Published by:

Bank Indonesia
Jl. MH Thamrin No.2, Jakarta
Indonesia

The Financial Stability Review (FSR) is one of the avenues through which
Bank Indonesia achieves its mission ≈to safeguard the stability of the Indonesian Rupiah by
maintaining monetary and financial system stability for sustainable national economic
development∆.

FSR is published biannually with the objectives:

To foster public awareness regarding domestic and global financial system stability issues;
To analyze potential risks confronting the domestic financial system;
To evaluate progress and issues related to financial system stability; and
To recommend policies to relevant authorities for promoting a stable financial system.

This edition was launched in March 2008 and is based on data and information available as of December 2007, except where
stated otherwise.

The complete Financial Stability Review is available for download in PDF format from Bank Indonesia»s website : http://www.bi.go.id

Any inquiries, comments and feedback please contact:

Bank Indonesia
Directorate of Banking Research and Regulation
Financial System Stability Bureau
Jl.MH Thamrin No.2, Jakarta, Indonesia
Phone : (+62-21) 381 8902, 381 8075
Fax : (+62-21) 351 8629
Email : BSSK@bi.go.id
Financial Stability Review
( No. 10, March 2008 )
ii
Table of Contents

Foreword vi Bank Risk Profile: Level and Direction 52

Prospects of the Indonesian Financial System 53
Overview 3 Potential Vulnerabilities 54
Box 3.1.Impact of Fuel Price Increases on Financial
Chapter 1 Macroeconomic Conditions and System Stability 56
Box 3.2.Natural Disasters, Life Cycles and Financial
the Real Sector 9
System Stability 57
Macroeconomic Conditions 9
Conditions in the Real Sector 14
Box 1.1. Macroeconomic Stress Test 19 Chapter 4 Financial Infrastructure 61
Box 1.2. Potential Pressure from Foreign Debt 20 Payment System 61
Payment System Performance 61
Chapter 2 Financial Sector 25 Payment System Policy and Risk Mitigation 62

Structure of the Indonesian Financial System 25 Credit Information Bureau 63

Banks 25 Financial System Risk Mitigation 65

Funding and Liquidity Risk 25 Financial System Stability Forum 65

Credit Growth and Credit Risk 27 Crisis Management Protocol 65

Market Risk 34
Profitability and Capital 36 Articles
Non-Bank Financial Institutions and the Capital Article 1 Property Industry Survey:
Market 39 Observing Potential Pressure on
Finance Companies 39 Repayment Ability 69
Capital Market 40 Article 2 Household Balance Sheet Survey :
Box 2.1. Insurance Industry Performance and Significant Indicators in Financial System
Potential Risk on the Financial System 45 Stability Surveillance 77

Chapter 3 Prospects of the Indonesian Financial Glossary 89

System 51
Economic Prospects and Risk Perception 51

iii
 List of Tables and Figures

Table Graph
1.1 Global Economic Indicators 10 1.1 Global Stock Price Index 9
1.2 Indonesia»s Non-oil/gas Exports by Country 10 1.2 Indonesian Non-Oil/Gas Exports 10
1.3 Indonesian Economic Growth 13 1.3 Value of Indonesian Non-Oil/Gas Imports 10
1.4 Impacts of Exchange Rate to Conglomeration 1.4 Price Index of Several Commodities 11
Equity 16 1.5 International Interest Rate 11
1.5 Competitiveness Rating √ World Economic 1.6 Real Interest Rate in Indonesia and USA 11
Forum 17 1.7 Standard & Poor»s Outlook Sovereign Rating for
Indonesia 11
2.1 Price Index Performance of Several Regional Stock 1.8 Moody»s Outlook Sovereign Rating for
Exchanges 41 Indonesia 12
2.2 Sectoral Price Index 42 1.9 Fitch Outlook Sovereign Rating on Indonesia 12
1.10 Capital Inflow Composition 12
3.1 Consensus Forecasts of Several Economic 1.11 Composition of Foreign Portfolio Capital Flow 12
Indicators 51 1.12 Investment Portfolio Ratio 12
3.2 Indonesian Risk Perception 52 1.13 Rupiah Exchange Rate Performance 13
1.14 Foreign Exchange Rate 13
4.1 Settlement Value and Volume Development in 1.15 Indonesian inflation and BI Rate 13
BI-RTGS System 62 1.16 Domestic Interest Rate 14
4.2 Payment Card Transactions 62 1.17 Variance between Loan and Fixed Deposit Rates 14
4.3 Comparisons of DIS Regulations 64 1.18 Consumer Confidence Index Performance 14
1.19 Consumption Credit 15
Table Box: 1.20 Growth of ROA and ROE 15
2.1.1 Insurance Company Expansion 2003-2006 45 1.21 Debt-to-Equity Ratio 15
1.22 Non Financial Public Listed Companies
3.1.1. Projected Gross NPL in 2008 against Various Oil Probability of Default (December 2007) 15
Price Scenarios 56 1.23 Non Financial Public Listed Companies
Probability of Default (June 2008) 15
1.24 Non Financial Public Listed Companies
Probability of Default (December 2007 and
June 2008) 16
1.25 Net Foreign Exchange Liabilities to Capital Ratio 16
1.26 Sectoral GDP Growth 17
1.27 Financing of Public Listed Companies and their
Expansion (Asset Growth) 17
1.28 Unemployment Rate in Indonesia 17
1.29 Growth of DER and TL/TA 18

2.1 Financial Institutions» Assets 26

2.2 Growth in Deposits by Currency (m-t-m) 26
2.3 Growth in Deposits by Component (m-t-m) 26
2.4 Liquid Asset Ratio of Banks 27
2.5 Average Interest Rate of O/N Inter-Bank Money
Market 27

iv
2.6 Credit Growth 28 2.45 Inflows to SUN-SBI-Shares 41
2.7 Composition of Productive Assets 28 2.46 Asian Stock Market Volatility 41
2.8 Foreign Currency Loans 28 2.47 Regional Stock Exchange: Share Index
2.9 Growth by Loan Type 28 Performance 41
2.10 Credit Allocation by Economic Sector 29 2.48 Stock Market: Transaction Value & JSX 42
2.11 Undisbursed Loans 29 2.49 Market Efficiency Coefficient 42
2.12 Non-Performing Loans 30 2.50 Stock Market: Capitalization Value & Issuance
2.13 NPL Nominal 30 Value 42
2.14 Nominal NPL by Bank Group 30 2.51 Price Performance of Several Series of SUN 42
2.15 Gross NPL by Bank Group 30 2.52 Yield of 5-Year Tenure Investments 43
2.16 Nominal NPL by Economic Sector 31 2.53 SUN Ownership 43
2.17 NPL Share by Economic Sector 31 2.54 SUN: Market Liquidity of Various Tenures 43
2.18 NPL by Loan Type 31 2.55 Issuance and Position of Corporate Bonds 43
2.19 NPL Share based on Loan Type 31 2.56 Net Asset Value of Mutual Funds by Type 44
2.20 Gross NPL Performance 32 2.57 Mutual Funds: Net Asset Value & Participating
2.21 Gross NPL Ratio for Consumption Credit 32 Units 44
2.22 Nominal NPL of the Corporate and MSME 2.58 Mutual Funds: Redemptions and Subscriptions 44
Sectors 33 2.59 Composition of Mutual Funds» Net Asset Value 44
2.23 Gross NPL of the Corporate and MSME Sectors 33
2.24 NPL of Foreign Currency and Rupiah 3.1 Bank Risk Profile and Direction 53
Denominated Loans 33 3.2 Financial Stability Index 53
2.25 Stress Test of NPL against CAR 34
2.26 Credit, NPL and Loan Loss Provisions 34 4.1 Payment System Transaction Activities in
2.27 Interest Rate and Exchange Rate Performance 35 Semester II 2007 61
2.28 Lending Rate by Bank Group 35
2.29 Rupiah Maturity Profile 35 Graph Box :
2.30 Foreign Exchange Maturity Profile 35 1.2.1 Foreign Debt 20
2.31 Growth of NOP (Overall) 36 1.2.2 Debt Burden Indicators of Indonesia 20
2.32 SUN Ownership by Banks 36 1.2.3 Indonesia ULN Payment Plan 20
2.33 Bank NII 37
2.34 ROA Ratio by Bank Group 37 2.1.1. Insurance Capital 2003-2006 45
2.35 Komposisi Pendapatan Bunga Bank 37 2.1.2. Assets-Premiums-Claims: 2003-2006 45
2.36 CAR Ratio by Bank Group as of Semester II 2007 37 2.1.3. Insurance Profits: 2003-2006 45
2.37 Core Capital Ratio to Risk Weighted Assets and 2.1.4. Several Insurance Company Indicators 46
CAR 37 2.1.5. Investments by Insurance Companies:
2.38 Map of Core Capital Performance 38 2003-2006 46
2.39 Integrated Stress Test 38 2.1.6. Premiums: Unit Link and Total: 2003-2006 46
2.40 Operational Activities of Finance Companies 39 2.1.7. Investment Return: Unit Link against Total:
2.41 Financing Activities of Finance Companies 39 2003-2006 46
2.42 Performance of Finance Companies 39
2.43 National Private Finance Companies» Source of 3.1.1. Bank NPL and Global Oil Price 56
Funds 40
2.44 Joint Finance Companies» Source of Funds 40

v
 Foreword

By expressing thanks and praise to God Almighty, we are pleased to present the Financial Stability Review (FSR)
No. 10, March 2008. The FSR is one of the reports presented to our stakeholders regarding the implementation of
Bank Indonesia»s primary function, which aside from safeguarding monetary stability is also to maintain financial
system stability.
As with previous reviews, this edition features analysis results on current sources of instability, risk mitigation measures
and future financial stability prospects. In addition, this particular edition includes two articles pertaining to the results of
recent property credit and household financial balance surveys. The inclusion of these articles is deemed pertinent because
history has demonstrated that financial crises can stem from a collapse in the property sector and the inability of the
household sector to repay outstanding liabilities to financial institutions.
The publication of this FSR is also deemed strategic considering the mounting challenges facing the Indonesian
financial sector. The greatest challenge emanates from the global economy, mainly as a result of the subprime mortgage
crisis that is sweeping major countries across the globe. This crisis has also triggered escalating uncertainty and shattered
the confidence of business players in the global financial market. In addition, the soaring global prices of oil and basic
food commodities have sparked the threat of rising inflation amidst sluggish global economic growth. Domestically, the
challenges come from the intense frequency of natural disasters plaguing the country and macroeconomic conditions
that still yet to reach the levels in 2007.
The unrelenting challenges we face require the focused attention of all related stakeholders in the financial sector.
To support awareness, up-to-date information is critical coupled with detailed reviews of financial sector issues. Through
the publication of FSRs, it is expected that such information and reviews will be routinely available for the benefit of all
related parties, including business players, government officials, academics and analysts.
It is important to note that the year 2007 was one of the finest years in the context of financial system stability. The
Indonesian financial sector was well maintained, whereas banks, which dominate the financial sector, continued to shine.
The intermediation function improved with credit growth reaching 25.5%, whereas gross non-performing loans (NPL)
dropped below 5% for the first time since the crisis. In the future, one key challenge is to direct credit growth towards
more productive purpose and promote the advancement of micro, small and medium enterprises, which have proven to
be resilient to the crises.

vi
 With respect to the above expectations, once again we welcome the publication of this edition of the Financial
Stability Review. For that, we would like to extend our sincere gratitude to all parties who have directly and indirectly
contributed to the publication of this review. May the fruits of this review prove useful in maintaining future financial
system stability that can safeguard the macroeconomic stability for the prosperity of the general public.

Jakarta, March 2008

DEPUTY GOVERNOR
BANK INDONESIA

Muliaman D. Hadad

vii
viii
 Overview

Overview

1
 Overview

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2
 Overview

Overview

Indonesian financial system stability during the second semester of 2007

was well maintained and future prospects remain upbeat. This was achieved
through the sustained support of macroeconomic stability as well as real
sector performance, which continued to improve although not quite as well
as expected. Financial sector performance, in particular the banking sector,
also picked up, which stimulated growth in loan extension as well as improved
the quality of the loans. Non-bank financial institutions and the capital markets
carried on expanding amid increasing pressure stemming from global financial
markets. The securities market also experienced satisfactory growth despite
confronting pressure several times during 2007, for which the negative
impacts were mitigated. Looking towards the future, the persisting sources
of instability require close monitoring and the negative impacts must be
mitigated, among others through the Crisis Management Protocol jointly
coordinated between the relevant authorities for banking, the capital markets
and non-bank financial institutions.

1. SOURCES OF INSTABILITY
In the second semester of 2007 financial system
stability was beset by even greater challenges than were
faced during the previous period. The sources of instability
that have prevailed since the preceding semester continued
amid dynamic developments in the financial sector.
In general, pressure on the financial system during
the second semester of 2007 mainly emanated from the
external environment. This was primarily reflected by
fluctuations in the global financial market. In fact, global
stock markets were corrected more frequently due to
increasing uncertainty and waning confidence among
business players in the global financial market, which
represented the second-round effects of the subprime
mortgage crisis. There has been no direct involvement of
Indonesian banks in subprime mortgage transactions.
However, due to ever increasing integration between the
domestic and global economies, global financial market
volatility triggered by the subprime mortgage crisis

3
 Overview
promptly affected the domestic financial sector. As a
consequence, any pressure on the global stock market
rapidly led to a deep correction in Indonesia»s equity market.
Such conditions can jeopardize the financial system,
especially if a simultaneous sudden reversal of capital flows
occurs.
Increasing external volatility was also attributable to
the elevated global prices of oil as well as basic
commodities. In the reporting period, the global price of
oil passed the USD110 per barrel mark. Meanwhile, the
prices of basic commodities have also risen sharply,
particularly the prices of farm and mining products as well
as natural resources. These price hikes spurred the threat
of high inflation, which could undermine public purchasing
power, both globally and domestically. In terms of the
financial sector, high inflation would reduce debtor
repayment capacity, potentially leading to an increase in
non-performing loans (NPL).
Another significant issue that contributed to
increasing external volatility was sluggish global economic
performance, principally caused by the heavy economic
burden currently befalling the United States. Following the
subprime mortgage crisis economic growth in the United
States has been slow, with several experts in the field even
expecting an impending recession. A slowdown in global
economic growth will exert additional pressures on the
financial sector as it weakens the performance of exporters
as the customers of banks and other financial institutions.
Meanwhile, high dependence on bank financing,
constraints in the real sector and high concentration on
consumer loans persist as the prevailing sources of
instability. With such high dependence on bank financing,
any fluctuations or crises in the banking sector would
rapidly affect other industries in the financial sector. The
protracted resolution of the various issues currently
affecting the real sector, such as unemployment and limited
4
infrastructure, may encumber investment activities and
disrupt operations in the business community.
Despite the slightly higher rise in working capital
credit growth compared to consumption credit during the
reporting period, ongoing vigilance is imperative in order
to avoid over concentration on consumption credit. Such
a concentration could imperil the financial sector,
particularly if household income becomes insufficient to
repay outstanding loans to banks and other financial
institutions. In addition, concentration on consumption
credit may diminish the willingness of banks to extend
productive loans, which are, in fact, crucial to support
sustainable economic growth.
Natural disasters have plagued Indonesia regularly
in recent years, which constitute yet another source of
instability that should be carefully observed. Regardless of
the various measures undertaken by Bank Indonesia in
terms of regulating the special handling of bank loans in
affected areas, if wide-reaching natural disasters persist,
financial system stability will almost certainly be affected.
Another important source of instability is associated
with the ever increasing integration of banks and non-
bank financial institutions that has led to a blurring of the
distinction between the products offered by banks and
those offered by other financial institutions. Innovation of
financial products that is not supported by comprehensive
risk mitigation and sufficient product transparency may
harm the consumers and endanger financial system
stability.
Furthermore, the possibility of security disruptions
due to the upcoming General Election should be taken
into account. Even though previous general elections have
passed relatively peacefully and the public are becoming
increasingly familiar with the dynamics of democratic
parties, the financial sector should remain cautious and
try to anticipate any potential disturbances to financial

system stability, including those associated with
preparations for the General Election.
2. RISK MITIGATION
To reduce the possibility of financial sector instability,
several risk-mitigation steps have been implemented. First
was strengthening bank risk management. During the
reporting period, the implementation of risk management
has been improved, partially as a result of risk-management
certification for bankers as well as the additional
preparations taken by banks in accordance with Basel II
implementation. Additionally, the introduction of risk-
based supervision by bank supervisors has encouraged
banks to implement better risk management.
Risk mitigation has also been reinforced through
more effective surveillance on the financial system.
Therefore, the review and development of various
surveillance methods and approaches should continue to
be pursued, either quantitatively through stress tests and
simulations, or qualitatively through the regular monitoring
of sectoral performance for sectors with direct and indirect
impacts on financial system stability, for example the real
and household sectors.
To reduce dependence on banks, risk mitigation can
be applied, among others, through financial deepening
which allows non-bank financial institutions to play larger
roles in the financial sector. Financial deepening also allows
the development of hedging and derivative markets,
therefore, financial institutions and business players alike
can employ sound risk management.
To reduce the risks associated with volatility in the
global market, closer coordination between the relevant
authorities for banking, the capital markets and other
financial institutions is critical and must be pursued further.
Through close coordination anticipative steps can be
formulated prior to the problem spreading. Furthermore,
Overview
prioritizing the role of the Financial System Stability Forum
(FSSF) and expediting draft legislation for the Financial
Sector Safety Net Act represent two more important
avenues which must be explored in more depth.
Notwithstanding, Crisis Management Protocol, which sets
out the procedures and steps to be taken during a crisis, is
critical in the context of maintaining financial system
stability.
3. OUTLOOK FOR FINANCIAL SYSTEM STABILITY
In the future, financial system stability is expected to
be maintained despite facing more arduous challenges in
2008, particularly stemming from the economic downturn
in the United States and the oil price hikes, as well as
contagion from the intense pressure building in the global
financial market. This positive view is supported by
improved bank risk management and tighter surveillance
of financial system stability, both in terms of the method
and coverage area. In addition, various stress tests that
have been conducted strongly indicate that banks, as the
foundation of the financial sector, are resilient to the risks
associated with credit, the interest rate and exchange rate
as well as the price of government debt securities/
government bonds (SUN).
Stronger bank capital has further raised optimism
for the future. Regulations stipulating a minimum core
capital (tier 1) of Rp80 billion by the end of 2007 have
been met by all commercial banks. Furthermore, the
requirement for all commercial banks to retain a minimum
core capital of Rp100 billion by 2010 is expected to
strengthen bank capital enabling the banks to confront
larger risks.
Amid rising uncertainty in the global financial market,
the prospects of the Indonesian financial system remain
positive due to stronger commodity prices and better risk
management. Despite the rising trend in commodity prices
5
 Overview
attributable to uncertainty, it is also important to note that
rising prices will open new business opportunities in sectors
like mining (coal), alternative energy and plantations (crude
palm oil, soybean and sugar cane).
Efforts to maintain financial system stability require
adequate information regarding all relevant sectors. To
gauge property sector performance earlier an Early
Warning System (EWS) model was developed which
explains property credit behavior. The resultant model
indicates that property NPL over the upcoming 6 months
will decrease but then rise again in the subsequent 12
months. Furthermore, the results of a household balance
6
sheet survey conducted at six locations (Bodetabek, D.I.
Yogyakarta, West Java, Central Java, East Java and West
Sumatra) demonstrated that all households surveyed are
able to repay their outstanding liabilities to the banks and
non-bank financial institutions. This implies that the
resilience of the financial system stemming from the
household sector, especially at the six locations surveyed,
is not a cause for concern. In the future, to illustrate a
more complete picture regarding the role of the household
sector in maintaining financial system stability, the
household balance sheet survey should be expanded to
cover more locations throughout Indonesia.
 Chapter 1 Macroeconomic Conditions and the Real Sector

Chapter 1
Macroeconomic Conditions
and the Real Sector

7
 Chapter 1 Macroeconomic Conditions and the Real Sector

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8
 Chapter 1 Macroeconomic Conditions and the Real Sector

Macroeconomic Conditions
Chapter 1
and the Real Sector

Throughout the second semester of 2007, macroeconomic stability in

Indonesia was well protected from volatility in the global financial market.
Economic expansion continued, despite the expectation of a slowdown in
2008 triggered by the soaring global oil price. During the reporting period,
inflation remained under control and the domestic interest rate started to
decline, providing the opportunities for economic activity.

