Interview: Darmin Nasution
How prepared is BI to tolerate the appreciation of the rupiah? What steps are you taking to maintain the balance between growth and inflation?
DARMIN NASUTION: Apart from conventional monetary policy, BI has used rupiah appreciation to contain the inflationary pressure, particularly imported inflation, which results from rising international commodity prices. Movement of the rupiah will be consistently aligned with the fundamentals of the economy and will be directed toward achieving of macroeconomic stability.
To maintain the competitiveness of Indonesian products in the international market, the movement of the rupiah will also be aligned with that of currencies belonging to Indonesia’s trading partners. To bolster macroeconomic stability and achieve sustainable economic growth, BI applies a mix of monetary and macro-prudential policy instruments. The goal is to ensure internal and external balances through interest rates and exchange rate policies, as well as capital inflow and excess liquidity management.
As more consumer financing is made available, how confident are you that a bubble is not forming and that industry is not acting recklessly?
NASUTION: The role of credit in providing financing to the economy is still limited. The ratio of credit to GDP in Indonesia is relatively low compared to neighbouring countries. However, BI is closely monitoring the influx of foreign funds into the economy, as this may encourage excessively risky behaviour and create a credit market bubble, which could then lead to financial instability. Were that to happen, monetary policy could then be used to boost the stability of the financial system by influencing the pace of credit expansion and reducing excessive risk taking.
With capital inflows remaining high, interest rates are not sufficient as tools for shaping monetary policy and must be supplemented with other instruments. The central bank has thus adopted a mix of four policies: an interest rate policy, an exchange rate policy, one macroprudential policy to manage domestic liquidity and another to handle foreign capital inflows.
To what extent is it necessary for regulations to be put in place that would encourage greater lending for projects related to infrastructure?
NASUTION: Our domestic banks currently have ample liquidity to be channelled to infrastructure projects, but they still tend to be highly prudent in financing them.
Infrastructure projects are long term, while bank loans are dominated by short-term funding needs. This poses the risk of maturity mismatch.
Until recently, the government has carried out infrastructure development in the country primarily through state-owned enterprises (SOEs). From a financing standpoint, the state-owned banks play a major role through their syndicated loans. In promoting infrastructure financing while keeping sound banking practices, BI has raised the legal lending limit from 25% of a bank’s capital to 30%, applied only to loans to those SOEs engaged in development projects.
What is being done to increase the availability of more sophisticated structured products (SPs)?
NASUTION: SPs support the deepening of the financial market, but we have learned from the global economic crisis that they can also lead to an increase in the instability of the financial system if they are not prudently managed. In this regard, BI regulates banks that are involved in dealing with SPs.
Banks are only able to perform SP-related activities after they have obtained approval from BI. Also, foreign exchange banks can only conduct SP transactions that are linked to the basic variables of exchange rate and/or interest rates.
Non-foreign-exchange banks are allowed to have SP transactions linked to the basic variables of interest only.
Companies are also required to state their SP activities plan in their bank business plan and to implement effective risk management in conducting SP activities.
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