 1998 Recapitalization: Rp430 trillions Closing and merger bank: BLBI Full Blanket Guarantee Strengthen regulation and supervision

By the end of year 2000 there were modestsigns of a banking recovery: NPL have dropped to average 18% CAR improved to positive of more than 4 Some banks have returned to profitability


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RESPONSE TO CRISIS 1997/1998

Central Bank of Indonesia independency:UU no.23/1999

Managed Floating Free Floating Exchange Rate Banking International Settlement (BIS) principles Money Laundering Financial Action Task Force

(FATF/PPATK) Free Capital Movement: UU no.24/1999

Monetary Policies after the crisis:

Objective: maintain pricestability (low inflation) Inflation targeting framework

since 2005 Free Floating Exchange Rate

(Managed floating?)


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RESPONSE TO GLOBALECONOMIC CRISIS 2008:

Expantionary monetary policiesthrough lowering interest ratesand some other policies such asallowing bank not using mark tomarket for its Surat BerhargaNegara hold in its balance sheets.

Indikator Kinerja Bank Umum 1998-2004

Sumber: Laporan Tahunan Bank Indonesia

1998 1999 2000 2001 2002 2003 2004

Jumlah Bank 208 164 151 145 141 138 134

Jumlah Kantor Bank 7661 7016 6397 6657 6886 7621 7826

Total Asset 895.5 1006.7 1030.5 1099.7 1112.2 1213.5 1272.1

Dana Pihak Ketiga 625.4 617.6 699.1 797.4 835.8 888.6 963.1

Kredit 545.5 277.3 320.4 358.6 410.3 477.2 595.1

LDR (%) 72.4 26.2 33.2 33 38.2 43.5 50

NPL - gross(%) 48.6 32.8 18.8 12.1 8.1 8.2 5.8

NPL - net(%) 34.7 7.3 5.8 3.6 2.1 3 1.7

Modal -129.8 -41.2 53.5 62.3 93 110.8 118.6

CAR -15.7 -8.1 12.5 20.5 22.5 19.4 19.4

Laba (rugi) sblm pajak -178.6 -75.4 10.5 13.1 22 26.4 41.1

Net Interest Income -61.2 -38.6 22.8 37.8 42.9 49.5 65.8

general business environment - monetary policy sri adiningsih mm ugm course material

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