1.1. MACROECONOMIC CONDITIONS on Indonesia»s domestic financial market was principally

The performance of the global economy during the due to the absence of financial institutions in Indonesia
second semester of 2007 was dominated by volatility due that directly invest in such loans. In addition, the buoyant
to the widening impacts of the subprime mortgage crisis domestic equity market was also bolstered by improving
and the soaring global price of oil. The subprime mortgage macroeconomic fundamentals.
crisis represents the turning point of the high-risk credit The second round effects of the subprime mortgage
scheme provided by financial institutions to finance crisis weakened the purchasing power of consumers in
housing. The crisis struck in 2006; however the impacts the US. Lackluster household consumption spending
only began to spread early in the second semester of 2007. limited corporate sector revenue, which triggered waves
Reports of losses by major investors in subprime of redundancies. As household consumption spending is
mortgage loans, including highly reputable banks in the the primary contributing factor of economic growth in the
United States (US) and Europe, followed by reports of
increasing delinquency and foreclosure rates on subprime Graph 1.1
Global Stock Price Index
mortgage debtors, triggered negative sentiment and forced
35,000 35,000
investors to make huge redemptions at that time. The Singapore Hongkong
30,000 New York Dow Jones 30,000
redemptions affected the financial markets of other 25,000
Indonesia Nikkei
25,000

countries, including emerging markets, thus weakening 20,000 20,000

the global stock market index. However, conversely, the 15,000 15,000

10,000 10,000
Indonesian stock market index continued to climb up to
5,000 5,000
the end of December 2007, despite increased volatility.
0 0
2006 2007
The relatively small impact of the subprime mortgage crisis Source: Bloomberg

9
 Chapter 1 Macroeconomic Conditions and the Real Sector

US, such a decline undermined the US economic growth grew by 16.5% (y-o-y), slightly below growth for 2004-
in 2007, declining by 0.4% to 2.2%. It is therefore 2006, which averaged 18.8% per annum.
reasonable that many economists form a conjecture that
Graph 1.2
the US is approaching an impending recession. Indonesian Non-Oil/Gas Exports
As the US represents almost 20% of the global Millions of USD Millions of USD

Manufacturing Agriculture, Hunting, Fishing

economy, when the US sneezes the whole world catches 8000 Mining and Quarrying Total 8000
7000 7000
a cold. Consequently, in 2007, the IMF estimated global
6000 6000
economic growth to slow down to 4.9%. The deceleration 5000 5000
4000 4000
is primarily attributable to sluggish growth in developed
3000 3000
economies. On the contrary, economic growth remained 2000 2000
1000 1000
robust in developing countries; particularly China and India.
0 0
2006 2007

Table 1.1 Source: BI

Global Economic Indicators

% Graph 1.3
Projection
Value of Indonesian Non-Oil/Gas Imports
Category 2005 2006
2007 2008 Millions of USD Millions of USD

Manufacturing
World Output*) 4.4 5.0 4.9 4.1 8,000
Mining and Quarrying
8,000

Advanced Economies*) 2.5 3.0 2.6 1.8 7,000 Agriculture, Hunting, Fishing 7,000
Total
Emerging & Developing Countries*) 7.0 7.7 7.8 6.9 6,000 6,000

Consumer PriceAdvanced Economies 2.3 2.3 2.1 2.0 5,000 5,000

Emerging & Developing Countries1) 5.2 5.1 5.9 5.3 4,000 4,000
3,000 3,000
(exclude Zimbabwe)
2) 2,000 2,000
LIBOR
1,000 1,000
US Dollar Deposit 3.8 5.3 5.2 4.4
0 0
Euro Deposit 2.2 3.1 4.0 4.1 2006 2007
Yen Deposit 0.1 0.4 0.9 1.1 Source: BI

Oil Price (USD) - average3) 41.3 20.5 6.6 9.5

Table 1.2
Source: World Economic Outlook - IMF October 2007
*) World Economic Outlook Update Projection - IMF January 2008 Indonesia»s Non-oil/gas Exports by Country

Country 2003 2004 2005 2006 2007

The continuing economic decline of the US has the
USA 14.61 14.07 14.00 13.19 12.00
potential to undermine economic growth in emerging
Canada 0.80 0.71 0.70 0.67 0.59
market countries in line with tighter competition between Singapore 10.46 10.86 10.60 9.82 9.57
Malaysia 4.80 5.01 4.92 4.84 5.05
exports among countries, particularly in Asia. This is due India 3.53 3.94 4.34 4.37 5.26
Japan 14.44 15.17 14.76 15.21 14.35
to the diminishing purchasing power of households in the
China 5.64 6.09 6.01 6.98 7.31
US, who are the main consumers of exported products South Korea 3.74 3.27 4.03 4.23 4.10
Europe 18.31 16.51 16.24 16.11 15.72
from Asian countries. In Indonesia, however, such
Source: BI
conditions have relatively insignificant effects on export
value and volume. Up to November 2007, the export value Indonesia»s relatively high export value is mainly
of Indonesia grew rapidly despite a slightly slower rate. supported by the rising price of export commodities in the
During the first 11 months of 2007, Indonesian exports international market, particularly oil, CPO, tin and rubber.

10
 Chapter 1 Macroeconomic Conditions and the Real Sector

Graph 1.4 suppressing the negative sentiment prevalent in the

Price Index of Several Commodities
market. As a result, the indices of global stock exchanges,
500 500
450 Oil Copper 450
which had plummeted due to redemptions, began to
Tin Gold
400 Palm Oil Coffee 400
Rice Rubber
slowly rebound.
350 Aluminium 350
300 300 The sharp reduction in the Fed fund rate spurred a
250 250
200 200 higher interest rate differential in emerging markets
150 150
countries against the interest rate of the US. Economic
100 100
50 50 growth in these emerging market countries remained
0 0
2000 2001 2002 2003 2004 2005 2006 2007 relatively strong with bullish expectations of a high
Source: BI
investment return, which generated positive sentiment in
Furthermore, increasing diversification amongst Indonesia»s emerging market countries, including Indonesia. The higher
export target countries, trending more towards Asian real interest rate in Indonesia compared to the US, better
countries, particularly China and India, also supports strong rupiah returns and the improving sovereign rating awarded
export performance. The increase in exports to these two to Indonesia by international ratings agencies, have all
key countries may compensate the decline in exports helped generate more foreign investment inflows to
stemming from economic problems in the US. Indonesia.
In an attempt to recover the US» economy, the Federal
Graph 1.6
Reserve (Fed) reduced its federal funds rate to 4.25% in Real Interest Rate in Indonesia and USA
% %
December 2007, reducing it further to 2.25% in March
2008. In addition to the reduction in the interest rate, the 4 4
US
2 2
Fed also injected large amounts of liquidity into the banking
0 0
system and financial market to prevent any further
-2 -2
Indonesia
deepening of the potential economic crisis in the US. In -4 -4

addition, a number of other central banks also undertook -6 -6

such measures. The steps taken by the Fed and several -8 -8

2005 2006 2007
other central banks were sufficiently effective in Sources: Bloomberg, BI, BPS

Graph 1.7
Graph 1.5
Standard & Poor»s Outlook Sovereign Rating
International Interest Rate
for Indonesia
% %
BBB+
SIBOR ECB FFR LIBOR BBB
6 6 Stable Outlook
-
BBB
5 5 BB+
BB
4 4
-
BB
3 3 B+

2 2 B
B- B -
1 1 CCC+

0 0 SD SD
2001 2002 2003 2004 2005 2006 2007 2008 Jul-92 Sep-94 Dec-96 Feb-99 Apr-01 Jul-03 Sep-05 Nov-07

Source: Bloomberg Source: Bloomberg

11
 Chapter 1 Macroeconomic Conditions and the Real Sector

Graph 1.8 Graph 1.10

Moody»s Outlook Sovereign Rating for Indonesia Capital Inflow Composition
% of Total Liabilities, BOP
BBB 80
72 Direct investment (in Indonesia)
BBB
- Positive Outlook 70 63 Portfolio investment (Liabilities)
57 55
BB+ 60

BB 50 43 45
37
BB
- 40
28
B+ 30

B 20

B- 10

CCC+ 0
2004 2005 2006 2007
Jun-97 Dec-98 Jun-00 Dec-01 Jun-03 Nov-04 May-06 Nov-07
Source: BI
Source: Bloomberg

Graph 1.9 Graph 1.11

Fitch Outlook Sovereign Rating on Indonesia Composition of Foreign Portfolio Capital Flow

% of Total Liabilities, BOP

Baa2 45
40
Stable Outlook 40 Bond & Note (Public)
Baa3
35 Others - SBI (Public)
Ba1 Equity Securities (Private)
30
Debt Sec. (Private)
25 22 23
Ba2 19
20 18 16
Ba3 15
14
15 11
B1 10 6 6
3 3
B2 5
0
B3 -1
-5 -2
-4
Caa1 -10
Mar-94 Jun-96 Oct-98 Jan-01 May-03 Aug-05 Nov-07 2004 2005 2006 2007
Source: BI
Source: Bloomberg

However, uncertainty regarding the possible further Graph 1.12

Investment Portfolio Ratio
propagation of the subprime mortgage crisis led to extreme
%

caution on the part of investors. They tended towards 2.00 2.18

PI/CA
PI/FDI 1.63
short-term investments in the form of financial asset PI/Int»l Reserve
1.50
portfolio. In 2007, the share of the capital flow portfolio
1.04
0.94
in the capital flow component reached 55%, whereas the 1.00
0.80

share of Foreign Direct Investment (FDI) was 45%. 0.50

0.28 0.24 0.20
Meanwhile, investment share in Bank Indonesia Certificates 0.10 0.12
0.03 0.03
0.00
Malaysia Philippines Indonesia
(SBI) vastly increased to 14%. On a regional scale, the Thailand
Source: BI
portfolio ratio of Indonesia in terms of the Capital Account,
FDI and foreign exchange reserves were higher than surpassed that of 2006. The growing BoP surplus helped

Thailand and Malaysia, but remained lower than the increase forex reserves to USD56.92 billion in December

Philippines. 2007; equal to 5.7 months of imports and foreign debt

Greater export performance and persistent portfolio repayments.

investment inflows to Indonesia supported the Indonesia Along with the BoP surplus, an attractive return on

Balance of Payments (BoP) surplus in 2007, which the rupiah and well-maintained risk factors, the rupiah

12
 Chapter 1 Macroeconomic Conditions and the Real Sector

exchange rate in 2007 appreciated, on average, by 0.44% Graph 1.15

Indonesian inflation and BI Rate
reaching Rp9,125 by year end. However, when the rupiah
% %
is compared to several other currencies during 2007, the
Inflation (y-o-y)
rupiah exchange index remained the lowest despite 16 16

volatility staying under control. 12 12

Controlled exchange rate volatility and consistent BI-rate

8
8

monetary policy to maintain price stability improved inflation

4 4
expectations. During the second semester of 2007, the
0 0
inflation rate remained manageable. In general, the inflation 2005 2006 2007
Sources: BPS & BI
rate in 2007 stayed within the corridor set by Bank Indonesia
(BI), namely 6%±1%. Controlled inflation rate expectations controlled inflation and a declining interest rate, stimulated
enabled the BI rate (policy interest rate) to decline gradually the Indonesian economy to continue growing apace
and measurably, reaching 8.00% in December 2007. despite the slowdown in the global economy. In 2007
Increases of exports and consumption power, economic growth reached 6.33%, which exceeded the
supported by well-maintained macroeconomic stability, previous year of 5.48%.

Graph 1.13 Table 1.3

Rupiah Exchange Rate Performance Indonesian Economic Growth
IDR/USD IDR/USD
%
9,600 9,600
9,500
Monthly Average
9,500 2007
Quarterly Average Indicator 2005 2006 2007
9,400 Annual Average 9,400 QI Q II Q III Q IV
9,295 Semester Average
9,300 9,300
9,238
9,201
9,200 9,165 9,181 9,210
9,200 GDP Growth (%) 5.60 5.48 5.99 6.34 6.52 6.47 6.33
9,125
9,100 9,124 9,129 9,134 9,100
9,108 9,109 - Sisi Pengeluaran
9,000 9,039 9,000
8,968 - Consumption 4.41 3.91 4.57 4.60 5.43 6.92 5.41
8,900 8,900
8,800 8,800 - Investment (Gross
8,700 8,700 Fixed Capital Form) 9.93 2.91 7.82 6.96 8.83 9.75 8.37
9,474
9,255
9,157
8,929
9,018
9,366
9,128
9,093
9,155
9,174
9,138
9,087
9,075
9,077
9,172
9,095
8,842
8,981
9,067
9,358
9,105
9,102
9,267
9,356

8,600 8,600
- Exports 8.60 9.16 8.95 9.78 7.78 9.14 8.00
8,500 8,500
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 - Imports 12.35 7.57 8.45 7.29 8.15 9.64 8.38
2006 2007
Source: Bloomberg Source: BI

Graph 1.14
Foreign Exchange Rate The risks stemming from external sector
1 January 2007 = 100 vulnerabilities are expected to remain high in the future.
Index Index

This is primarily attributable to the potential expansion

115 115
of the subprime mortgage crisis in the global economy
110 110

105 105
through the financial markets, as well as inflationary
100 100 pressures due to price hikes affecting global oil and food
95 95
commodities. In addition, uncertainty remains prevalent
90 SGD PHP KRW EUR 90
JPY IDR THB regarding a global economic recession induced by a
85 85
Jan Feb Mar Apr May Jun Jul Ags Sep Oct Nov Dec weaker U.S. economy, especially if the economic
2007
Note: rising index = stronger exchange rate
Source: Bloomberg
stimulation package introduced by the U.S. Government

13
 Chapter 1 Macroeconomic Conditions and the Real Sector

fails to abate the declining conditions currently Graph 1.16

Domestic Interest Rate
compounding their domestic economy. Against this
% %

unfavorable backdrop, global economic growth in 2008

Consumer Loans

-estimated by IMF in October 2007 to reach 4.8%- was 15 Investment Loans 15

corrected in January 2008 down to 4.1%. Such conditions Working Capital Loans

10 BI-rate 1-month SBI 10

also decreased the domestic economic growth projections
1-month Rp Time Deposits
to a level of 6.5% according to the IMF. This figure is, 5 5
Savings Deposits
however, in harmony with BI estimates which put growth
0 0
in 2008 at 6.2%-6.8%. 2005 2006 2007
Source: BI
Such macroeconomic performance affected
financial sector resilience. This was evident, among others, Graph 1.17
Variance between Loan and Fixed Deposit Rates
from macro stress tests concerning credit risk in the
% %

banking industry (see Box 2.1). In addition to the 2005 2006 2007
10 10
macroeconomic factors, financial sector resilience was
8 8
also influenced by foreign debt. Analysis on potential
6 6
pressure emanating from foreign debt is elaborated in
4 4
Box 2.2.
2 2

0 0
Average Working Capital Investment Consumer
1.2. CONDITIONS IN THE REAL SECTOR Loans Loans Loans
Source: BI
Improved economic fundamentals enabled a gradual
decrease in the BI Rate which was closely followed by other Index, which boosts private consumption.1 This was also
domestic rates. By end of the second semester of 2007, evidenced by the rise in consumer loans. Increasing private
interest rates for investment credit, working capital credit consumption was, among others, caused by the decreasing
and consumption credit dropped by 98 bps, 88 bps and interest rate and also supported by stronger public
78 bps respectively compared to the end of the previous
Graph 1.18
semester, to 13.01%, 13.00% and 16.13%. The reduction Consumer Confidence Index Performance
Index
in the BI Rate was partially transmitted to the lending rates, 150.0

illustrated by a relatively wide spread between lending rates

125.0
(particularly consumption credit) and the deposit rate. Optimis
100.0
However, expectations of low interest rates and well- Pesimis

75.0
maintained macroeconomic stability encouraged positive
50.0 Index of Current Economic Conditions
sentiment. This, in turn, prompted consumer confidence Index of Consumer Confidence
Index of Consumer Expectations
(demand) and producer optimism (supply) regarding future 25.0
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112
2005 2006 2007
economic growth. Source: BI

From the demand side, greater consumer confidence

1 Consumer Survey in December 2007. The survey has been routinely conducted every
month since October 1999 by the Directorate of Economic and Monetary Statistics,
was reflected by the upsurge in the Consumer Confidence Bank Indonesia

14
 Chapter 1 Macroeconomic Conditions and the Real Sector

Graph 1.19 Graph 1.21

Consumption Credit Debt-to-Equity Ratio
Outstanding
Trillions of Rp % 1.20
300 30
1.00
250 25
Loans (left axis)
0.80
200 20
0.60
150 15
0.40
100 Growth (right axis) 10
0.20
50 5
NPL (left axis) 0.00
0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2004 2005 2006 2005 2006 2007
Source: BI Source: BEI

purchasing power as well as seasonal factors such as
religious holidays and New Year festivities during the
second semester of 2007.
Meanwhile, on the supply side, in accordance with
favorable macroeconomic conditions the financial
performance of the corporate sector in 2007, in particular
public listed non-financial companies, improved relatively
compared to previous years. This was indicated by an
in the future. In line with this, the estimated probability
of default (PD) for non financial public listed companies
indicates that the number of companies with a PD above
0.5 is expected to rise from 21 at the end of December
2007 to 22 by the end of June 2008. This indicates a
Graph 1.22
Non Financial Public Listed Companies Probability of
Default (December 2007)

increase in ROA and ROE as well as lower leverage. Distribusi Forecast Probability of Default December 2007

However, improved corporate sector performance

has, so far, failed to yield adequate business expansion. In
178
fact before the corporate sector improved, it was beset
with volatility in the financial market, for example
stemming from the subprime mortgage turmoil, as well
22
3 0 0 2 0 0 0 0
as soaring oil and basic commodity prices. Such volatility
0.0-0.1 0.1-0.2 0.2-0.3 0.3-0.4 0.4-0.5 0.5-0.6 0.6-0.7 0.7-0.8 0.8-0.9 0.9-1.0
has the potential to impede corporate sector performance

Graph 1.23
Graph 1.20
Non Financial Public Listed Companies Probability of
Growth of ROA and ROE
Default (June 2008)
600 350
ROA (left axis) ROE (right axis) 300 Distribusi Forecast Probability of Default June 2008
500
250
400
200
300 150 181

200 100
50
100
0
0
-50
-100 -100 19
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2 1 0 0 2 0 0 0
2003 2004 2005 2006 2007
Source: BEI 0.0-0.1 0.1-0.2 0.2-0.3 0.3-0.4 0.4-0.5 0.5-0.6 0.6-0.7 0.7-0.8 0.8-0.9 0.9-1.0

15
 Chapter 1 Macroeconomic Conditions and the Real Sector

Graph 1.24 Although, in general, the conglomerates appear sufficiently

Non Financial Public Listed Companies Probability of
Default (December 2007 and June 2008) resilient to exchange rate volatility, due to recent global

% and domestic economic developments, however, it is critical

Dec-07 Jun-08 to prudently remember that numerous conglomerates

18.9 currently have a ratio of net foreign exchange liabilities to
16.2
12.1 capital above 25%.
10.0 9.8 12.1
9.4
10.0 9.8 9.4 6.9 7.1
6.9 7.1
Graph 1.25
0.0 Net Foreign Exchange Liabilities to Capital Ratio
0.0
%
Agri Mining Bsc Idty Misc Idty Cnsmr Gds Property Infrstrctr Trade,
& Che Invstmt 200
175
Net Foreign Exchange Liabilities
150 to Capital Ratio > 25%
potential decline in corporate sector performance which 125
100
will raise credit risk in the real sector in the future. The 75

sectors projected to experience a rise on PD include the 50

25
trade, service and investment sectors, as well as 0
(25)
miscellaneous industry. (50)
A C E G I K M O Q S U W Y AA AC AE AG AI AK AM AO AQ
In addition to a potential rise on credit risk, companies
in the real sector will also be exposed to exchange rate Meanwhile, despite the investment components of
risk. The results of stress tests on 47 large companies and Gross Domestic Product (GDP) structure indicating growth,
conglomerates in Indonesia showed that conglomerate such growth was in fact limited. The expansion primarily
performance should remain relatively solid even if the originated from the non-traded sector (transportation,
rupiah depreciates to Rp9,500/USD. However, should the communications, electricity, gas and water, as well as
rupiah weaken to Rp14,000/USD, this has the potential services and finance). On the other hand, the
to disrupt one conglomerate; reducing its capital by 100%. manufacturing industrial sector, which was expected to

Table 1.4
Impacts of Exchange Rate to Conglomeration Equity

Pengurangan Rupiah Exchange Rate (IDR/USD)

45,000
Equity 9,000 9,500 10,000 10,500 11,000 11,500 12,000 12,500 13,000 13,500 14,000 25,000 35,000

10% 0 1 6 6 8 7 8 8 7 6 3 0 0 0
20% 0 0 1 6 1 5 6 5 3 3 5 0 0 0
30% 0 0 0 1 5 4 0 2 5 4 2 0 0 0
40% 0 0 0 0 1 2 5 1 0 2 5 1 0 0
50% 0 0 0 0 0 1 1 4 1 0 0 2 0 0
60% 0 0 0 0 0 0 1 1 4 2 1 2 0 0
70% 0 0 0 0 0 0 0 1 1 3 3 3 2 0
80% 0 0 0 0 0 0 0 0 1 1 1 0 0 0
90% 0 0 0 0 0 0 0 0 0 1 1 0 0 0
100% 0 0 0 0 0 0 0 0 0 0 1 14 20 22

Jmlh Konglomerasi
0 1 7 13 15 19 21 22 22 22 22 22 22 22
bermasalah

16
 Chapter 1 Macroeconomic Conditions and the Real Sector

be the main driver of economic growth due to its large Amid higher business risk pressure, the corporate
multiplier effect on other economic sectors, did not grow sector tends to conduct business by utilizing internal funds
as hoped: just 4.9%. These are not dissimilar conditions rather than external fund sources such as bank loans. In
to the previous semester. spite of the declining interest rate trend, credit extended
by banks has not yet been optimally exploited. This also
Graph 1.26
Sectoral GDP Growth elucidates why credit extension by banks, particularly
(Growth, yoy)
16.00 investment credit, remains below potential. The tendency
Agribusiness Mining & Quarrying
14.00 Manufacturing Electricity, Gas and Water
Construction Trading, Hotel,
and Restaurant
of corporations to finance using internal resources is clearly
12.00 Transportation
Dan Communication Financial, Rent,
10.00
Services and Services
evidenced by the relatively high ratio of own capital to
8.00 total assets in listed companies.
6.00

4.00
Graph 1.27
2.00 Financing of Public Listed Companies and their Expansion
0.00 (Asset Growth)
2005 2006 2007
Source: BI 1.0 1.0
Growth of Assets (left axis)
0.8 Self Financing (right axis) 0.8
Agriculture; Industrial; Construction; Transportation
0.6 0.6
and Communications; Services; Mining and Excavation;
0.4 0.4
Utilities (electricity, gas and clean water); Trade, Hotels and
0.2 0.2
Restaurants; Finance, Rental and Services.
0.0 0.0
In general, limited investment growth was due to
-0.2 -0.2
the constraints still challenging corporate sector expansion, 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

particularly infrastructure and employment. Considering
the prolonged resolution of these issues, there has been
no significant improvement in Indonesia»s investment
competitiveness. According to the World Economic Forum
East Asia (June 2007), the average rating of Indonesia»s
investment competitiveness among ASEAN countries is just
above Vietnam and the Philippines.
Source: BEI
On one hand, the tendency to finance using internal
funds reflects the improved financial condition of the
corporate sector as they are not dependent on bank credit.
However, on the other hand, such a tendency has the
potential to restrict companies from fully expanding their
businesses due to limited internal funds. If this remains

Table 1.5 Graph 1.28

Competitiveness Rating √ World Economic Forum Unemployment Rate in Indonesia
%
12
Country GCI 2007- 2008 GCI 2006-2007
(of 131 countries) (of 122 countries) 10

Indonesia 54 54 8
Malaysia 21 19
6
Vietnam 68 64
Thailand 28 28 4
China 34 35
2
Philippines 71 75
Singapore 7 8 0
2001 2002 2003 2004 2005 Feb-06 Aug-06 Feb-07 Aug-07
Source: BPS

17
 Chapter 1 Macroeconomic Conditions and the Real Sector

the status quo, new employment opportunities will be decrease. This suggests that the capital inflows have not
limited which will undermine efforts to reduce the relatively been absorbed by the corporate sector, in particular public
high unemployment rate. listed companies.
Meanwhile, capital inflows -generally in the form of In the future, arduous developmental challenges are
financial assets- have not fully financed the real sector, expected to remain in the real sector associated with
particularly the investment sector. Amidst the surging potential inflationary pressure and the knock-on effects
capital inflows to Indonesia, the debt-to-equity ratio of of the global economic slowdown. In order to stimulate
public listed non financial companies has tended to robust, sustainable economic growth, support from various
stakeholders is required to overcome the constraints faced
Graph 1.29
Growth of DER and TL/TA in the real sector. In this context, the role of the Micro,
1.20 1.20 Small and Medium Sector, which has long proved its
1.00 1.00
resilience in crisis conditions, should be prioritized in the
0.80 0.80
economy. Thus, improvements in macroeconomic
0.60 0.60
conditions will essentially be followed by progress in the
0.40 0.40
real sector. Furthermore, as consequence, this will
0.20 Debt Equity Ratio 0.20
Total Liabilities/Total Assets
strengthen the resilience of the economy and domestic
0.00 0.00
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 financial sector towards external shocks.
2005 2006 2007
Source: BEI

18
 Chapter 1 Macroeconomic Conditions and the Real Sector

Box 1.1 Macroeconomic Stress Test

To assess the impact of macroeconomic conditions JCI = Jakarta Composite Index

on bank credit risk, a macroeconomic stress test was GDP = Gross Domestic Product
applied using a fixed-effect panel data model. The INF = Inflation
model developed is a linear regression model based on XRATE = Exchange Rate
the General Unrestricted Model as follows:

k n
By using data for 15 major commercial banks
Yit = αi + δt +
j=1
ΣγY i it - j Σβ X
+
m=0
i it - m + εit in Indonesia from December 1995 to May 2005, the
results indicated that changes in credit risk,
Where: particularly the LLP/TL variable, were significantly
Yit : credit risk (LLP/TL and NPL/TL) influenced by changes in macroeconomic indicators
Xit : macroeconomic variables (GDP, Petrol Price, such as M2 and inflation. This implies that, in general,
Diesel Price, M1, M2, JCI, INF, EXRATE) shocks stemming from macroeconomic factors
ai : individual effect of each bank intensified the credit risk of banks. Consequently,
eit : residual, where et~N(0, σ 2 ) each development in the macroeconomic
t : time period environment, either domestic or international, must
LLP = Loan Loss Provisions be thoroughly observed and anticipated by
M1 = Narrow Money stakeholders in the financial sector. Failure to monitor
NPL = Non-performing Loans or anticipate macroeconomic developments could
M2 = Broad Money endanger the banking industry and the financial
TL = Total Loans system in general.

19
 Chapter 1 Macroeconomic Conditions and the Real Sector

Box 1.2 Potential Pressure from Foreign Debt

One important aspect that requires close However, additional caution is required due to
consideration in relation to macroeconomic several signs of increasing potential pressure
performance is the potential pressure stemming from emanating from foreign debt. First, the value of
foreign debt. Up to December 2007, Indonesia»s foreign foreign debt has increased. Compared to the position
debt totaled US$136.6 billion, dominated by the in 2006, foreign debt grew by 7%. An increase was
Government (51.0%) followed by the Private sector also apparent in short-tenure foreign debt; from
and others (49%). US$16.5 billion to US$23.1 billion or up 40.2%. As
a consequence, the short-tenure foreign debt ratio
Graph Box 1.2.1 to foreign exchange reserves also increased; from
Foreign Debt
38.7% (end of 2006) to 40.6% (end of 2007).
Millions of USD
90,000 Furthermore, the growth in foreign exchange
Government
80,000 Private reserves falls short of the increase in short-tenure
Others
70,000
foreign debt.
60,000
50,000 It is critical to monitor such developments in
40,000 foreign debt considering the impacts on financial
30,000
sector resilience as foreign debt or inflows of foreign
20,000
10,000 capital are principally invested in SBI and government
- bonds (SUN), and tending to increase. By the end of
2000 2001 2002 2003 2004 2005 2006 2007
2007, SBI and SUN ownership by foreign investors
In general, Indonesia»s foreign debt appears totaled US$11.3 billion; up US$3.2 billion (39.3%)
sustainable. This is evidenced by indicators such as the over the previous year. Pressures on financial sector
external debt to GDP ratio, external debt to exports resilience may emerge should the foreign capital
ratio and debt service ratio (DSR). These three ratios in invested in domestic securities experience a sudden
2007 were below the benchmark values set by the reversal. In addition, pressures may also appear due
World Bank and consequently can be declared as to the relatively large value of foreign debt in the
sufficiently safe. payment plan. For 2008, the payment plan amounts

Graph Box 1.2.2 Graph Box 1.2.3

Debt Burden Indicators of Indonesia Indonesia ULN Payment Plan
% % Millions of USD Millions of USD
200 300 2,800 5,000
180 ED / EXPORT (RHS) Government (lhs) Private (lhs) Total (rhs)
4,500
ED / GDP (RHS) 250 2,400
160 4,000
DSR (LHS)
140 ST ED / RESERVE (LHS) 2,000 3,500
200
120 3,000
1,600
100 150 2,500
80 1,200
2,000
100
60 1,500
800
40 1,000
50 400
20 500
0 0 0 0
1997 1998 1999 2005 2006 2007 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2008
Source : Dint/PPLN

20
 Chapter 1 Macroeconomic Conditions and the Real Sector

to US$23.7 billion, consisting of Government foreign Private sector will have to manage their foreign debts
debt payments to the tune of US$9.1billion (38.3%) and ensure their timely repayment to avoid any
and Private foreign debt payments totaling US$14.6 potential reputational risk and prevent a rise in the
billion (61.7%). Therefore, the Government and international perception of Indonesia»s country risk.

21
 Chapter 1 Macroeconomic Conditions and the Real Sector

Halaman ini sengaja dikosongkan

22
 Chapter 2 Financial Sector

Chapter 2
Financial Sector

23
 Chapter 2 Financial Sector

This page is intentionally blank

24
 Chapter 2 Financial Sector

Chapter 2 Financial Sector

In the second semester of 2007, Indonesian financial sector stability was

well maintained. The banking industry, which continued to dominate the
financial sector, performed favorably with high credit growth. However, the
need for more productive loans remains. Credit quality improved, as reflected
by the gross NPL ratio dipping below 5% in December 2007 for the first
time since the crisis. Banks remained liquid and controlled market risk as
well as maintaining sufficient capital and their profitability. Non-bank financial
institutions and the capital market also expanded amid mounting pressure
stemming from the global market.

2.1. STRUCTURE OF THE INDONESIAN FINANCIAL
SYSTEM
The structure of the Indonesian financial system has
not significantly changed since the previous edition of the
Financial Stability Review (FSR No. 9). The financial system
still constitutes commercial banks, rural banks and the non-
bank financial industry which includes insurance, pension
funds, finance institutions, securities and pawn brokers.
Data indicates that banks continue to dominate the sector
but with a shrinking share; amounting to 79% of total
assets of the financial system as a whole. Additionally, the
banking industry is still dominated by 15 major banks with
a share of around 70% of total bank assets.
In addition to banks, finance companies have also
witnessed a declining share. Meanwhile, the share of
securities companies has increased significantly, followed
by insurance companies. As an aggregate, total funds
managed by the financial sector amount to 64% of
Indonesia»s GDP.2
2.2. BANKS
2.2.1. Funding and Liquidity Risk
Deposits
Deposits, as the banks» primary source of funds
continued to increase during the second semester of 2007.
By year end, total deposits held by the banking industry
reached Rp1,510.7 trillion, representing a rise of Rp157.0
trillion (11.60%) in one semester. However, this was not
marked by the preference of investors to invest in foreign
currency as was common during the previous semester.
2 Nominal price GDP

25
 Chapter 2 Financial Sector

During the reporting semester, rupiah deposits grew by towards more profitable alternative investments, such as
13.62%, whereas deposits in foreign currency only mutual funds, as the return on term deposits fell.
increased by 1.36%. Consequently, during the second semester of 2007 the
net asset value (NAV) of mutual funds grew rapidly by
Graph 2.1
Financial Institutions» Assets 36.4%.

Graph 2.2
Share of Total Assets of Financial Institution
Growth in Deposits by Currency (m-t-m)
2005
0.3% %
9
5.3% 1.0%
3.5%
7.3% Semester I
Rp Deposits
1.1% 6

81.5%
-3
Commercial Banks Rural Banks Foreign Exchange Deposits Semester II
Insurance Companies Pension Funds
Finance Companies Securities Companies -6
Pawn Brokers 2006 June 2007 2007
2006
4.6% 3.7% 0.3%
3.2% Graph 2.3
8.2%
1.1% Growth in Deposits by Component (m-t-m)
%
12
Semester I Semester II

9
79.0% Demand Deposits
Savings Deposits
Source: BI and others 6

3 Deposits
Term deposits continued to command the largest
0
share of total deposits, however, growth of demand
-3
deposits and savings accounts outpaced that of term 2006 June 2007 2007

deposits during the second semester of 2007. Demand

deposits and savings accounts grew by 9.25% and 23.69%
respectively, yet term deposits grew by 6.15%. This is in
line with the banks» strategy to generate cheaper fund
sources due to cost efficiency. High growth in savings
accounts throughout the reporting period was accredited
to the numerous innovations made in savings products,
such as debit cards and termed savings products with
higher interest rates.
Meanwhile, slower growth in term deposits was in
line with the lower interest rate offered on term deposits
following reductions in the BI Rate. Customers tended
Liquidity Adequacy
Bank liquidity was relatively well managed during
the second semester of 2007. Banks maintained sufficient
liquidity, reflected by the high ratio of liquid assets3 to
non-core deposits (NCD)4 . Higher growth of liquid assets
compared to short-term liabilities raised the reported liquid
asset ratio from 138.9% in the previous semester to
147.7% by the end of the reporting semester.
3 Liquid assets include cash and placements at BI (BI demand deposits, SBI and Fasbi)
4 Assumption for non-core deposits (NCD) is 30% demand deposits and savings + 10%
termed deposits up to 3 months.

26
 Chapter 2 Financial Sector

Graph 2.4 Inter-Bank Money Market (PUAB)

Liquid Asset Ratio of Banks
In the second semester of 2007, PUAB remained
Trillions of Rp %
stable despite some interest rate fluctuations. It was noted
180
480
that the highest overnight (O/N) PUAB interest rate was
400
21% in the second week of September due to a
320

120
concomitant liquidity contraction, principally emanating
240

160
from the settlement of Indonesian Retail Bonds (IRB) and

80 tax payments. Nevertheless, conditions were adequately

0 60 managed, for instance through the Repo SBI facility, and
Dec'06 Jun '07 Sept'07 Dec '07

Liquid Assets NCD Liquid Assets/NCD no volatility appeared.

Placements of liquid assets in liquid and low-risk
instruments such as SBI (Bank Indonesia Certificates) and
Fasbi (Bank Indonesia Deposit Facility) increased. By the
end of the second semester of 2007, bank placements
in SBI and Fasbi reached Rp250.70 trillion, representing
a rise of 11.86% in 6 months. With the relatively high
return and low risk, liquidity placements in SBI and Fasbi
are advantageous and beneficial for liquidity
management because deposits, as banks» primary source
of funds, remain concentrated on short-term funds that
are vulnerable to sudden withdrawal. By the end of the
reporting semester, short-term funds accounted for
93.3% of deposits. This percentage will continue to rise
if banks persist with their strategy to generate cheap fund
sources.
Graph 2.5
Average Interest Rate of O/N Inter-Bank Money Market
%
16
Meanwhile, the lowest PUAB interest rate was less
than 1% in mid October. This was partially due to below-
normal financial transaction activity after the religious
holiday of Idul Fitri, indicated by a PUAB transaction volume
of just 70% compared to the previous week. In addition,
the Fasbi window was closed during the religious holiday,
which prevented the liquidity supply from Fasbi and SBI
being reabsorbed and, therefore, added the market
liquidity.
2.2.2 Credit Growth and Credit Risk
Credit Growth
Improving economic conditions, in particular the low
interest rate supported by policies to stimulate
intermediation in 2007, indicated very satisfactory results
in the reporting period. During the second semester of
2007, bank loans significantly increased (Rp141.5 trillion
or 15.7%) over the previous period (Rp 71.1 trillion or
8.5%), with total credit growth reaching 25.5%; exceeding
the target of 22%.

Afternoon In general, banks tended to focus on extending less

12
risky credit, however, the riskier credit, for example to the
Morning
8 industrial sector and foreign currency denominated credit,
Foreign Domestic
also witnessed quite significant growth. Nonetheless, this
4

credit growth was more selective compared to the pre-

0
Jan'07 Mar'07 May'07 July'07 Sep'07 Nov'07 crisis era, mainly due to better risk management applied

27
 Chapter 2 Financial Sector

by banks. The preference to extend credit with more Rp590/USD. Loans extended in foreign currency grew
controlled risk was indicated by higher growth in working significantly by 21.8%; making up 27% of the total rise in
capital and consumption credits compared to investment bank loans during the reporting period. Nevertheless, the
credit, and the tendency of extending credit to existing share of foreign currency denominated loans in total bank
borrowers rather than to new borrowers. Accordingly, the credit was relatively stable at around 20% (21.0% at the
share of credit in bank assets grew. end of December 2007). In terms of risk, the growth in
Meanwhile, the low interest rate did not discourage foreign currency loans has not so far created any problems
the public from depositing their funds at banks, which as the share remains relatively small.
was evidenced by the surge in bank deposits totaling
Graph 2.8
Rp157.0 trillion (11.6%). The surge in deposits did not
Foreign Currency Loans
exceed loan growth during the second semester of 2007,
Trillions of Rp %
220.0 40.0
therefore, the loan-to-deposit ratio (LDR) by the end of
Nominal (left axis) 35.0
200.0 YOY
December 2007 reached 69.2%; surpassing the ratio at YTD 30.0
25.0
180.0
the end of June 2007, namely 66.8%. 20.0
160.0 15.0
10.0
Graph 2.6 140.0
5.0
Credit Growth
0.0
% 120.0
-5.0
30.0
100.0 -10.0
25.0 2005 June 2006 June 2007 June Dec

20.0

15.0
Compared to other types of loans, Working Capital
10.0 Credit (WCC) recorded the largest rise in value and highest
5.0 growth in the second semester of 2007. Working capital
0.0
credit accounted for 62.5% of the total rise in credit during
-5.0
2006 June 2007 June Dec the reporting semester, growing by 28.6% (y-o-y). That
increase was followed by Consumption Credit (CC) which
Graph 2.7
Composition of Productive Assets represented 23.6% of the total increase in credit, growing
by 24.6% (y-o-y).

10.1% 7.8%
100%
19.5% Graph 2.9
20.8% Loans
80% BI Growth by Loan Type
13.7% 14.0%
Securities
60% ABA
35.0
line = YOY Working Capital Investment Consumer
40% 58.4% 30.0 Loan Loan Loan
55.1% bar = YTD
25.0
20%
20.0
0% 15.0
Jun-07 Dec-07
10.0
5.0
Bank loans denominated in foreign currency
0.0

increased along with the expansion in import and export -5.0

-10.0
activities as well as rupiah depreciation against the USD to 2006 Jun 2007 Jun Dec

28
 Chapter 2 Financial Sector

Credit share is still dominated by WCC (53.5% of which in the reporting period reached Rp60.0 trillion
total bank loans), followed by CC with a share of 28.2%, (22.5% y-o-y). This increase means that credit to the MSM
and finally investment credit. As mentioned previously, the sector represented 40.7% of the total increase in bank
dominant shares of WCC and CC indicate the banks» loans during the reporting period and reached 50.2% of
preference to extend credit with more controlled risk. WCC total bank credit.
is generally a short-term, relatively high-value loan It is projected that in the first semester of 2008, credit
extended to borrowers already known to the banking growth will slow down compared to the reporting period
industry, whereas CC generally covers lower value loans but still exceed that of the first semester of 2007. This is
to households as the majority borrowers. Banks opted to due to sufficiently large undisbursed loans until the end
concentrate on WCC and CC to mitigate the mismatch of of 2007. During the reporting period undisbursed bank
fund resources dominated in the short-term. However, to loans (UL) rose by Rp32.7 trillion or 18.6%. By the end of
support higher economic growth in the future, the December 2007, UL totaled Rp208.3 trillion or as a
proportion of productive loans (for investment and working percentage 20.7% of total bank loans. This has remained
capital) should be expanded. relatively stable since the crisis within the range of 20%-
21%.
Graph 2.10
Credit Allocation by Economic Sector
Graph 2.11
Trillions of Rp Undisbursed Loans
300.0 Trillions of Rp Trillions of Rp
Others
280.0 220 1050
Industrial
260.0 Trade UL (left axis)
210 1000
Combined Credit
240.0
200 950
220.0
190
200.0 900
180
180.0 850
170
160.0
800
140.0 160

150 750
120.0
2006 Jun 2007 Jun Dec
140 700
2006 Jun 2007 Jun Dec

The preference for controlled risk is also evidenced

by credit allocation based on economic sector. The trade
sector, which generally demands working capital credit,
grew the most reaching 24.6% of the total increase in
bank loans during the reporting period; a rise of 32.7% y-
o-y. This was followed by the Others Sector, which generally
applies for consumption credit, with growth accounting
for 23.4% of the total rise in credit (24.7% y-o-y). The
share of the Trade Sector reached 21.6%, surpassing the
Industrial Sector with 20.5%. The preference for loans with
more controlled risk is also indicated by growth in credit
extended to micro, small and medium segment (MSM),
Credit Risk
Improved macroeconomic conditions acutely
supported the bank loan restructuring process, thus for
the first time since the crisis, the gross ratio of NPL was
below 5%. This is also in line with a more effective risk
management by banks and as a result of various policies
instituted by Bank Indonesia and the government, which
are conducive to improve the quality of bank credit. Non-
performing loans decreased the most in the major state-
owned banks, hence risk pressure on the financial system
also dissipated.

29
 Chapter 2 Financial Sector

During the second semester of 2007, total non-
performing loans decreased by Rp9.0 trillion, which
represents a 15.5% decline compared to the Rp0.6 trillion
drop (1.0%) in the previous period. Therefore, nominal
NPL has now lowered to Rp48.6 trillion. The three types
of credit that make up NPL (sub-standard (SS), doubtful
(D) and loss (L)) decreased by 30.2%, 34.5% and 10.3%
respectively. Meanwhile, loans placed ≈Special Mention∆
also declined nominally by 6.6% compared to late June
2007. The quality of credit has improved in line with the
increasing total loans by Rp141.7 trillion or 15.7% during
the reporting semester, therefore, the gross NPL ratio
declined from 6.4% to 4.6%. On the other hand, the
reduction in nominal NPL lowered the loan loss provisions
by Rp2.1 trillion or 4.8%. After calculating the loss
provisions Net NPL decreased from 2.9% to 1.9%; the
The lower quantity of non-performing loans in the
major banks group dispersed pressure on financial system
stability. During the second semester of 2007, nominal
NPL for major banks significantly fell (Rp8.5 trillion or
18.5%) and was followed by a noteworthy increase in
credit allocation. As a consequence, gross NPL of this group
declined from 7.4% to 5.2%. The decrease in NPL of the
major banks was principally attributable to restructuring
and write-offs by state-owned banks. However, non-
performing loans increased for the group of foreign bank
branches to the tune of Rp0.5 trillion or 14.3%. Therefore,
gross NPL of this group equaled the gross NPL of the major
banks group for the first time, namely 5.2%.
Graph 2.14
Nominal NPL by Bank Group
Billions of Rp

lowest since the crisis. Foreign

Mixed
Graph 2.12
Non-Performing Loans Small Banks
% Trillions of Rp
11 75 Medium Banks
10 70
9 65
NPL Gross Large Banks
8 60
7 -10000 -8000 -6000 -4000 -2000 0 2000
55
6
50
5
4 NPL Nominal NPL Net
45 Graph 2.15
3 40 Gross NPL by Bank Group
2 35 %
1 30 9.0
8.4
- 25 Dec-06
7.4
2003 2004 2005 2006 2007 Dec Jun-07
Dec-07
6.0
5.2 5.1 5.2
Graph 2.13
4.0
NPL Nominal 3.8 4.0 3.6
3.2 3.3 3.1
3.0
3.0
Trillions of Rp Trillions of Rp 2.2
22.0 75.0 1.8
20.0 70.0
18.0 65.0 0.0
16.0 Total NPL Large Medium Small Mixed Foreign
60.0
14.0
55.0
12.0
Sub-standard (left) 50.0 The two economic sectors with the largest nominal
10.0
45.0
8.0 NPL, namely the manufacturing sector and trade sector,
6.0 40.0

4.0
Loss (right)
35.0 showed favorable improvements in loan quality. Improving
Doubtful (left)
2.0 30.0
2006 Jun 2007 Jun Dec macroeconomic conditions during the reporting semester

30
 Chapter 2 Financial Sector

coupled with a BI-Rate decline of 50 bps raised borrower Graph 2.17

NPL Share by Economic Sector
outlook during the restructuring process. Nominal NPL in
%
the manufacturing sector went down significantly by Rp4.0 100
Others Sectors

trillion or 21.7%, therefore, the gross NPL ratio declined 80 Business Services

from 10.0% to 7.10%. However, recent data showed that 60 Trading

the manufacturing sector continues to dominate NPL share,

40
Industry
accounting for 35.3% of total bank NPL. Thus, credit
20

extension to this sector should be tightly monitored so Agribusiness

0
2000 2001 2002 2003 2004 2005 2006 2007 Dec
that its quality can be assured to avoid disrupting financial
Other manufacturings = Mining, Electricity, Services, Construction, Transportation

sector stability. Meanwhile, credit quality in the trade sector,

which has the second largest share of nominal NPL, also the manufacturing sector and trade sector indirectly raised
picked up. Nominal NPL in the trade sector declined by the quality of WCC, which constitutes the largest share of
Rp2.2 trillion or 19.6%, therefore, the gross NPL ratio fell NPL in total bank NPL. Nominally, NPL of WCC dropped
from 6.1% to 4.1%. by Rp6.1 trillion or 23.3%, therefore, the gross NPL ratio
declined from 5.8% to 3.7%. In accordance with such an
Graph 2.16
Nominal NPL by Economic Sector improvement, the NPL share of WCC in total bank NPL
Trillions of Rp also went down from 52.1% to 48.8%. Meanwhile,
Others nominal NPL IC decreased by Rp2.9 trillion or 19.1%. As a
Social Services
Business Services
Transportation
Graph 2.18
Trade NPL by Loan Type
Construction Trillions of Rp
Electric
Industrial
Mining Consumer
Agriculture
-5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0

Investment

It is worth noting that during the reporting semester,

of all economic sectors only credit extended to the mining Working Capital

sector experienced a modest decline in quality, whereas -7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0

the other nine sectors showed improvement. In terms of

Graph 2.19
financial system stability and the bank intermediation NPL Share based on Loan Type
function, conditions were conducive. Towards the future, 100%
90%
such improvements should be prolonged while 80%
70%
simultaneously improving the quality of credit extended 60%
50%
to the mining sector.
40%
In terms of credit type, the quality of Working Capital 30%
20%
Credit (WCC) and Investment Credit (IC) improved 10% Working Capital Investment Consumption
0%
significantly. The aforementioned rise in credit quality to 2002 2003 2004 2005 2006 2007 Dec

31
 Chapter 2 Financial Sector

result, the gross NPL ratio is lowered from 9.1% to 6.6%.
Against this encouraging backdrop, the IC share of nominal
NPL was noted to reach 30.0% of total bank NPL by the
end of semester II 2007.
As the NPL shares of WCC and IC in total bank NPL
are relatively large, tight monitoring is prerequisite to
maintain credit quality in order to avoid undermining bank
resilience. Strict monitoring is also important because credit
such as IC commonly targets corporate borrowers over a
long tenor and with a relatively full range of facilities.
Furthermore, IC is often denominated in foreign currency;
therefore, borrowers are exposed to exchange rate risk
loans, personal and uncollateralized loans). From these
three components of consumption credit, by the end of
the second semester of 2007, the highest gross NPL ratio
was for credit cards, totaling 12.0%, whereas the gross
NPL ratios for housing loans and others were 3.02% and
1.90% respectively. The high gross NPL ratio for credit cards
was, among others, due to taxation constraints concerning
credit write-offs. However, in general banks maintained
sufficient provisions; therefore, the net NPL ratio for credit
cards was actually relatively low.
Graph 2.21
Gross NPL Ratio for Consumption Credit

which can raise the potential of default. %

15
KPR
Graph 2.20 13 Credit Card
Others
Gross NPL Performance
10
% %
4.0
22.0
8
Consumer (right axis)
3.5
5
17.0
Investment (left axis)
3.0 3

12.0
7.0
Working Capital (left axis)
2.0
2002 2003 2004 2005
The final type of credit is consumption credit (CC).
During the reporting period, the quality of this credit
improved slightly, denoted by a declining nominal NPL by
Rp0.01 trillion or 0.1%, therefore, the gross NPL ratio of
CC went down from 3.5% to 3.1%. The nugatory
improvement in credit quality clearly evidences the plight
of the household sector, for which economic conditions
are yet to become favorable, particularly in terms of
income. Conversely, this could also be interpreted as
households» inability to manage their incomes
appropriately.
In general, there are three components of
consumption credit that must be analyzed, including credit
cards, housing loans and others (such as motor vehicle
2.5 0
2002 2003 2004 2005 2006 2007 Dec
2.0
The quality of credit for the Micro, Small and Medium
1.5
2006 2007 Dec
segment (MSM) also improved, indicated by the decline in
nominal NPL by Rp2.0 trillion or 10.0%. Consequently,
gross NPL went down from 4.8% to 3.5%. This
improvement in credit quality was supported by conducive
economic conditions and various policies promulgated by
the government and Bank Indonesia directed at MSM
business expansion. This type of loan is not expected to
heap pressure on financial system stability in the short term
as it is typically diversified with a relatively small credit
ceiling and a large number of borrowers. Furthermore, it
is also concentrated on consumption.
Improvements were also witnessed in non-MSM
credit, for which borrowers are predominantly provided
with a loan facility of above Rp5 billion. During the second
semester of 2007, nominal NPL for non-MSM credit fell

32
 Chapter 2 Financial Sector

by Rp7 trillion or 23.8%, therefore, the gross NPL ratio loans. The success of the restructuring process reduced
went down from 7.3% to 4.6%. Even though the share foreign currency denominated nominal NPL by Rp2.1
of non-MSM credit in total bank loans was only 48.9% trillion or 21.4%, therefore, gross NPL dropped from 7.9%
(less than the share of MSM credit), the decline in NPL of to 5.1%. Meanwhile, the nominal NPL of rupiah
the non-MSM segment is very satisfactory as non-MSM denominated loans declined by Rp6.8 trillion or 16.9%,
borrowers are typically from the corporate sector with a reducing the gross NPL ratio from 5.3% to 3.8%.
large amount of facilities, long tenure periods and often
Graph 2.24
in the form of foreign currency, which can disrupt the NPL of Foreign Currency and Rupiah Denominated Loans
% Billions of USD
financial system if the loans are not repaid. The crisis that 35.0 4.5
NPL Foreign Exchange (USD) 4.0
befell the Indonesian economy in 1997/1998 proved that 30.0 NPL Gross (left axis)
3.5
corporate borrowers are particularly vulnerable to financial 25.0
3.0
20.0 2.5
crisis.
15.0 2.0
1.5
Graph 2.22 10.0
1.0
Nominal NPL of the Corporate and MSME Sectors 5.0 0.5

Trillions of Rp Trillions of Rp 0.0 -

50 25 2001 2002 2003 2004 2005 2006 2007 Dec

45 Corporation (left axis)

40 20
35 Stress Test
30 15
In determining the resilience of the banking system
25 MSME (right axis)
20 10 against fluctuating credit risk, a stress test was performed
15
10 5 to illustrate the effect of a rise in NPL against bank capital.
5
- 0
For this purpose, banks were categorized into three groups,
2001 2004 2005
` 2006 2007 Dec
namely the group of 15 major banks, medium-sized banks
Graph 2.23 and small banks. Meanwhile, the rising NPL scenario is
Gross NPL of the Corporate and MSME Sectors
% %
supplemented with several alternatives and linked to the
13.0 5.5
12.0
MSME (right axis) NPL position as per the end of semester II 2007. The results
5.0
11.0 demonstrate that the banks would be able to overcome
4.5
10.0
9.0 4.0 shocks in the form of an NPL rise up to 25% above the
8.0 3.5 reported position. In particular for the group of 15 major
7.0
3.0
6.0 banks, average CAR would only drop by about 1% (lowest
Corporation (left axis) 2.5
5.0
0% and highest 5.5%) from 18.0% to 16.9%. The CAR
4.0 2.0
2003 2004 2005
` 2006 2007 Dec
of medium and small banks would even tend to be
Despite rupiah depreciation, the performance of persistently higher than the CAR of the major bank group
foreign currency denominated loans improved, which for every scenario. A bank»s ability to address such a rise in
eased the risk pressure on banks. In reality, the majority of NPL is due to the high profit generated to cover the
corporate debtors that were restructured by state-owned additional allowance for credit loss provisions, as well as
banks were borrowers of foreign currency denominated strong capital.

33
 Chapter 2 Financial Sector

Graph 2.25 revised the investment package to allay uncertainty in the

Stress Test of NPL against CAR
%
business community, which also indirectly alleviated credit
22.5
risk exposure to banks. In the context of credit
restructuring, the promulgation of Government Regulation
20.0
No. 33/2006 on Procedures for Writing Off State-Owned

17.5
Receivables, is also expected to assist credit risk mitigation,
particularly for state-owned banks.
15 Large Banks Middle Bank Small Bank
15.0 Policies instituted by Bank Indonesia also paved the
Start 1 2 3 4 5 7 10 15 20 25
NPL Increasing Scenario way for banks to mitigate credit risk. Conducive monetary
policy will help banks prepare to improve credit quality as
Risk Mitigation
well as enhance their intermediary function, in particular
Several efforts have been taken to ease bank credit
for productive loans. Meanwhile, a range of banking
risk. Banks mitigate credit risk through the implementation
policies has been issued to encourage the implementation
of risk management on all business lines; also by expanding
of effective risk management. Additionally, the Credit
capacity with a risk management certification program.
Information Bureau was established to help disseminate
Basel II implementation is also expected to strengthen the
credit information required by the business community in
future application of credit risk management. Another
order to reduce credit risk stemming from asymmetric
important step taken by banks to mitigate credit risk is to
information.
maintain adequate loan loss provisions. During the
reporting period, loss provisions were reduced by Rp2.1
2.2.3. Market Risk
trillion or 4.8% in line with the drop in nominal bank NPL.
More favorable macroeconomic conditions, which
Despite the reduction, the loss provisions remain sufficiently
enabled a BI Rate reduction, tended to curb banks» market
conservative to anticipate potential losses.
risk exposure. The managed reduction of the interest rate
Graph 2.26 that has persisted since 2007 continued into the second
Credit, NPL and Loan Loss Provisions
semester despite a slowdown by year end. The average
Trillions of Rp
100 1100
interest rate of the 1-month term deposits fell by only 27
1000
90
900 bps in the reporting semester, compared to a 150-bps
80 Loans (right axis) 800
Nominal NPL (left axis) decline in the previous semester. Meanwhile, the interest
70 700

60 600 rates of working capital credit, investment credit and

500
50
APLL (left axis) 400
consumption credit declined by 88 bps, 98 bps and 78
40 300 bps respectively.
30 200
2000 2001 2002 2003 2004 2005 2006 2007 Even though the magnitude of the interest rate

Credit risk mitigation is also well supported by decline for consumption credit was outpaced by the other

government policies, for example, the government lending rates, the decrease surpassed that of the previous

guarantee for Rural Community Loans. As a result, the semester. The slow interest rate decline at year end was

risks borne by banks are lower. In addition, the government associated with the sluggish decline in the BI Rate.

34
 Chapter 2 Financial Sector

However, in general, banks seemed more willing to lower
their lending rates. By the end of December 2007, the
interest rates for WCC and IC (13.00% and 13.01%
respectively) had reached their lowest levels since 2001.
Only the interest rate for CC remained relatively high at
16.13%. This primarily emanated from the joint-venture
banks group and the group of foreign bank branches,
which averaged over 30%.
previous year»s position, particularly for the foreign
exchange portfolio. The increasing trend of foreign
exchange portfolio should be monitored with caution,
particularly for the short-term portfolio with net short
position, even though the number is relatively small. Banks
are projected to overcome exchange rate volatility as they
are cushioned by relatively high capital, however, effective
risk management is also necessary.

Graph 2.27
Interest Rate and Exchange Rate Performance Stress Test
% Trillions of Rp With the prevailing conditions of the maturity profile,
22 11500
potential interest rate risk will intensify should a swing in
19 Consumer Loans (left axis)
10500 the interest rate occur. The underdeveloped hedging and
16 Investment Loan
(left axis)
derivative markets has forced banks to be more cautious
13 Working Capital 9500
Loans (left axis)

10
when confronting the possibility of an interest rate swing.
8500
7 Exchange Rate
Stress test results indicate that a 1% increase in the interest
1-month deposits
(right axis) (left axis)
4 7500
rate would lower CAR by an average of 34 bps.
2002 2003 2004 2005 2006 2007

Graph 2.29
Graph 2.28
Rupiah Maturity Profile
Lending Rate by Bank Group
% Trillions of Rp
450
40
Jun06 Dec06
300
Jun07 Dec07
30
WC = Working Capital 150
I = Investment
C = Consumer
0
20

(150)
Dec05 Jun06
10
(300) Dec06 Jun07
Dec07
(450)
0
sd 1 month 1 - 3 months 3 - 6 months 6 - 12 months > 12 months
WC I C WC I C WC I C WC I C WC I C
State-Owned Regional Dev. Domestic Private Foreign & Joint All Banks
Banks Banks Banks Venture Banks
Graph 2.30
Foreign Exchange Maturity Profile
With the prevailing decline in the interest rate during
Billions of USD
the second semester of 2007, banks implemented interest 10

rate risk management by maintaining net short position 5

for short-term portfolio and net long position for long-

0

term portfolio. Consequently, banks could generate profit

(5)
when interest rates fell. This maturity profile composition
Dec05 Jun06
(10)
Dec06 Jun07
was evident for both rupiah and foreign exchange
Dec07
(15)
portfolios with an increasing trend compared with the sd 1 month 1 - 3 months 3 - 6 months 6 - 12 months > 12 months

35
 Chapter 2 Financial Sector

Fluctuations in the exchange rate by the end of the Graph 2.32

SUN Ownership by Banks
second semester of 2007 did not trigger any instability as % %
100 21
banks maintained a relatively low Net Open Position (NOP)
(4.47%). However, this position increased quite 75 17

significantly compared to the position in the previous

50 13
semester of 3.92% due to the increase in the maturity
profile of short position for the short-term portfolio. 25 9

While the average NOP is far below the maximum

0 5
Dec»05 Jun»06 Dec»06 Jun»07 Dec»07
limit of 20%, any rising trend should be carefully monitored Trading (left axis) Trading Government Bonds to Total Assets (right axis)
Investment (left axis) Government Bonds to Total Assets (right axis)
by improving risk management and preparing an adequate
contingency plan. Based on stress test results concerning
maintaining a low proportion of SUN for trading purposes.
the impact of rupiah appreciation/depreciation on capital
The strategy has, so far, been successful as it is also
(CAR), it has been noted that banks can generally maintain
reinforced by strong bank capital. Consequently, pressure
CAR above 8%.
on capital will only be experienced if the SUN price drops
In line with the declining interest rate trend, SUN
significantly. Results of stress tests indicate that the CAR
ownership by banks, particularly in the trading portfolio,
of banks would drop below 8% if the SUN price decreased
also witnessed growth. Ownership of trading portfolio by
by 20% or more. In the future, besides relying on strong
banks rose by Rp12.5 trillion compared to the end of the
capital, banks should continue to strengthen their risk
previous semester, expanding its share in total SUN
management.
composition from 61.2% to 64.3%. Such conditions can
leave banks more exposed to market risk associated with
2.2.4. Profitability and Capital
SUN prices. The expanding share of trading portfolio
Profitability
composition has not been excessive; nevertheless attention
The profitability of banks improved during the second
must be paid to recent volatility in the global financial
semester of 2007 compared to the previous semester.
market.
Contrasted against the same position of the previous year,
Hitherto, the leading strategy employed by banks to
the net interest income (NII) of banks during semester II
mitigate the market risks associated with SUN prices is by
2007 rose to Rp50.0 trillion from Rp46.4 trillion in the

Graph 2.31 previous semester. This was due to a rise in interest income
Growth of NOP (Overall) from Rp87 trillion (during semester I 2007) to Rp89 trillion
%
24
Domestic Private Banks Joint Venture Banks Regional Dev. Banks State-Owned Banks
(during semester II 2007), and a reduction in interest expense
Foreign Banks All Banks The highest of NOP
20 from Rp40.6 trillion to Rp39 trillion. The rise in profitability
19.2
16 17.4 was in line with a higher increase in loans compared to
16.9 16.9
14.7 15.3
12
deposits, supported by higher quality loans and the tendency
8
of banks to move away from expensive funding sources.
4
Meanwhile, the return on assets (ROA) decreased
0
Sep Dec Mar Jun Sep Dec slightly from 2.81% to 2.78% as the rise in NII was offset
2006 2007

36
 Chapter 2 Financial Sector

by an increase in assets. By differentiating banks into two Rate, income from BI Certificates fell from 11.8% to
groups, a drop in ROA was only experienced by the «others» 10.2%.
bank group; from 3.26% to 2.98%. Conversely, the large
banks groups saw an increase in ROA from 2.62% to 2.69%. Capital
The rise in total credit extended during the reporting
Graph 2.33
Bank NII period increased the risk weighted assets of banks. The
Trillions of Rp
16.0 increase in risk-weighted assets outpaced the growth in
14.0
capital which drove down the capital adequacy ratio (CAR)
12.0

10.0 from 20.7% to 19.3%. The drop in CAR was experienced

8.0
by all banks groups. The largest decline was borne by the
6.0

4.0
others bank group, more specifically from 23.8% to
2.0
Interest Income Interest Expenses NII 22.1%, whereas the least significant decrease was for the
-
Dec «03 Jun «04 Dec «04 Jun «05 Dec «05 Jun «06 Dec «06 Jun «07 Dec «07 large banks group (19.3% to 18.0%).

Graph 2.34 Graph 2.36

ROA Ratio by Bank Group CAR Ratio by Bank Group as of Semester II 2007
4
Jun'07 Dec'07 %
3.5 25
Jun'07 Dec'07
3 Dec'07
20
2.5

2 15
1.5
10
1

0.5
5
0
Large Bank Others Bank Industry
0
Large Bank Others Bank Industry
The share of interest income from loans continued
to expand along with greater credit extension, rising from Despite the decline, the CAR of Indonesia»s banks
63.5% to 64.7%. Furthermore, the share of interest remains the highest in Asia. Bank capital mostly consists
income from securities increased slightly from 16.8% to of core capital (Tier I) with a ratio to risk-weighed assets
16.9%. Oppositely, in line with the reduction of the BI of 16.8% by the end of December 2007. A high core

Graph 2.35 Graph 2.37

Komposisi Pendapatan Bunga Bank Core Capital Ratio to Risk Weighted Assets and CAR
%
30
8.90 9.16 8.21 7.88 8.3 CAR
25 Tier 1 to Risk Weighted
Assets Ratio
20
63.1 59.2 60.1 63.5 64.7
15

10
Joint Venture Banks
Foreign Banks

22.9 21.4 16.8

15 Big Banks

22.0 16.9 5
All Banks
Others

6.01 8.75 10.37 11.78 10.2

0
Dec «05 Jun «06 Dec «06 Jun «07 Dec «07
A B C D E F G H I J K L M N O
BI Securities Loans Others Banks

37
 Chapter 2 Financial Sector

capital ratio to risk-weighted assets indicates the solvability Stress Test

of banks is sufficient to absorb business risks and to provide
more room for banks to expand credit.
It is important to note that even though aggregate
bank CAR is fairly high, there remain several medium and
small banks with marginal CAR (between 9% and 12%).
Such banks are particularly vulnerable to risk, especially if
they do not apply apposite risk management.
Whereas, full bank compliance to the minimum core
capital requirement for commercial banks of Rp80 billion
by the end of 2007 has been accomplished. Nevertheless,
as banks are further required to meet a minimum core
capital requirement of Rp100 billion by 2010, future
surveillance will emphasize the satisfactory fulfillment of
this requirement. By the end of December 2007, 20 banks
had a core capital of between Rp80 billion and Rp100
billion.
Graph 2.38
Map of Core Capital Performance
To observe the resilience of 15 large banks against
unfavorable economic conditions, integrated stress tests
were used covering a number of economic variables as
follows:
A rising interest rate against the net maturity profile
of bank assets and liabilities under 3 months. In this
case, banks with a long position or greater assets than
liabilities will reap positive benefits and vice versa;
A weakening exchange rate against the bank»s net
open position. In this case, a bank with a long position
is best suited to obtain benefits.
Furthermore, stress tests were supplemented with a
scenario incorporating lower SUN prices, below par in
terms of their specified percentage and rising bank NPL.
The impacts of such a scenario are first transmitted to the
profit and loss of the bank and then to the bank»s capital.
In addition to gauging market risk, this stress test
also measures credit risk using unfavorable credit conditions

50
in each category. The scenario assumes a 5% rise in the
45 Dec'06
Jun'07 NPL of standard credit, followed by 5% of sub-standard
40
Dec-07
35 credit becoming doubtful and then 5% of doubtful credit
30
25 becoming loss. Notwithstanding, the stress test was further
43
20 39 41
15 30 29 30
33 complemented using a scenario which assumes a 3% rise
25 23 25 25
10 20
in the interest rate that will affect the assets and liabilities
5 9 9 9
0
< 80 M 80 M - 100 M 100 M - 200 M 200 M -1 T >1T
of the bank, especially with maturity below 3 months; a
Data SIMWAS, sebelum judgement pengawas
Rp500 drop in the exchange rate against the net open

Graph 2.39 position and a decline in the value of SUN by 5% from

Integrated Stress Test normal. The impacts of such a scenario on a bank»s capital
%
30 depend heavily on the condition of NPL, foreign exchange
CAR AWAL
25 CAR BARU assets and liabilities, sufficient loan loss provisions, the size
20 of the banks profit and loss as well as the bank»s capital.
15 Based on the scenario described above, the results
10 of the stress test on 15 large banks indicate that the CAR
5 of one bank would drop below the prevailing regulation.
0 On average the decline in CAR is 1.5%, namely from
A B C D E F G H I J K L M N O

38
 Chapter 2 Financial Sector

18.0% to 16.5%. However, in general bank capital is Graph 2.41

Financing Activities of Finance Companies
strong enough to overcome the various simultaneous
%

shocks tested in the model. 100

90
80
70
2.3. NON-BANK FINANCIAL INSTITUTIONS AND
60
50
THE CAPITAL MARKET
40
30
Up to the end of semester II 2007, non-bank financial
20
institutions and the capital market continued to grow amid 10
0
Sewa Guna Anjak Credit Consumer
pressures stemming from global market shocks. Usaha Piutang Card Financing
Domestic Private Finance Companies 10% 3% 0% 87%
Meanwhile, increasing consumer financing NPL from Joint Venture Finance Companies 46% 1% 2% 50%
Total 34% 2% 1% 63%
finance companies should be monitored to avoid any
additional pressure on bank resilience and the financial risk due to the expectation of lower motor vehicle demand
system. Such surveillance is critical because despite a more as a result of the soaring global oil price. The high risk of
robust financial market, short-term volatility has increased. consumer financing is also evidenced by increasing
consumer financing NPL, climbing from 1.24% (December
2.3.1. Finance Companies 2006) to 1.52% (October 2007).
In 2007 (up to November 2007), the performance The profitability of finance companies increased;
of finance companies improved greatly, indicated by a 16% indicated by the 11% rise in profit before tax to Rp4.48
increase in total assets to Rp126.4 trillion, which trillion, whereas in the previous year it fell by 13%.
outstripped performance in the previous year (13%). However, ROE dropped to 19% (November 2007) from
However, financing tended to slow down considerably, 21% (December 2006) principally due to less effective asset
with just 15.52% growth compared to 37.65% in the management by national private finance companies.
previous year.
Graph 2.42
The financing offered by finance companies, Performance of Finance Companies

particularly national private finance companies, remained 120

Thousands
0,35

concentrated on consumer financing, primarily motor 100 0,30

vehicle loans. This type of loan has relatively high potential 80

0,25

0,20
60
Graph 2.40 0,15
Operational Activities of Finance Companies 40
0,10
Billions of Rp
140 20 0,05
2004 0 0,00
120
2005 Dec 05 Dec 06 Nov 07
100 2006 Pembiayaan Total ROA SN ROA PP
Jun 07 Pembiayaan SN ROE SN ROE PP
80 Pembiayaan Ptgn
Nov
60
The efficiency of joint-venture finance companies
40

20
improved, reflected by the decline in the ratio of operating
0 expense to operating income from around 90%
Assets Financing Funding Capital

39
 Chapter 2 Financial Sector

(December 2006) to 76% (November 2007). This was
mainly due to broader access to funding sources, further
supported by more diversified financing.
Loans from domestic banks remained as the primary
source of funds for national private finance companies. In
2007, total loans grew by 30% to Rp13.47 trillion.
Meanwhile, total loans from domestic banks to finance
companies increased by 19% to Rp35.47 trillion,
predominantly extended to joint-venture finance
companies. In addition to loans from domestic banks, joint-
venture finance companies also utilized funds from foreign
loans, accounting for 52% of total loans (November 2007).
Graph 2.43
National Private Finance Companies» Source of Funds
Thousands
16
Domestic Bank Loans
14 Foreign Loans
12 Securities
10
trillion. Moreover, one company used right issues and one
company issued bonds abroad.
The proclivity of finance companies towards
consumer financing, primarily to purchase motor vehicles,
combined with increasing consumer financing NPL and
compounded by high dependence on banks for their
source of funds intensified risk exposure to banks.
Meanwhile, Bank Indonesia Regulation (PBI) No.8/6/PBI/
2006 regarding the Implementation of Consolidated Risk
Management for Banks Controlling Subsidiaries could
potentially spur losses for finance companies affiliated with
banks due to higher provisions costs in line with higher
NPL for consumer financing. As finance company losses
will be further reflected on the consolidated balance sheets
of banks, early caution is required.
2.3.2. Capital Market

8
Foreign Investor Portfolio
6 Entering semester II 2007, pressure on financial
4
system stability tended to be more intense, due for the
2

0 most part to more aggressive foreign investor behavior

Dec 05 Dec 06 Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07
utilizing short-term profit taking. Such behavior triggered
Graph 2.44
corrections in the domestic capital market. During the
Joint Finance Companies» Source of Funds
Thousands
reporting semester, foreign investment in rupiah financial
35
Domestic Bank Loans Securities instruments continued to grow by around Rp49 trillion,
30 Foreign Loans

25
which is very similar to growth in the previous semester.
20 Such growth has led to foreign investment in BI Certificates,
15
SUN and shares to increase by almost Rp98 trillion. The
10
composition of this investment is respectively Rp35 trillion
5
(BI Certificates), Rp29 trillion (SUN) and Rp33 trillion (net
0
Dec 05 Dec 06 Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07
purchases of shares).
In 2007, finance companies actively accumulated The relatively high yield of rupiah investments
funds through bonds issuances, therefore the ratio of maintained foreign investor appetite for rupiah financial
finance companies» borrowings to equity decreased from instruments. However, portfolio behavioral changes by
3.98 (December 2006) to 3.90 (November 2007). In 2007, foreign investors, who mainly consist of hedge fund
nine companies publicly issued bonds to a value of Rp6.15 managers, have been apparent. Foreign investors more

40
 Chapter 2 Financial Sector

aggressively sought short-term profit taking and profit Table 2.1

Price Index Performance of Several Regional
realization, in particular to cover losses from the subprime Stock Exchanges
financial asset portfolio. Such behavior led to significant
Growth (%)
Dec 06 Jun 07 Dec 07
corrections in the capital market and induced volatility. Sem II 07 2007
Capital market corrections also led to negative sentiment, JSX 1,805.52 2,139.28 2,745.83 18.49 28.35
STI 2,985.83 3,548.20 3,445.82 18.83 -2.89
which weakened the rupiah against the US dollar.
KLCI 1,096.24 1,354.38 1,447.04 23.55 6.84
SET 679.84 776.79 858.10 14.26 10.47
Graph 2.45
PCOMM 3,940.47 5,148.42 4,422.22 30.65 -14.11
Inflows to SUN-SBI-Shares
HSCI 2,802.68 3,109.64 3,874.22 10.95 24.59
Trillions of Rp
30 NIKKEI 336.39 356.40 301.09 5.95 -15.52
Stocks NASDAQ 3,415.29 2,603.23 2,674.46 -23.78 2.74
20 Securities DJI 12,463.15 13,443.75 13,365.87 7.87 -0.58
Government Bonds
SIASA 6,979.53 13,202.68 18,658.13 89.16 41.32
10
KOSPI 1,434.46 1,743.60 1,897.13 21.55 8.81

Graph 2.47
-10
Regional Stock Exchange: Share Index Performance

-20
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 6000
JSX STI KLCI HSCI
2007
SET PCOMM
5000
NIKKEI NASDAQ
Graph 2.46 4000
Asian Stock Market Volatility
3000
70
JSX
60 KLCI
2000
SET
50 1000
PCOMM

40 STI
0
29 29 28 29 29 29 29 29 29 29 29 29
30 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
2006 2007
20

10 The Jakarta (JSX) Composite also experienced a sharp

0
1/12 2/12 3/12 4/12 5/12 6/12 7/12 8/12 9/12 10/12 11/12 12/12 correction; dropping 7% in August 2007 to reach its lowest
2007
level of 1,908.64 on 17 August. Active stock investment
Equity Market by foreign investors -mainly in the form of short-term profit
In semester II 2007, global equity markets experienced taking- triggered an upswing in prices and the JSX
significant corrections, mainly due to strong negative Composite rallied to 2,745.83 by the end of December
sentiment stemming from deteriorating expectations 2007. Therefore, as an aggregate for 2007, the JSX
regarding the U.S. economic prospects as the fall out from strengthened by around 28%. By sector, strong index
the subprime mortgage crisis continues to plague the global performance was recorded in the agricultural sector, mining
economy. Such conditions have had a clear impact on equity sector and miscellaneous industrial sector.
markets in emerging Asian markets as well as undermining On the one hand, portfolio behavior by foreign
index performance in 2007. Moreover, several Asian bourses, investors stimulated a price increase, yet on the other hand
particularly in economies directly connected to the U.S., it also caused more volatile price fluctuations. The market
suffered from tumbling stock prices. efficiency coefficients for stock exchanges in emerging Asian

41
 Chapter 2 Financial Sector

Table 2.2 Graph 2.50

Sectoral Price Index Stock Market: Capitalization Value & Issuance Value

Growth (%) (Capitalization Value, Trillions of Rp) (Emisi Value, Trillions of Rp)
Dec 06 Jun 07 Dec 07 2,500 340
Sem II 07 2007 Capitalization Value (BEJ) 330
Capitalization Value (BES)
Agriculture 1,190.71 1,680.12 2,754.76 41.10 63.96 2,000 320
Emisi Value
Basic Industry 148.79 196.10 238.05 31.80 21.39 310
1,500
Cnstr, Property, RE 120.82 211.72 251.82 75.24 18.94 300
290
Consumer 390.19 437.01 436.04 12.00 -0.22 1,000
280
Financial 204.39 223.14 260.57 9.17 16.77
500 270
Infrastructure 754.54 750.43 874.07 -0.54 16.48
260
Mining 920.31 1,647.04 3,270.09 78.97 98.54 0 250
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Miscellaneous 282.14 324.96 477.35 15.18 46.90
2007
Trade Service 274.28 387.38 392.24 41.24 1.26
the previous year of just 5%. Impressive growth of stock
Graph 2.48
indices boosted market capitalization by 59% to around
Stock Market: Transaction Value & JSX
Trillions of Rp JSX Rp1,988.3 trillion. Meanwhile, the number of issuing
140 3000
Indonesia companies expanded by 24 to 468.
120 2500
Foreign
JSX
100 2000

80
1500
Bonds Market
60
1000
In semester II 2007, the SUN (government bonds)
40
500 market, which acts as the reference of the domestic bonds
20

0 0 market experienced a mild correction and therefore

Jan Feb Mar Apr May Jun Jul Ags Sep Oct Nov Dec
2007 decreased by an average of 4%. The market correction
markets were predominantly below 75%. This confirms that was principally due to a deferred reduction in the BI Rate,
market corrections have triggered more volatility in short- which narrowed the potential SUN price increase. This
term prices; however, the markets have remained resilient encouraged investors to switch portfolio from high-priced
so price stability in the long-term has been maintained. SUN to SUN with below par prices, mostly through
Meanwhile, in 2007, financing through the equity purchases in the primary market. As a consequence, in
market increased as shown by the rise in share issuances 2007 the SUN price only grew around by 5% on average;
by around 17% to Rp328 trillion. This vastly outperformed far below growth in 2006 which reached 20%.

Graph 2.49 Graph 2.51

Market Efficiency Coefficient Price Performance of Several Series of SUN
%
90.0 115
80.0
70.0 110

60.0
105
50.0
40.0
100
30.0
20.0 95
MEC-IHSG MEC-KLCI MEC-SET FR0023 FR0025 FR0026 FR0027
10.0
MEC-PCOMM MEC-STI FR0028 FR0030 FR0043
0.0 90
12 12 12 12 12 12 12 12 12 12 12 12 2 2 2 2 2 2 2 2 2 2 2 2
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2007 2007

42
 Chapter 2 Financial Sector

Graph 2.52 specifically by 19% to Rp116 trillion. Such growth

Yield of 5-Year Tenure Investments
increased the share of non-bank residents» SUN ownership
%
12
from 22% (end of June 2007) to 25% (end of December
10
2007). Non-bank resident investors include individuals,
8
non-bank financial institutions, foundations and other
6
financial institutions.
4
The distribution of SUN liquidity concentrated around
2
Indonesia Philippines Thailand Singapore tenors of 1 to 5 years, for which prices were too high and
0
2 2 2 2 2 2 2 2 2 2 2 2
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec above par. Expectations of a stall in the interest rate decline
20 0 7
in 2008 encouraged investors to reduce their ownership of
Keen interest from domestic investors in SUN was highly priced SUN and divert their investment to lower price
reflected by burgeoning SUN ownership by banks and non- SUN. Concentration on 1 to 5 year tenors triggered switching
bank residents. By the end of semester II 2007, domestic portfolio behavior and created pressure on SUN prices.
bank ownership of SUN rose to Rp265 trillion, with a
Graph 2.55
relatively stable share of total SUN at around 58%. SUN Issuance and Position of Corporate Bonds

ownership by non-bank residents grew expeditiously, more Emisi & Position, Trillions of Rp Emiten
140 180
Emisi Position Emiten
Graph 2.53 120
175
SUN Ownership 100
Trillions of Rp 170
80
300
60 165
250
40
200 160
20
150
0 155
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
100 2006 2007

50
In 2007, company financing through the issuance
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec of corporate bonds increased dramatically. This was
2007
Banks Residents Foreign primarily supported by the declining interest rate trend.
Corporate bond issuances went up by around 30% to
Graph 2.54
SUN: Market Liquidity of Various Tenures Rp134 trillion; comprehensively eclipsing the increase in
Trillions of Rp issuances the previous year (13%). In addition, the number
40
FR VR ORI
of companies issuing bonds expanded by 13 to total 175.
35

30 With such growth, financing through the issuance of

25
corporate bonds grew by 25% to around Rp85 trillion.
20

15

10 Mutual Funds
5
The declining trend of the interest rate throughout
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 29
Years 2007 improved the performance of mutual funds. In 2007,

43
 Chapter 2 Financial Sector

the net asset value of mutual funds increased by 79% to alternatives including protected mutual funds, indexed
Rp91 trillion. This represents a slight increase on growth mutual funds and exchange traded funds. As a result of
in the previous year of 76%. Furthermore, it was also diversification, the share of net asset value of each type of
supported by a persistently bullish equity market, which mutual fund remained relatively equal, namely 23% (fixed
boosted the net asset value of mutual funds in the form income), 38% (equity), 16% (mixed), 5% (money market)
of equity funds by around 300% to Rp35 trillion. The rise and 18% (protected).
in net asset value is in line with strong investor demand as
Graph 2.58
indicated by the expansion of participating units that grew Mutual Funds: Redemptions and Subscriptions
by approximately 47% and higher subscriptions (totaling Trillions of Rp
14
Rp122.8 trillion) compared to redemptions (reaching Redemption Subscription
12
Rp102.7 trillion).
10

8
Graph 2.56
Net Asset Value of Mutual Funds by Type 6

Trillions of Rp 4
40
2
Fixed Income Stocks Mixed Money Market Protected
35
0
30 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2007
25

20
Graph 2.59
15 Composition of Mutual Funds» Net Asset Value
10
%
5
90.00
0 Fixed Income Mixed Protected
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 80.00
Stocks Money Market Index
2007 70.00
60.00

Graph 2.57 50.00

Mutual Funds: Net Asset Value & Participating Units 40.00
30.00
NAB Triliun Rp - Unit Penyertaan Miliar NAB Unit Penyertaan
20.00
100 1800
90 NAB NAB/Unit 10.00
1600
Unit Penyertaan
80 0.00
1400
Dec 03 Dec 04 Dec 05 Dec 06 Dec 07
70
1200
60
1000
50 In 2008, the net asset value of mutual funds is
800
40
30
600 projected to continue to rise due primarily to the
20 400
200
continuing, bullish equity market. Against this propitious
10
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0 background, equity based mutual funds are expected to
2007
prosper even further. Nevertheless, volatile equity prices
Corrections in the SUN market slowed growth in the and potential risk stemming from new investment
net asset value of fixed income mutual funds to around alternatives that are not yet well understood by investors
11%. However, as a whole the corrections in the SUN may induce corrections in the mutual funds market. Thus,
market did not actually affect the mutual funds market greater diversification in mutual funds investment will be
due to the diversification of investments in various the key in supporting stable growth in mutual funds.

44
 Chapter 2 Financial Sector

Insurance Industry Performance and Potential Risk on the

Box 2.1
Financial System

Insurance Industry Performance In terms of performance, during 2006 assets

One important industry in the Indonesian financial
system is the insurance industry. Based on the most
recent data, the number of insurance companies has
declined from 157 (2005) to 146 (2006), however,
capital has surged from Rp25 trillion (2005) to Rp34
trillion (2006). The implementation of risk-based capital
(RBC) has reduced the number of insurance companies
that are unable to strengthen their capital. Nonetheless,
the insurance business has expanded, as indicated by
the growing number of auxiliary institutions from 219
(2005) to 256 (2006).
Table Box 2.1.1
Insurance Company Expansion 2003-2006
2003 2004
I. Insurance Company
a. Life Insurance 60 57
grew by 23% to Rp171 trillion, whereas premiums
and claims increased by around 14% to Rp52 trillion
and Rp38 trillion respectively. Most growth was
recorded in the life insurance industry, where assets
expanded by 31% to Rp71 trillion, and premiums and
claims went up by around 20% to Rp27 trillion and
Rp23 trillion respectively. The profit generated by the
life insurance industry nearly increased twofold to
Rp2.3 trillion.
In line with robust profit growth, the ROA, ROE,
ROI and investment yield from life insurance also
performed well. Life insurance became more active
and efficient in managing investment while remaining
prudent. Meanwhile, general insurance also became
2005 2006
Graph Box 2.1.2.
Assets-Premiums-Claims: 2003-2006
51 45 Trillions of Rp

b. Loss Insurance 104 101 97 92 180

Assets Premi Klaim
160
c. Reinsurance 4 4 4 4
140
d. Social Insurance 5 5 5 5
120
II. Insurance Auxiliary
100
a. Insurance broker 120 128 134 154
80
b. Reinsurance broker 21 18 21 29
60
c. Insurance Adjuster 25 30 30 30 40
d. Actuarial Consultant 20 23 28 34 20
e. Insurance Agent 0 5 6 9 0
2003 2004 2005 2006

Graph Box 2.1.1. Graph Box 2.1.3.

Insurance Capital 2003-2006 Insurance Profits: 2003-2006
Trillions of Rp Billions of Rp
16.00 2500.0
Asuransi Jiwa Asuransi Kerugian Asuransi Jiwa Asuransi Kerugian
14.00
Reinsurance Asuransi Sos & Jamsostek Reinsurance Asuransi Sos & Jamsostek
2000.0
12.00 Asuransi PNS & TNI Asuransi PNS & TNI

10.00 1500.0
8.00
1000.0
6.00

4.00
500.0
2.00

0.00 0.0
2003 2004 2005 2006 2003 2004 2005 2006

45
 Chapter 2 Financial Sector

more active in investment; however, in terms of customers, besides receiving coverage, also receive a
investment management it seemed to be less efficient certain investment return.
than life insurance.
Graph Box 2.1.6.
Premiums: Unit Link and Total: 2003-2006
Graph Box 2.1.4.
Several Insurance Company Indicators Billions of Rp % Premi UL/Premi Total
30 30.00
Premi Unit Link Total Premi Premi UL/T Premi
20.00
2005 2006 25 25.00
18.00
16.00 20 20.00
14.00
12.00 15 15.00
10.00
10 10.00
8.00
6.00 5 5.00
4.00
2.00 0 0.00
0.00 2003 2004 2005 2006
ROA-AJ ROA-AU ROE-AJ ROE-AU ROI-AJ ROI-AU Invyield Invyield
- AJ - AU
Graph Box 2.1.7.
Graph Box 2.1.5. Investment Return: Unit Link against Total: 2003-2006
Investments by Insurance Companies: 2003-2006 Billions of Rp Hasil Inv UL/Hasil Inv Total
7 40.00
Trillions of Rp
Hasil Inv Unit Link Hasil Inv Total Hsl Inv UL/Hsl Inv Total
70 6 35.00
Securities Deposits Stock & Bonds Mutual Funds
30.00
60 5
25.00
50 4
20.00
40 3
15.00
30 2
10.00
20 1 5.00

10
0
2003 2004 2005
Regarding investment activities, insurance
companies became more active in investment, not only
in term deposits but also equity and bonds as well as
mutual funds. In 2006, investment by insurance
companies in equity and bonds leapt 158% to Rp60
trillion, whereas investment in mutual funds increased
by 29% to Rp10 trillion.
Risk Potential
It is worth noting that the relatively robust
performance of life insurance companies is principally
supported by the development of a non-conventional
insurance product known as Unit Link. The product
has the characteristics of both a conventional insurance
product as well as a savings product. Unit Link
0 0.00
2003 2004 2005 2006
2006
In 2006, 21 companies offered Unit Link. The
Unit Link premium has continued to grow despite its
relatively low contribution to total life insurance
premiums; around 25%. Unit Link has enabled life
insurance to become more active in investment and
consequently market risk has intensified. This is clearly
indicated by poor investment returns during periods
of upward trending interest rates (2005) but vastly
improved investment returns when the interest rate
trends downwards (2006).
Strong life insurance performance is also well
supported by cooperation between life insurance
companies and banks through Bancassurance. By end
of 2007, 27 major banks carried Bancassurance, mainly
in the form of insurance product agents including Unit
Link. Bancassurance in this form is advantageous for

46

both parties. On the one hand, insurance companies
have access to a wider customer base; while on the
other hand, banks have the opportunity to boost their
fee-based income.
However, Bancassurance activities are still prone
to potential bank risk exposure, typically in the form
of reputational risk due to the following reasons:
Possibility of misselling due to poor understanding
by the banks» sales personnel regarding the
characteristics of insurance products.
Chapter 2 Financial Sector
Insurance products may develop becoming more
similar to bank products. Closer association to
bank products will lead to a more complicated
claims process;
With potential higher market risk and reputational
risk, banks should be more prudent in offering Unit
Link products and Bancassurance. Such prudence must
be developed through comprehensive understanding
of the products offered as well as risk mitigation steps
that have been prepared to anticipate loss potential.
47
 Chapter 2 Financial Sector

Halaman ini sengaja dikosongkan

48
 Chapter 3 Prospects of the Indonesian Financial System

Chapter 3
Prospects of the Indonesian
Financial System

49
 Chapter 3 Prospects of the Indonesian Financial System

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50
 Chapter 3 Prospects of the Indonesian Financial System

Chapter 3 Prospects of the Indonesian Financial System

The outlook of the Indonesian financial system remains positive amid rising
inflationary pressures and sluggish global economic growth. The internal
condition of the financial sector, particularly the banking industry, contributes
to this expectation. Strong capital and improvement in risk management will
help Indonesian banks in mitigating future risks. In addition, closer
coordination between the banking and the capital market authorities as well
as non-bank financial institutions will also support financial system stability.

3.1. ECONOMIC PROSPECTS AND RISK Table 3.1

Consensus Forecasts of Several Economic Indicators
PERCEPTION
Despite recent inflationary pressures in the domestic 2007 2008

economy spurred by the slowdown in the global economy, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

the prospects of the Indonesian economy remain positive GDP (%yoy) 6.0 6.3 6.5 6.1 6.2 6.1 6.1 6.1

with projected growth exceeding 6%. Consensus forecasts
for the Asia Pacific region have projected that economic
growth will be supported by increases in international trade
and controlled inflation.
In addition, investment and exports have become
the foundations of economic growth rather than
consumption, which had supported the Indonesian
economy since the crisis. Such conditions have been
stimulated by a downward domestic interest rate trend
and steadily growing business confidence, despite the fact
that the economy has not quite recovered to pre-crisis
levels. Optimistic macroeconomic prospects have reinforced
Inflation (% yoy) 6.4 6.0 6.5 6.6 6.4 6.7 6.4 6.6
Balance of Trade (US$ milliar) 7.9 8.4 8.1 8.7 8.5 8.9 9.4 10.4
Source: Asia Pacific Concensus Forecast
financial system stability and supported sustainable
domestic economic growth.
Meanwhile, foreign investors still deem economic
conditions and investment instruments in Indonesia
attractive and relatively stable, despite several hikes in risk
perception as reflected by widening yield spread. However,
vigilance over investment inflows, particularly short term,
remains critical as they are vulnerable to external shocks
with the potential to trigger a sudden reversal.

51
 Chapter 3 Prospects of the Indonesian Financial System
Table 3.2
Indonesian Risk Perception
Yield Spread (bps)
Bonds Rating Y-t-m (%)
Sep 2007 Dec 2007
Indo 41 Ba3 (Moody's) 7.27 386.6 423.9
Indo 17 BB+ (S&P) 8.96 475.2 495.2
Indo 45 Ba3 (Moody's) 11.01 546.6 653.4
Source: Bloomberg
3.2. BANK RISK PROFILE: LEVEL AND DIRECTION
Indonesia is for the most part a bank-based economy,
and therefore, the level and direction of the bank risk profile
strongly influences financial system stability. In general,
the risks confronting banks were largely mitigated and their
near-term outlook appears stable. Pressures in the domestic
economy and global financial markets did not undermine
banking system resilience. Intermediary functions have
gradually returned to the pre-crisis level, whilst efficiency
improved and non-performing loans diminished. As a
result, profitability has increased despite a slight reduction
in CAR attributable to greater credit extension.
Meanwhile, the improved bank intermediary function
was balanced by a better risk control system (RCS) for credit
risk. Enhanced credit risk management, followed by credit
restructuring at several state-owned banks ameliorated
bank loan quality. As stated in Chapter 2, by the end of
2007, for the first time since the crisis, the gross ratio of
non-performing loans dropped below 5%.
However, amid various internal and external issues,
for example the imminent recovery of the real sector, the
high frequency of natural disasters, commodity price
shocks for staples, and the soaring global oil price, banks
are expected to confront potential increasing credit risk
exposure. Nevertheless, with the improved RCS, the rise
in credit risk exposure is not projected to be significant.
Meanwhile, liquidity risk remains low with a stable
trend in line with the high ratio of liquid assets against
52
non-core deposits. Bank liquidity was also well-
maintained, reflected by a lack of volatility in the Inter-
bank Money Market (PUAB) which can disrupt bank
performance. However, potential liquidity risk remains
due to the unbalanced structure of bank deposits, in
terms of tenure, volume and ownership. Possible shocks
in the global market that can be transmitted to the
domestic financial market have the potential to increase
liquidity risk.
Market risk stemming from the exchange rate is
relatively low and stable. Technically, exchange rate risk is
manageable due to the relatively low net open position of
banks, far below the maximum ratio of 20%. Whereas,
market risk emanating from the interest rate will remain
moderate and stable, in line with the bank maturity profile
that is short for the short term and long for the long term.
The maturity profile strategy has, hitherto, been effective
in overcoming interest rate risk, however, vulnerabilities
may occur if there is a swing in the interest rate. This is of
concern because the financial instruments that can be
utilized to control interest rate risk are relatively limited
due to the underdeveloped hedging and derivatives
markets in Indonesia.
Furthermore, market risk exposure from SUN prices
is also moderate and stable. The strategy undertaken by
banks to lower SUN price risk is to maintain a small
portfolio of SUN for trading purposes. Nevertheless,
caution must be exercised especially if the trading SUN
portfolio is expanded and accompanied by price shocks
because market volatility is generally beyond the control
of banks.
The near-term outlook for operational risk remains
difficult to predict. Numerous challenges beset Indonesian
banks in terms of assessing operational risk due system
and technological constraints. Moreover, limitation of loss
data availability has been a daunting challenge, and hence,
 Chapter 3 Prospects of the Indonesian Financial System

Graph 3.1
Bank Risk Profile and Direction

Market Risk Liquidity Risk Credit Risk

Inherent Risk

Smt-II 2007 Smt-II 2007 Smt-II 2007

High

Outlook Outlook Outlook

Moderate

Interest Government
Rate Bonds Price
Low

Exchange Rate

Strong Acceptable Weak Strong Acceptable Weak Strong Acceptable Weak

Risk Control Risk Control Risk Control

modeling and quantifying the risk is an extremely arduous
task. Against this unfavorable backdrop, Bank Indonesia
will continue to boost capacity building of banks whilst
conducting rigorous supervision over the quality of banks»
internal control. Basel II implementation is expected to
improve competence and capacity in measuring and
controlling operational risk in the banking industry.
3.3. PROSPECTS OF THE INDONESIAN FINANCIAL
SYSTEM
Financial system stability was well preserved during
the second semester of 2007 with a positive near-term
outlook. This is in line with improved macroeconomic
conditions, relatively stable domestic financial markets, as
well as improved bank infrastructure and performance.
Financial system stability in 2007 was largely affected
by global economic developments, such as the subprime
mortgage debacle and the persistently soaring
international prices of oil, commodities, food and other
basic necessities. Growing pressures stemming from the
global economy slightly raised the financial stability index
subprime mortgage fiasco and deteriorating U.S. economy
will potentially undermine domestic financial markets and
corporate performance that constitute the main borrowers
from banks. Domestically, persistent natural disasters have
the potential to exacerbate non-performing loans. These
issues are expected to pressurize financial system resilience
in the first semester of 2008; therefore, the financial system
stability index will predictably rise slightly to 1.34 by the
end of June 2008.
Regardless of the potential decrease in financial
system stability originating from the corporate sector as
the predominant borrowers from banks, in general, banks
are projected to overcome this issue by accumulating
sufficient reserves of productive assets and capital.
Additionally, credit restructuring will continue and is
expected to raise the quality of bank credit.
Graph 3.2
Financial Stability Index
2.5
FSI
FSI (average)
2
1.34
1.5
1.251.27

from 1.21 in late June 2007 to 1.25 at the end of December 1

2007.
0.5

Entering 2008, increased uncertainty in global

0
M04 M08 M12 M04 M08 M12 M04 M08 M12 M04 M08 M12 M04 M08 M12 M04
financial markets as the second-round effects of the 2003 2004 2005 2006 2007 2008

53
 Chapter 3 Prospects of the Indonesian Financial System
Shocks and adverse developments occurring in the
domestic and global economy are challenges. The soaring
global price of oil and other basic commodities have, in
fact, fostered the search for new alternative energy
sources. Besides, since the crisis, strategic infrastructure
has not received the attention it deserves, consequently,
the government rolled out several policy packages to
accelerate infrastructure development. These efforts have
provided significant business opportunities to several
sectors such as crude palm oil, coal, sugar, infrastructure
and property. Expansion of these sectors should be
supported by a more auspicious investment climate, as
well as financing from financial institutions and the capital
market.
3.4. POTENTIAL VULNERABILITIES
The factors that induced potential vulnerabilities
during the previous semester are predicted to persist and
overshadow financial system stability. Externally, the most
significant vulnerabilities are associated with global
economic shocks, primarily the lasting impacts of losses
brought about by the subprime mortgage crisis, soaring
global oil and commodity prices, as well as sluggish global
economic growth.
Until now, the subprime mortgage crisis has endured
affecting several other segments. In the United States, the
crisis has triggered losses at major financial institutions,
and also monoline insurance companies, which ensure the
timely repayment of loans and interest from bonds or other
securities after default has occurred. The two largest
monoline insurance companies in the United States (Ambac
Financial Group Inc., and MBIA) suffered losses and saw
their ratings slip, which precipitated a very low stock price.
Such negative growth could lead to a narrow credit market
in the United States and other associated developed
countries.
54
Even though Indonesia avoided direct losses due to
the subprime mortgage crisis, impacts were felt in line with
greater integration between the domestic and global
economies. Meanwhile, global oil price hikes could lead
to higher production costs and trigger downstream price
hikes, which would weaken public purchasing power. As
a consequence, the prospect of non-performing loans
would be bleak, which in turn would place pressure on
the financial system (see Box 3.1).
Sluggish global economic growth, which was
engendered by a slowdown in the U.S. economy, has
further widened to encompass several European countries.
The Federal Reserve»s policy to slash interest rates in the
United States in order to stimulate economic growth, has
in fact hastened a wider interest rate differential that has
the potential to catalyze short-term capital inflows to the
domestic financial market. Vulnerability will appear should
a sudden reversal of these capital inflows transpire.
Domestically, vulnerabilities exist in the form of
frequent natural disasters that have decimated parts of
Indonesia. Furthermore, potential vulnerabilities may
emerge from soaring commodity prices as well as
preparations for the upcoming general election. Bank
regulations regarding credit extension to borrowers in
disaster zones have been enacted in response to the
potential credit risk stemming from persistent natural
disasters (see Box 3.2). Meanwhile, control of basic
commodity prices and anticipatory measures in preparation
for the upcoming General Election require firm action from
the Government.
Several challenges must be confronted by Indonesia»s
banks in the near future. The main challenges include bank
consolidation and the implementation of Basel II. Bank
consolidation will predictably improve competitiveness,
boost economies of scale of domestic banks and simplify
bank supervision. On the other hand, Basel II

implementation will foster higher quality bank risk
management.
Potential vulnerabilities can be lessened by placing
more emphasis on the Financial System Stability Forum
(FSSF), which aims to act as a medium to exchange
Chapter 3 Prospects of the Indonesian Financial System
information and resolve risks in the economy that could
trigger a crisis. In the future, closer coordination between
the banking and the capital market authorities as well as
non-bank financial institutions should be perused to bolster
financial system stability.
55
 Chapter 3 Prospects of the Indonesian Financial System

Box 3.1 Impact of Fuel Price Increases on Financial System Stability

Approaching the end of 2007 and entering 2008, Graph Box 3.1.1.
the global oil price continued to soar to new heights, Bank NPL and Global Oil Price

even surpassing US$110 per barrel. As a result, extreme USD/barel %

100 10.00
vigilance is required as was evidenced by experience 90 9.00

from 2005 that indicated a rise in the oil price spurred 80 8.00
70 7.00
pressures on the financial system, particularly through 60 6.00
an increase in bank NPL. 50 5.00
40 4.00
However, when reviewing data from 2007, the
30 3.00
correlation between the global oil price and bank NPL 20 2.00
Oil Price (left axis)
10 1.00
is not always in the same direction. As illustrated in NPL (right axis)
0 0.00
Graph 3.1.1, at times when the global oil price tended Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov
2004 2005 2006 2007
to rise, bank NPL went down. This was possible because
during that period, bank NPL was most strongly December 2007 (4.6%). Simulation results showed
influenced by credit restructuring. However, the impact that, ceteris paribus, each 10% increase in the global
of the global oil price will be noticeable in a few months; oil price will generate three-month gross NPL ratio
therefore, stringent surveillance is required by banks of 0.20%. Thus, if the global oil price reached
on borrowers sensitive to oil price fluctuations. With USD115 and persisted, the gross NPL ratio for the
prudent surveillance, a rise in NPL and the subsequent three subsequent months is estimated to be around
provisions can be estimated. 5.66% (see Table Box 3.1.1.).
Additionally, to investigate the impact of global The above figures demonstrate that the rise in
oil price changes on NPL, banks have begun the global oil price could significantly impact the banks.
conducting simulations. The calculations in the Therefore, it should not be neglected in terms of
simulation are based on gross NPL at the end of financial system stability surveillance.

Table Box 3.1.1.

Projected Gross NPL in 2008 against Various Oil Price Scenarios

World Oil
USD 75 USD 85 USD 100 USD 110 USD 115 USD 120 USD 125
Price Scenarios

NPL gross Ratio (%) 4.82% 5.02% 5.37% 5.57% 5.66% 5.75% 5.82%

56

Box 3.2 Natural Disasters, Life Cycles and Financial System Stability
In recent times the full panoply of natural disasters
has befallen Indonesia. News of earthquakes, flooding,
landslides and tornados featured in the mass media
almost daily. Natural disasters have plagued Indonesia
primarily due to relentless environmental destruction.
Environmental destruction and the ensuing
natural disasters can have negative affects on financial
system stability. Natural disasters not only involve
astronomical economic costs, but can also decimate
infrastructure, which can disrupt financial services and
the payment system. For banks, natural disasters can
raise credit risk through burgeoning NPL and also
intensify operational risk. Furthermore, serious
operational disruptions can lead to reputational risk.
Thus, a proper Disaster Recovery Plan or Business
Continuity Plan should be thoroughly prepared.
There can be no doubt that saving the
environment is the best way to prevent natural
disasters. As the banking authority, Bank Indonesia
has endeavored to encourage banks to support
environmental concerns. This is reflected by Bank
Indonesia Regulation (PBI) No.7/2/PBI/2005 dated
20January 2005 on Productive Asset Evaluation for
Commercial Banks that mandates banks to evaluate
their environmental business activities when assessing
the business prospects of a borrower. Furthermore,
to support economic recovery following a natural
disaster, Bank Indonesia promulgated PBI No.8/15/PBI/
2006 dated 5 October 2006 regarding Special
Treatment of Bank Credit in Regions Affected by
Natural Disasters. Additionally, banks can also help to
protect the environment through project financing,
for example mitigating the greenhouse effect, seeking
alternative fuels, refuse recycling and industrial waste
processing.
A relatively new and hotly debated issue relating
to the environment is global warming. This topic
Chapter 3 Prospects of the Indonesian Financial System
featured prominently at the United Nations Climate
Change Conference held in Bali on 3-14 December
2007. In this context, the most pertinent question is
how can the financial sector actively contribute in
mitigating global warming?
Indonesia has abundant natural resources, for
instance the awe-inspiring forests that account for
25% of forests in East Asia and the Pacific. A report
from World Bank states that Indonesia is a nation
characterized by mega biodiversity. With such
expansive forested areas, Indonesia has the
opportunity to mitigate greenhouse gases, which have,
for a long time been considered as the main cause of
global warming. The carbon market, which was
created by the Kyoto Protocol in 1997, provides a rare
opportunity for financial institutions to become
involved in financing business activities that can
mitigate the emission of greenhouse gases (GHG).
Under the terms of the carbon market, a country
that exceeds its quota for GHG emissions can pay
compensation by contributing to the GHG emission
mitigation project in its own country or abroad. A
carbon transaction is defined as a contract purchase
where the first party compensates the second for
conducting mitigating activities for GHG emissions.
Payment can be in cash, equity, debt, convertible debt,
warrant or in the form of technological conversion.
The European Union Emissions Trading Scheme (EU
ETS) is the largest capitalized carbon market that
represents developed countries which are actively
involved in the carbon market to finance GHG emission
mitigation in European countries as well as developing
countries.
Due to the limited or negligible exposure of
Indonesia to the carbon market, the carbon market
share in the Indonesian financial market is also almost
null, thus its impact on financial system stability can
57
 Chapter 3 Prospects of the Indonesian Financial System
be ignored. However, the carbon market has the
potential to fund environmental projects in Indonesia.
Furthermore, as Indonesia has the potential to
contribute extensively in mitigating the greenhouse
effect, carbon market exposure is likely to increase. The
international carbon market expanded its capitalization
to an amount of US$30 billion in 2006; triple the
amount in 2005. It is time to consider efforts to
encourage carbon trading in the Indonesian financial
market as one source of financing for environmental
projects
58
References
Asia Cleantech, ≈Avoided deforestation credits head
for the voluntary carbon markets∆, 7 January 2008.
New Energy Finance, ≈Clean energy investment breaks
the $100bn barrier in 2007∆, Press Release 2
January 2008.
The World Bank, ≈Environment at a Glance -
Indonesia∆, 2004.
The World Bank, ≈State and Trends of the Carbon
Market 2007∆, May 2007.
United Nations Framework Convention on Climate
Change (UNFCCC) website (http://unfccc.int).
 Chapter 4 Financial Infrastructure

Chapter 4
Financial Infrastructure

59
 Chapter 4 Financial Infrastructure

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60
 Chapter 4 Financial Infrastructure

Chapter 4 Financial Infrastructure

Indonesian financial infrastructure continued to support the preservation of

financial system stability. Despite increases in volume and settlement value,
the payment system functioned without fault, successfully mitigating
settlement risk and operational risk. Meanwhile, the Credit Information Bureau
played a more significant role in the provision of credit information to business
players. In addition, financial infrastructure was strengthened by the more
encompassing function of the Financial System Stability Forum (FSSF).

4.1. PAYMENT SYSTEM
4.1.1. Payment System Performance
The Indonesian payment system performed robustly
and did not exhibit any potential risk potential and has
fully supported financial system stability. In the second
semester of 2007, nearly all (around 96.51%) of the total
value of inter-bank payment transactions was performed
through the Bank Indonesia Real Time Gross Settlement
system (BI-RTGS). Meanwhile, transactions processed
Graph 4.1
Payment System Transaction Activities in
Semester II 2007
0.0002%
3.4852% 0.0045%
96.5101%
through clearing totaled just 3.49%, with the remainder
through credit cards and account-based cards (ATM,
ATM+Debit and Debit cards).
Compared to the previous semester, the value of
payment transactions through the BI-RTGS system in the
reporting semester declined by 10.42% (from Rp22.09
thousand trillion to Rp20.01 thousand trillion), despite a
surge in volume by 15.34% (from 3.87 million transactions
to 4.57 million transactions). The decline in payment
transaction value was due to infrequent intervention in
monetary management. Meanwhile, the swell in payment
transaction volume was attributable to increased economic
activities in the community for special occasions such as
religious celebrations, year-end bookkeeping and New Year
festivities. Moreover, the rise in payment transaction volume
owed to higher transaction activities in the foreign exchange
market to fulfill foreign currency demand from the corporate

RTGS Credit Card

sector, as well as increasing transaction activities in the capital
Clearing Account Based Card (ATM, ATM+debet & debet)
market during the reporting semester.

61
 Chapter 4 Financial Infrastructure

Table 4.1 decline in payment card transaction value and volume was
Settlement Value and Volume Development in
BI-RTGS System
principally due to a contraction in the volume and value
of account-based card transactions in the form of ATM
Semester I-2007 Semester II-2007 Growth cards and ATM+debit cards, which dominated (around

Transaction Transaction Transaction Transaction Value Volume 95.97%) payment card transactions.
Value Volume Value Volume
(thousand (thousand Table 4.2
trillions) (millions) trillions) (millions) Payment Card Transactions
Rp22.09 3.87 Rp20.01 4.57 (10.42%) 15.34% Total Transaction Transaction
Cards Type Cards Volume Value
(in millions) (in millions) (in trillions)
As a continuation of activities in the previous semester, Credit card 9.15 67.22 39.96
the implementation of Bank Indonesia»s National Clearing Debit card (ATM
and ATM+Debit) 35.20 990.04 941.64
System (SKNBI) through Local Clearing Providers (LCP)
Total 44.35 657.26 981.20
proceeded as planned. Consequently, by the end of
semester II 2007 41 LCP had implemented SKNBI .
Meanwhile, the value of credit clearing transactions in the 4.1.2. Payment System Policy and Risk
reporting semester totaled Rp195.49 trillion with a Mitigation
transaction volume of 19.62 million transactions. Conversely, In the operation of the payment system, Bank
the value of debit clearing transactions amounted to Indonesia must confront risk as the regulator and operator
Rp529.23 trillion with a transaction volume of 20.28 million of the payment system as well as one of its users. To
transactions. Contrasted against semester I 2007 both credit mitigate the inherent risk potential, Bank Indonesia
and debit clearing increased in value and volume. The rise undertakes the following measures:
in value and volume of credit clearing was 12.91% and
8.22% respectively, whilst debit clearing expanded in value a. Intensification of BI-RTGS Adherence to Core
and volume by 11.47% and 2.11% respectively. Principles for Systemically Important Payment Systems
In the reporting semester, Bank Indonesia (CP SIPS)
approved seven payment card providers in the form of Core Principles for Systemically Important Payment
credit cards, debit cards, ATM cards and pre-paid card. Systems (CP SIPS) is an international standard issued
Despite the increasing number of cards issued, actual usage by the Bank for International Settlements (BIS),
of credit cards, debit cards and ATM cards has slowed when through the Committee on Payment and Settlement
compared to the previous semester. The total number of Systems (CPSS). Fulfillment of this international
cards issued in the reporting semester was 44.35 million standard will bolster risk mitigation.
cards, representing a jump of 8.74% over the previous Furthermore, by adhering to the CP SIPS, regulations
semester. Meanwhile, the transaction value attributable concerning the BI-RTGS system become more
to payment cards totaled Rp0.98 thousand trillion; a decline transparent, including publishing the charges that
of 12.51% compared to the previous semester, with a apply to Bank Indonesia when using the system.
transaction volume of 657.26 million; down 23.12%. The Other than transparency, regulations applicable to the

62

BI-RTGS system also consider the efficiency of system
participants, providing freedom to choose their
participation in the BI-RTGS system. In terms of the
application, innovative new safety features are being
implemented to ensure the safety of the administrator
(Bank Indonesia) and participants. In addition, Bank
Indonesia will also issue regulations regarding
customer protection for users of the payment system,
amongst others including protecting the credit and
debit accounts of customers as well as providing
interest and compensation.
b. Payment System Oversight
Effective oversight will mitigate risk in the payment
system. As part of the efforts to maintain a quick,
safe and reliable BI-RTGS system, Bank Indonesia has
been conducting onsite and offsite surveillance of
participants. Onsite surveillance is performed through
direct site visits to participants» production locations
to confirm participant compliance to applicable BI-
RTGS system regulations. Conversely, offsite
surveillance is performed by analyzing submitted
reports consisting of internal audit reports and security
audit reports.
c. Business Continuity Plan for the Payment System
To maintain the BI-RTGS system, Bank Indonesia
conducts periodic trials using several scenarios to
prepare and train operational personnel so they are
always prepared for any eventuality. The trials also
measure the preparedness of the administrator»s
backup system. To maintain the BI-RTGS system in
terms of the participants, Bank Indonesia provides
opportunities for participants to test their connection
to the administrator in order to ensure the readiness
of the backup system. Should the backup system fail,
Chapter 4 Financial Infrastructure
Bank Indonesia also has a Guest Bank facility, which
can be utilized by participants to settle outstanding
transactions in the BI-RTGS system.
d. Security Upgrades for Payment Cards (APMK)
The licensing process for payment cards can be used
to enhance the safety of payment cards before they
become too widely used by the public. Bank
Indonesia applies prudential principles in the licensing
process of APMK issuances such as by analyzing
requests by candidate providers of payment cards.
Improving safety can be implemented from the
technological side by implementing chip technology
in ATM cards and debit cards. Meanwhile, to minimize
risks to customers, Bank Indonesia conducts direct
oversight on APMK providers and indirect oversight
by analyzing periodic APMK performance reports
submitted to Bank Indonesia.
4.2. CREDIT INFORMATION BUREAU
Another important step taken to strengthen
Indonesian financial sector infrastructure is the establishment
of the Credit Information Bureau (BIK) at Bank Indonesia.
The establishment of BIK is one program contained within
the Indonesian Banking Architecture (IBA), particularly the
fifth pillar which is to complete the existing infrastructure in
order to support a healthy banking industry.
In general, BIK is mandated with assisting banks and
other financial institutions to smooth the process of fund
allocation and the application of risk management through
the provision of reliable information on debtor quality.
Complete and transparent information on debtors is vital
to avoid asymmetric information in credit extension to
minimize credit risk.
The provision of debtor information has actually long
been performed by Bank Indonesia. It was initially known
63
 Chapter 4 Financial Infrastructure
as the Credit Information System which then became the
Fund Allocation Information System and since 2005 has
been known as the Debtor Information System (DIS). DIS
is a system to manage and provide information on
individual debtors.
Since the promulgation of BI Regulation (PBI) No.7/
8/PBI/2005 dated 24 January 2005 on DIS, the debtor
information report submitted to Bank Indonesia must be
published online on a website created by Bank Indonesia.
The first application of web-based DIS was version 504;
currently version 510 is being used. Improvement and
development of the DIS application will help expedite
online and real-time DIS implementation. DIS coverage
includes the following:
Table 4.3
Comparisons of DIS Regulations
Description Old DIS Regulation
Eligible to submit reports Commercial Banks
IDI On line but not in real time
Reported Ceiling Rp50 million or more
Debtor Identification Number (DIN) No unique number
Audit No special DIS audit
Report Submission Through switching - PT Aplikanusa Lintasarta
Communication Network Dial up via VSAT
Those reporting on DIS include Commercial Banks,
Rural Banks, Sharia Banks, Non-bank Credit Card
Providers ( LPKKSB ) and Non-bank Financial
Institutions. For Commercial Banks and Rural Banks
with assets totaling Rp10 billion or more as well as
LPKKSB, reporting is mandatory. Oppositely, for other
financial institutions and Rural Banks with assets of
less than Rp10 billion, reporting is on a voluntary basis.
Debtor reports include all fund provision facilities
recorded on the books from Rp1 and above.
Debtor information reports have to be submitted
64
online to Bank Indonesia monthly through the web-
based DIS application.
Those whom submit their debtor reports according
to prevailing regulations have the right to obtain
Individual Debtor Information (IDI) online and in real
time. Information covered by IDI includes debtor
identity, debtor owner/manager, facilities received by
the debtor from the reporting bank, outstanding debt
or facilities, collateral and credit quality.
Penalties on those whom fail to submit reports or
corrections are imposed according to prevailing
regulations or as per existing agreements.
The differences in regulations between the current
DIS application and the old system are as follows:
Current DIS Regulation
Commercial Banks, Rural Bank, PKKSB,
and LKNB
On line and in real time
Value of all provided facilities
Each debtor receives a unique DIN
Special DIS audit
Direct to BI server (Head Office)
Dial up via BI extranet
For credit providers, BIK and DIS are particularly
beneficial in terms of assisting a time-efficient analysis and
decision-making process for credit extension. In addition,
with comprehensive and accurate information, credit risk
can be minimized. Meanwhile, to the receivers of credit,
BIK and DIS will speed up credit approval times. Furthermore,
new customers have wider access to credit providers as their
credit performance information can be accessed by potential
creditors through DIS. Another benefit is that debtors can
check the accuracy of their credit history by submitting a
written request to Bank Indonesia with proof of identity.

4.3. FINANCIAL SYSTEM RISK MITIGATION
4.3.1. Financial System Stability Forum
The Financial System Stability Forum (FSSF) has
increasingly underpinned its pivotal role as a venue of
coordination among authorities responsible for safeguarding
financial stability in Indonesia. During the second semester
of 2007 FSSF delivered several major initiatives to bolster
the domestic financial system and hosted a regular
information exchange on issues surrounding financial system
developments both globally and domestically. As reported
in the previous Financial Stability Review (FSR No. 9), FSSF
consists of the Steering Forum, Executive Forum and
Working Groups, which function as follows:
To support decision-making to prevent systemic crisis
emanating from problem banks;
To coordinate and exchange information in order to
harmonize legislation and regulations for banks, non-
bank financial institutions and the capital market;
To prepare a Macro Early Warning System for the
financial sector and to mitigate institutional problems
in the financial system with systemic potential based
on the information gathered by the early warning
systems of respective supervisory institutions;
To coordinate and synchronize the drafting of
Indonesia Financial System Architecture (IFSA).
To coordinate preparation of the Financial Sector
Assessment Program (FSAP).
Chapter 4 Financial Infrastructure
To support the implementation of the functions
mentioned, working groups have been formed at the
Organizing Forum level since the second half of 2007.
These include IFSA and FSAP Preparation, Subprime
Mortgage Crisis, Crisis Management Protocol, and
Government Bond Repo working groups.
The FSSF regularly holds meetings to discuss the latest
developments in the Indonesian financial sector. In the
meetings, required anticipatory steps are discussed to
prevent unprecedented shocks. Moreover, to encourage
information exchange, each month Bank Indonesia
disseminates the latest information to FSSF regarding
banking industry performance and the assessment results
of overall financial system stability.
4.3.2. Crisis Management Protocol
Meanwhile, in association with Crisis Management
Protocol (CMP), several milestones have been completed
including setting CMP coverage. The objective will be to
minimize the impact of financial distress. At present, a
comprehensive CMP is being developed and will be
followed by a legal framework, as well as an organization
and coordination mechanism, infrastructure preparation,
data and information sharing, indicators and scenario
setting, communication program and crisis simulation.
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66
 Article I - Property Industry Survey: Observing Potential Pressure on Repayment Ability

Article

67
 Article I - Property Industry Survey: Observing Potential Pressure on Repayment Ability

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68
 Article I - Property Industry Survey: Observing Potential Pressure on Repayment Ability

Article I

Property Industry Survey:

Observing Potential Pressure on Repayment Ability

Wimboh Santoso5
, Noer Azam Achsani6
, Herawanto7

The goal of this survey is to build an economic model to be applied as an early warning system for the
negative effects of property and real estate industry growth on financial system stability and also to investigate
the financing behavior of real estate and property industry players. Utilizing data from 1996 √ August 2006, the
results demonstrate that the EWS model built in this study can comprehensively explain the behavior of GDP
construction, property credit and property NPL, especially on over 3, 6 and 12-month prediction periods.

I. INTRODUCTION quickly to the financial services sector because property

The property industry constitutes one of the
preeminent drivers of economic growth in any country. In
most developing countries, the property industry plays a
strategic role as it involves both upstream and downstream
industries. Rapid property industry growth is swiftly
transmitted to other industrial segments such as cement,
reinforced concrete, bricks, log/wood/timber, consultants
and real-estate agents. However, the implications of
property industry growth are not only limited to the
industries mentioned. Property industry growth spreads
5 Director, Financial System Stability Bureau, Directorate of Banking Research and Regula-
tion, Bank Indonesia, wimboh@bi.go.id
6 Researcher, Institute for Research and Community Empowerment of Bogor Agricultural
Institute (IPB), achsani@yahoo.com
7 Senior Researcher, Financial System Stability Bureau, Directorate of Banking Research
and Regulation, Bank Indonesia, herawanto@bi.go.id
companies require investment funds to begin construction,
which are primarily sourced from banks/financial
institutions. On the other hand, house buyers who require
funds to finance their property purchase also seek financing
from banks/financial institutions. At this point the financial
system becomes entwined with the property industry.
Growth in the real estate and property industry in
Indonesia over the past three years has shown significant
progress following the market crash due to the 1997
Economic Crisis. Such expansion in the real estate and
property industry can be seen as an indicator of improving
domestic economic conditions. That is because growth
in this industry is tightly correlated to labor as well as the
various support industries (such as cement, bricks, tiles,

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 Article I - Property Industry Survey: Observing Potential Pressure on Repayment Ability
paint, steel, timber/wood/logs), transportation, and other
related sectors. Literature Studies in numerous countries
(such as Nathakumaran et al (1996), Key et al (1994),
Wood and Williams (1992), Newell and Higgins (1996),
Krystalogianni et al (2004) and Everhart and Duva-
Hernandez (2001)) also show that the real estate and
property industry is a key indicator of economic
robustness.
The performance of the real estate and property
industry can also be considered as a signal to the financial
sector, particularly the banking sector. Experience in the
past has shown that pressure on the real estate and
property industry can trigger a crisis, as evident from the
US savings and loans crisis at the end of 1980s, the Swedish
and Japanese financial crises in the early 1990s and the
US subprime mortgage crisis which persists to this day.
This is in line with research conducted by Koehler (2001),
Carson (2001), Van den Bergh (2001) and Zhu (2003).
Observing the close correlation between the role of
the real estate and property industry on the economy as a
whole and financial system stability in particular, it is
imperative to continually review the behavior of the
property sector. In this context this research aims to:
(i) Construct an economic model that can be used as
an early warning system for the negative impacts of
real estate and property sector growth on financial
system stability,
(ii) Investigate the financing behavior of business players
in the real estate and property industry (developers,
banks and buyers),
(iii) Explore the expectations of business players in the
real estate and property industry as well as the
industry»s future prospects.
To achieve the goals of this study, the research is
split in two stages. Stage one includes constructing a model
that can be used as an Early Warning System (EWS) for
real estate and property industry growth. Only with a sound
70
early warning system can future property industry growth
be predicted.
Stage two involves a survey to study the financing
behavior of business players in the real estate and property
industry (developers, banks and buyers) and to investigate
the expectations of industry players regarding the future
prospects of the industry. The survey will be used to clarify
the economic model built in the initial stage.
2. EARLY WARNING SYSTEM FOR THE REAL
ESTATE AND PROPERTY INDUSTRY IN INDONESIA
Shocks (either from internal or external sources) will
trigger fluctuations in the economy. In the long run, such
fluctuations form the business cycle of a fluctuating
economy that is highly likely to reoccur in the future. If
such a cycle can be well understood then future economic
behavior should be known long in advance of its
occurrence. As a result, early warning systems and
economic cycle forecasts become vital for the government
and business players alike.
In the construction of an Early Warning System (EWS)
model for the real estate and property industry in Indonesia
and to analyze the effects of the industry on
macroeconomic variables and financial stability, five criteria
are used, namely: Accurate, Anticipative, Comprehensive,
Flexible, and Kiwari (up to date). To achieve the goals set,
the model is constructed using Business Cycle Analysis.
This method was established by the National Bureau of
Economic Research (NBER) and is currently used in many
developed countries, especially OECD countries. In
Indonesia and other developing countries, this method is
rarely used due to data limitations.
In business cycle analysis there are three types of
composite index and 1 reference series. Each composite
index is a combination of a few variables. The three indices
are leading, coincident and lagging indices. The Reference
Series is a variable that illustrates the aggregate economic
 Article I - Property Industry Survey: Observing Potential Pressure on Repayment Ability
conditions to be reviewed, which in this case are indicators
of the real estate and property sector. The leading index
moves ahead of the coincident and reference series. The
coincident index moves in correlation with the reference
series. And the lagging index moves behind (lag) the
coincident and reference series.
The leading index is the focus of attention because
it can provide an early warning system regarding the
direction of aggregate economic movement. The
coincident index can illustrate the current economic
situation and the lagging index confirms the movements
of the previous two indices.
This study uses three alternative reference series closely
related to the real estate and property industry, namely:
Alternative 1: banking indicators including property
credit and property NPL;
Alternative 2: Value-added construction measured
against the GDP of the construction sector; and
Alternative 3: Absorption level measured by the level
of occupancy/sales or rental/sale price index (for
commercial property) and the selling price index or
level of sales (for residential property).
An alternative to the third reference series is not used
due to the change in price definition in 2002. As a result,
the available series is very short and fails to qualify. Of the
two available alternatives, an early warning system is then
developed to detect the behavior of reference series in
the upcoming prediction period of 3, 6 and 12 months.
EWS development in the 3 periods is not merely based on
the accuracy of analysis results, but it also considers room
for the policy-maker, especially in the process of
formulating and determining policy.
Using data from 1996 √ August 2006, study results
show that the EWS model developed could
comprehensively explain the behavior of construction GDP,
property credit and property NPL in all prediction periods
(3, 6 and 12 months). To summarize, the analysis results
of the business cycle can be presented as follows:
Property NPL
NPL: The results show a declining trend of
property NPL in the upcoming 3 and 6-month periods (end
of 2006 √ March 2007). This is in line with NPL data (out
of sample); however in the upcoming 12 months (August
2007), NPL indicated a rise. This is also in line with abundant
press coverage in various media that also show a similar
trend.
The primary variable used to formulate the leading
index of property NPL is electricity consumption and the
consumer price index (for the upcoming 3-month period),
and 1-month SBI (for the upcoming 6 and 12-month
periods). Electricity consumption has a negative correlation,
which implies that high electricity consumption will be
followed by lower property NPL. In contrast, the consumer
price index and 1-month SBI correlate positively, which
indicates that high consumer prices and 1-month SBI will
trigger a surge in NPL in the following 6 and 12 months.
Property Credit
Credit: The model shows that property credit
in the subsequent 3, 6 and 12-month periods (November
2006 √ August 2007) is projected to experience growth.
This is consistent with the latest property credit data and
the prevailing expectations of business players in the
property sector.
A more thorough analysis shows that the primary
variables of the leading index for property credit are: the
inventory of rented offices, inventory of luxury hotels and
the apartment occupancy level. The inventory of rented
apartments and the occupancy level of rented apartments
positively correlate to property credit. Therefore, higher
levels of these indicators will be followed by a rising trend
in credit. In contrast, the inventory of luxury hotels
negatively correlates to property credit, so that a low
inventory of luxury hotels would indicate a rise in property
credit in the subsequent period.
GDP of the Construction Sector
Sector: Similar to the
previous two models, the early warning system for
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 Article I - Property Industry Survey: Observing Potential Pressure on Repayment Ability

construction GDP also convincingly projected GDP
movements for the subsequent 3, 6 and 12-month periods.
The model indicates GDP growth in the upcoming 3, 6
and 12-month periods (November 2006 √ August 2007).
Unfortunately, these results are still awaiting confirmation
from actual GDP data, which has yet to be published.
However, the results do match prevailing opinion of the
business players and property experts.
Further analysis reveals that the key variables for EWS
of construction GDP are the 1-month SBI rate, retail
occupancy level, and real investment approval for hotels.
The 1-month SBI rate negatively correlates to construction
GDP, therefore, a low 1-month SBI rate will be followed
by high economic activity in the property sector. On the
contrary, a high retail occupancy level and high real
investment approval for hotels will precipitate intense
activity in the property sector.
To study the effect of the property sector on the
economy in general and also financial system stability, the
variable of property NPL will be analyzed both as a leading
indicator and with regards to coincident and lagging
indicators. Property NPL itself is the primary component that
makes up the leading index for property credit with a
negative correlation. This translates to the backward-looking
tendency of banks; therefore, high NPL tends to be followed
by low property credit. The coincident index shows that
NPL movement correlates to other economic indicators such
as electricity consumption, exports, real exchange rate, sales
level of industrial areas as well as the occupancy level and
inventory of rented apartments. Property NPL behavior is
followed by property credit, M1 and net foreign assets.
conducted to identify future financing behavior and player
expectations, which comprise of developers, banks and
buyers. The survey is performed in 10 cities in Indonesia:
Jakarta, Bogor, Depok, Tangerang, Bekasi, Yogyakarta,
Medan, Palembang, Makasar and Balikpapan. Sample
Location Selection is conducted through Shift-share
Analysis (SSA) and Location Quotient (LQ).
SSA is an analysis method to measure whether a
sector in a certain region outperforms the average of other
regions or the national average. LQ is used to identify the
basis sectors in a region. A sector is categorized as a basis
sector if its LQ coefficient > 1. On the contrary, if the LQ
coefficient < 1 then it is not a basis sector. A region is
selected as a sample if in that region, the property sector
(construction) is the basis sector that supports the local
economy and outperforms other regions nationally.
Survey results for developers, buyers and banks are
as follows:
Developers: For small and subsidized housing
developers, the pre-selling method is preferable to post-
selling. With pre-selling, the developer has assured buyers
as well as supplementary capital. In contrast, despite having
to indent for 2-6 months, buyers are also satisfied as the
house selling price can be cheaper which suits their
financial situation. The larger the house to be purchased,
the more favorable the post-selling method becomes. In
addition, the tendency to use self-financing is bigger.
Graph A1.1
Residential Property Selling Method
%
70 Pre selling Post selling

60 64
57
50
3. FINANCING BEHAVIOR AND THE 52 51

40
EXPECTATIONS OF PROPERTY INDUSTRY 30 36 48
49
43
PLAYERS 20

10
In order to understand financing behavior and the
0
expectations of property industry players, a survey is Small type Small type Middle type Big type
subsidi non subsidi

72
 Article I - Property Industry Survey: Observing Potential Pressure on Repayment Ability

Graph A1.2 be tightly related to credit application are interest rates,

Commercial Property Selling Method
income level and down payments.
%

Graph A1.4
70 Pre Selling Post Selling
Residential Property Financing
60 63

50 54
58
4.9 0.6 0.6
40
8.6
42 46
30 37 38.3

20

10

0
Apartemen Perkantoran Pertokoan
46.9

From a source of financing viewpoint, the largest Self Funding Self Funding and Non Bank Bank
Self Funding and Bank Self Funding, Bank and Non Bank Non Bank
portion used by developers originates from self financing.
This is related to cost of clearing and preparing the land
Graph A1.5
until it is ready for construction that has to be borne by Commercial Property Financing

the developers themselves. Other funds come for down

1%
payments, bank loans and non-bank loans. The factors 4%
5%

15%
that significantly affect the developers» decision to seek a
bank loan are: the interest rate, property prices, building
material prices, occupancy levels and property demand.
75%

Graph A1.3 Self Funding Banking Non Bank Fund

Source of Financing Self Funding and Bank Self Funding and Non Bank

70,00

60,00 Many commercial property buyers (apartments and

50,00
shops) use self financing since their purchasing power is,
40,00
on average, relatively strong. Meanwhile, most property
30,00

20,00
is sold through post-selling. With this method of selling,
10,00 buyers are assured of a specific location as well as building
0,00
1 2 3 4 5 6 7
style and quality.
1. Modal sendiri 2. Uang muka penjualan 3. Pinjaman Bank 4. Pinjaman lembaga non Bank

Graph A1.6
Buyers: One of the interesting findings of this study Commercial Property Selling Method
%
is that the majority of residential buyers (about 40%)
Pre Selling Post Selling
purchase property using self financing due to several 80
76
79

reasons: (i) do not wish to be burdened by debt; (ii) 60

63

complicated bank procedures; and (iii) have sufficient

40
37
funds. The larger the property to be purchased, the more
24
20 21
substantial the portion of self financing used; however,
0
bank funds still dominate overall. The factors believed to Apartemen Perkantoran Pertokoan

73
 Article I - Property Industry Survey: Observing Potential Pressure on Repayment Ability
Banks: Factors influencing the amount of property
credit include: (i) property industry prospects; (ii) level of
property market absorption/demand; and (iii) macro,
security and political stability. Factors that affect the level
of property NPL include: (i) interest rate level; (ii) level of
public income; (iii) level of property absorption/demand;
and (iv) inflation.
In general, banks, buyers and developers have
acknowledged that conditions in the property sector in
Indonesia in 2007 are better than in 1999. In 1999, the
property sector was expanding after plummeting to its
nadir during the crisis. And in 2007 the sector continues
to strengthen. In addition, respondents have stated that
the lending rate for property credit is still too high, and
its ideal rate would be in the range of 8 √ 12%.
Respondents also opined that monthly installments,
reaching 30% of income, are still far too high. Around
10% would be a more acceptable percentage for monthly
installments.
4. CONCLUSION
An Early Warning System (EWS) for the real estate
and property industry was compiled using three reference
series: Property Credit, Property NPL and Construction
74
Sector GDP. The EWS built on those three reference series
could project up to the next 12 months with a high level
of accuracy. The results of business cycle analysis were
congruent with real conditions in the field as confirmed in
various media (national and international), as well as
findings from various surveys.
Interviews with market players showed that the
property industry is currently expanding, but the media
have reported a substantial number of empty commercial
properties, which has the potential to increase property
NPL. On the other hand, interview results with banks and
market players indicated that NPL and the interest rate
need to be carefully considered in the property business.
Therefore, monitoring credit risk exposure (especially in
the property sector) is vital in order to mitigate risk that
may be triggered by property NPL.
In order to develop a future Early Warning System
that supports financial system stability, it is necessary to
expand and complete the data as well as actively monitor
EWS related indicators, not only in the property sector,
but also for other sectors. This matter has been addressed
by developed countries that recently improved 19 types
of leading indicators to monitor future economic and
financial movements.
 Article I - Property Industry Survey: Observing Potential Pressure on Repayment Ability
References
Akerlof, George. 1970. The Market for Lemons: Quality,
Uncertainty and the Market Mechanism. Quarterly
journal of Economics 84: 488-500.
Bernanke, Ben S. and Alan S. Blinder. 1988. Credit, Money,
And Aggregate Demand . National Bureau Of
Economic Research. Working Paper No. 2534.
Bussiere, M and Marcel F. 2002. Towards a New Early
Warning System of
Financial Crises. Working Paper European Central Bank
no. 145.
Greef , I.J.M. de and R.T.A. de Haas. 2000. Housing Prices,
Bank Lending, and Monetary Policy. Paper presented
at the Financial Structure, and Behaviour and
Monetary Policy inthe EMU Conference, October 5-
6, 2000, Groningen.
Kiyotaki, N and Moore J. 1997. Credits Cycles. Journal of
Political Economy, Vol. 105, pages 211-248
Krytalogianni, A., G. Matysiak, dan S. Tsolacos. 2004.
Forecasting UK Commercial Real Estate Cycle Phases
With Leading Indicators: A Probit approach. Applied
Economics.
Nanthakumaran, N., B. O»Roarty, and A. Orr. 1997. The
Impact of Economic Indicators on Industrial Property
Market Performance. Center for Property Research.
University of Aberdeen. UK.
Samuelson, P.A. 1976. Optimality of Sluggish Predictors
under Ergodic Probabilities. International Economic
Review 17:1-7.
Sims, C. 1980. Macroeconomics and Reality. Econometrica,
Vol. 48 page 1-48.
Siregar, Doli. 2002. Dasar-Dasar Penilaian Properti.
Stiglitz, J. E. 1992. Capital Markets and Economics
Fluctuations in Capital Economies. European
Economics Review. Vol. 36, pages 269-306.
Sugema, Iman. 2000. Indonesia»s Deep Economic Crisis:
The Role of the Banking Sector in It»s Origin and
Propagation, PhD thesis, The Australian National
University.
Whitley, J and Richard W. 2003. A Quantitative Framework
for Commercial Property and its Relationship to the
Analysis of Financial Stability of the Corporate Sector.
Bank of England Working Paper no. 207.
Zhang, Whenda and Juzhong Zhuang. 2002. Leading
Indicators of Business Cycle in Malaysia and the
Philippines. ERD Working Paper No. 32
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 Article II - Household Balance Sheet Survey : Significant Indicators in Financial System Stability Surveillance

Article II

Household Balance Sheet Survey8 :

Significant Indicators in Financial System Stability Surveillance

Wimboh Santoso9
, Bagus Santoso10

A household survey was conducted to establish the structure of the general public»s household balance
sheet. The household balance sheet is an important indicator in terms of financial system stability surveillance. By
establishing the structure of the household balance sheet, it is expected that analyzing a household»s ability to
obtain bank credit and calculating the probability of default of the household sector can be measured more
accurately. Subsequently, a survey using the random sampling technique was undertaken of respondents in all
municipalities/cities in six locations: West Sumatera, West Java, Bodetabek, Central Java, D.I. Yogyakarta and
East Java. Survey results indicate that on average, households are capable of fulfilling their commitment to the
banks and non-bank financial institutions as reflected by the ratio of total liabilities to core income, the ratio of
bank liabilities to core income and the ratio of non-bank liabilities to core income, which were 19.98%, 14.42%,
and 5.56% respectively.

I. BACKGROUND household balance sheet has a potential to affect financial

As one of the units in an economic system,
households play an important role in the financial system.
In a financial system households can function as Investors/
Debtors (surplus units) as well as Creditors (deficit units)
as illustrated in Diagram 1. Therefore, pressure on the
8 Summarized from survey results conducted through collaboration between the Direc-
torate of Banking Research and Regulation and Bagus Santoso and Setiyono (Gadjah
Mada University), Viverita (University of Indonesia), FX. Sugiyanto (Diponegoro Univer-
sity), Niki Lukviarman (Andalas University), Maryunani (Brawijaya University) and Nury
Effendi (Padjadjaran University)
9 Director of the Financial System Stability Bureau, Directorate of Banking Research and
Regulation, Bank Indonesia, email address: wimboh@bi.go.id
10 Lecturer, Faculty of Economics, Gadjah Mada University, email address:
bagussantoso@ugm.ac.id
system performance and vice versa. If this is not well
anticipated, risks may disrupt the financial system as a
whole. In this context, surveillance on the household sector
is crucial to measure and monitor potential risk.
In order to support household sector surveillance,
data availability is a prerequisite, particularly Household
Balance Sheet data which is currently incomplete. By
establishing the household balance sheet, it is expected
that risk analysis for the household sector can be performed
more precisely.

77
 Article II - Household Balance Sheet Survey : Significant Indicators in Financial System Stability Surveillance

Graph A1.1 To establish the balance sheet, primary data is used

Financial System Stability Analysis Framework
in the form of a field survey based on the random sampling

Capital
technique. Survey implementation covers the following
Household Probability Bank
of Default Profitability
Financial Condition factors:
Macro
economic 1. Survey respondents are households located in six
Probability Non Bank Capital Financial
Corporate
of Default Financial
Institution
Profitability System survey regions. A household is defined as a person or
Stability
Financial Performance
Money JSI, Yield a group of persons living within one physical building/
Market Curve, Interbank
Money Market
International and Domestic :
- Economic Factor
census for which their food and other living necessities
- Non Economic Factor Financial
System
Infrastructure are jointly funded (Central Bureau of Statistics).
- Intermediation
- Transmission
Mechanism
2. The choice and determination of the number of
Inflation Target

Monetary Growth research respondents in each municipality/city is

Stability Inflation
II. OBJECTIVES
The objectives of the survey are as follows:
- To establish the structure of the public household
balance sheet in all municipalities/cities in six
locations to be used as the basis of analyzing a
household»s ability to obtain bank credit as well as
calculating the probability of default in the
household sector.
- To reinforce Bank Indonesia»s surveillance activities on
the household sector in Indonesia, especially in
relation to financial system stability.
III. METHODOLOGY AND DATA
III.1. Methodology
This survey is a quantitative study. The interview
process with respondents is performed face-to-face.
Through this survey a household balance sheet is created
in six locations: West Sumatera, West Java, Bodetabek,
Central Java, DIY, and East Java. Creating the household
balance sheet in this region represents an initial step in
Indonesia»s household balance sheet development
program. In its implementation, the choice of study
method to conduct the survey is at the discretion of the
surveyor through prior discussions with the host.
Domestic
Product
proportional to the number of residents in the
municipality/city. The proportion of respondents in
each municipality/city to the number of respondents
in a province is equal to the ratio of the number of
residents in each municipality/city to the number of
residents in the province. Moreover, the number of
respondents in each sub-district to the total
respondents in a municipality/city is equal to the ratio
of residents in each sub-district to total residents in
the municipality/city. The sample region was chosen
as it is a representative region that corresponds to
the survey methodology. In addition, the choice of
region was also determined by access availability to
the particular region.
3. Sampling is based on district/village.
III.2. Data
Data regarding the number of residents required to
estimate the total number of respondents, as well as the
names of the sub-district and village of the survey location
are obtained from the Provincial BPS Office, the
corresponding Municipal/City BPS Office and the regional
governments» websites. The residential data used is from
2004. The number of respondents in each province is 500,
therefore, the total number of respondents for the six
locations is 3,000.

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 Article II - Household Balance Sheet Survey : Significant Indicators in Financial System Stability Surveillance

Table A2.1 Table A2.3

Survey Region Assets and Liabilities

Wilayah Kotamadya Kabupaten No Elemen Aktiva No Elemen Pasiva

Sumbar Padang, Bukittinggi Solok, Agam, Padang Pariaman 1 Kas 1 Utang Bank
2 Tabungan 2 Utang Koperasi
Jabar Bandung Bandung, Indramayu,
3 Deposito 3 Utang Pegadaian
Karawang, Garut 4 Giro 4 Utang Toko/Dealer
Bodetabek Tangerang, Bogor, Tangerang, Bogor, Bekasi 5 Tabungan Asuransi 5 Uang Warung
Bekasi, Depok 6 Tabungan Koperasi 6 Utang Pemilik Rumah/
Jateng Semarang, Surakarta, Kudus Tanah
Pekalongan, Magelang 7 Tabungan Kantor Pos 7 Utang Saudara
DIY Yogyakarta Bantul, Kulonprogo 8 Piutang 8 Utang Majikan
9 Saham 9 Utang Arisan/Teman
Sleman, Gunung Kidul
10 Obligasi 10 Utang Pelepas Uang
Jatim Malang, Pasuruan Malang, Pasuruan, Batu 11 Reksadana 11 Utang Lainnya
12 Dana Pensiun
13 Bapertarum
14 Penyertaan modal usaha
Table A2.2
15 Ternak
Adjustments Made 16 Emas
17 Kendaraan
Wilayah Kotamadya 18 Rumah
19 Bangunan
Jatim Snow Ball Purposive Sampling: 5 besar 20 Tanah
kontributor PDRB Jatim 21 Harta Lainnya
DIY Secara umum tidak ada -
penyesuaian, kec. untuk
daerah-daerah yang
From the questionnaire, elements of household
terkena dampak gempa income and expenditure are compiled as follows:
Jateng Pertimbangan anggaran Pertimbangan anggaran untuk
untuk kecamatan kecamatan yang maju
Table A2.4
yang maju Income and Expenditure
Jabar - - 5 terbesar daerah
kontributor PDRB Jabar
No Elemen Pendapatan No Elemen Pengeluaran
'(kec. Bogor, Depok,
Tangerang, dan Bekasi)
1 Gaji & Tunjangan 1 Pangan
- Desa yang dikunjungi
2 Penghasilan usaha Netto 2 Pakaian
diseleksi 'berdasarkan 3 Penerimaan Pensiun 3 Sewa rumah dan tanah
pertimbangan jarak ke pusat 4 Beasiswa/Ikatan Dinas 4 Peralatan rumah tangga
kota tahan lama
Bodetabek Snow Ball - 5 Ganti Rugi Asuransi 5 Transportasi
Sumbar Pertimbangan anggaran Pertimbangan anggaran 6 Hasil Menang Undian 6 Kendaraan, dan bahan
bakar
7 Pendapatan Bunga 7 Listrik, air, dan
Piutang dan Bunga telekomunikasi
Tabungan
IV. ANALYSIS RESULTS 8 Hasil Netto Penjualan 8 Pendidikan
Tanah
IV.1. Balance Sheet Analysis
9 Hasil Netto Penjualan 9 Kesehatan
In accordance with the survey»s objectives, the Emas
10 Hasil Netto Penjualan 10 Rekreasi dan Perhiasan
structure of the Household Balance Sheet is formulated at Kendaraan
11 Bantuan Pemerintah 11 Aneka barang dan jasa
both the provincial and municipal levels from the data Non-Beasiswa
available. Elements of the balance sheet procured from 12 Bantuan Lembaga Non- 12 Pembayaran pokok
Pemerintah Non-Beasiswa pinjaman
the questionnaire are then grouped into ≈Assets∆ or 13 Penerimaan Lainnya 13 Pembayaran bunga
cicilan.
≈Liabilities and Equities∆ as follows:

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 Article II - Household Balance Sheet Survey : Significant Indicators in Financial System Stability Surveillance

Prior to the elements being arranged into a Balance
Sheet, they are classified based on a prediction of their
usefulness. Since the Household Balance Sheet data will
be used to maintain Financial System Stability, the assets
are grouped according to their liquidity, whereas liabilities
are grouped according to their source of funds, namely
Banks and Non-bank Financial Institutions (NBFI).
From the survey results and based on element
grouping contained in the financial report, the structure
of the household balance sheet is calculated. This
household balance sheet structure is calculated per resident
(total balance sheet elements divided by the number of
samples per location), and presented as follows:
1. West Sumatera

Table A2.5 Average Asset ( Rp ) Average Liabilities ( Rp )

Definition of Variables Current Assets : Household Debt: Banks 4,758,878
Cash 2,172,157 Household Debt: Non Banks 899,858
Variabel Definisi Saving, Deposit and 14,107,812 Household Debt: Store/ 518,548
Checking Acc Dealer
Aktiva Lancar Kas + Tabungan + Deposito + Giro + Insurance, Cooperatives, 2,827,600 Household Debt: Kiosk 2,400
Tabungan Asuransi + Tabungan Koperasi + Post Office
Tabungan Kantor Pos + Piutang + Account receivable 5,905,440 Household Debt: Landlord 0
Saham + Obligasi + Reksadana Stock, Bond, Mutual Fund 912,000 Household Debt: Relatives 81,200
Investasi Dana Pensiun+Bapertarum+Penyertaan Total Current Asset 25,925,010 Household Debt: Employer 800
modal usaha+Ternak Investment 12,235,804 Household Debt: ROSCA/ 17,720
Aktiva Tetap Emas + Kendaraan + Rumah + Bangunan + Friends
Tanah + Harta Lainnya Fixed Assets : Household Debt: Money 4,000
Total Aktiva Aktiva Lancar + Aktiva Tetap + Investasi Lender
Utang Bank Utang Bank Gold and Jewelry 6,440,278 Household Debt: Others 175,832
Vehicle 34,756,541 Total Others Debt 1,847,581
Utang LKNB Utang Koperasi + Utang Pegadaian
House and buildings 221,637,302 Total Debt 7,506,318
Utang Lain-lain Utang Toko/Dealer+Uang Warung+Utang
Land 50,354,506
Pemilik Rumah/Tanah+Utang Saudara+Utang
Total Fixed Asset 313,188,627 Net Worth 346,874,202
Majikan+Utang Arisan/Teman+Utang
Other Assets 3,031,080
Pelepas Uang+Utang Lainnya
Total Assets 354,380,520 Total Liabilities and Equity 354,380,520
Total Utang Utang Bank + Utang LKNB + Utang Lain-lain
Kekayaan Bersih Total Aset - Total Utang
Pendapatan Gaji & Tunjangan + Penghasilan usaha Netto
+ Penerimaan Pensiun The household balance sheet for residents of West
Total Pendapatan Gaji dan Tunjangan + Pendapatan Usaha
Sumatera is dominated by fixed assets with a share
Netto + Penerimaan Pensiun + Beasiswa/
Ikatan Dinas + Ganti Rugi Asuransi + Hasil of 88.38%. In terms of liquid assets, the largest
Menang Undian + Pendapatan Bunga
component is savings, term deposits and checking
Piutang dan Bunga Tabungan + Hasil Netto
Penjualan Tanah + Hasil Netto Penjualan accounts, which together make up 54.42% of total
Emas dan Perhiasan + Hasil Netto Penjualan
Kendaraan + Bantuan Pemerintah Non- liquid assets. Regarding liabilities the largest
Beasiswa + Bantuan Lembaga Non- component is net worth, namely 97.88% of total
Pemerintah Non-Beasiswa + Penerimaan
Lainnya liabilities. Concerning debt, households in West
Konsumsi Pangan+Pakaian+Sewa rumah dan
Sumatera rely on the banking sector with a share of
tanah+Peralatan rumah tangga tahan
lama+Transportasi, kendaraan, dan bahan 63.40% of total debt. Meanwhile, the shares of debt
bakar+Listrik, air, dan
to non-bank financial institutions and other debts are
telekomunikasi + Pendidikan + Kesehatan +
Rekreasi + Aneka barang dan jasa 11.99% and 24.61%, respectively.
Total Cicilan + Bunga Pembayaran pokok pinjaman + Pembayaran
bunga cicilan
2. West Java
Pembayaran Bunga Pembayaran bunga cicilan From the household balance sheet structure for
Pendapatan Bersih Pendapatan √ Konsumsi
residents in West Java, fixed assets (particularly houses

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 Article II - Household Balance Sheet Survey : Significant Indicators in Financial System Stability Surveillance

Average Asset ( Rp ) Average Liabilities ( Rp ) Average Asset ( Rp ) Average Liabilities ( Rp )

Current Assets : Household Debt, Banks 8,748,377 Fixed Assets : Household Debt : Money 10,119
Cash 1,152,812 Household Debt : Non 261,153 Lender
Banks Gold and Jewelry 2,779,087 Household Debt : Others 2,084,163
Saving, Deposit and 24,814,429 Household Debt : Store/ 1,276,500 Vehicle 39,825,257 Total Others Debt 4,659,396
Checking Acc Dealer
House and buildings 173,407,263 Total Debt 12,005,850
Insurance, Cooperatives, 2,400,146 Household Debt : Kiosk 200
Land 40,703,755
Post Office
Total Fixed Asset 256,715,362 Net Worth 278,688,032
Account receivable 2,912,344 Household Debt : Landlord 38,400
Other Assets 1,569,723
Stock, Bond, Mutual Fund 5,040,000 Household Debt : Relatives 160,680
Total Assets 290,693,882 Total Liabilities and Equity 290,693,882
Total Current Asset 36,319,732 Household Debt : Employer 0
Investment 6,625,170 Household Debt : ROSCA/ 12,000
Friends
Based on the household balance sheet structure for
Fixed Assets : Household Debt : Money 396
Lender Bodetabek, fixed assets (mainly houses and buildings)
Gold and Jewelry 3,044,710 Household Debt : Others 126,200
Vehicle 33,112,080 Total Others Debt 1,614,376 are the largest component of total assets, constituting
House and buildings 242,889,742 Total Debt 10,623,906
88.31%. Liquid assets, investments and other assets
Land 46,670,200
Total Fixed Asset 325,716,732 Net Worth 363,559,128 have shares of 8.04%, 3.11% and 0.54% respectively.
Other Assets 5,521,400
Total Assets 374,183,034 Total Liabilities and Equity 374,183,034
Relating to liquid assets, the largest components are
savings, term deposits and checking accounts with a
and buildings) are again the largest component of combined share of 66.95% of total liquid assets. As
total assets, with a share of 87%. Liquid assets, regards liabilities, the largest component is capital (net
investments and other assets have shares of 10%, worth) with a 95.87% share of total liabilities. Aside
2% and 1% respectively. With respect to liquid assets, from private capital, households in Bodetabek rely
the largest components are savings, term deposits heavily on banks for their funding, accounting for
and checking accounts that together make up 68% 45.28% of total debt. The shares of debt to non-
of total liquid assets. Meanwhile, referring to liabilities, bank financial institutions and other debts are
the largest component is net worth, with a share of 15.91% and 38.81% respectively.
97% of total liabilities. Besides, the majority of 4. D.I. Yogyakarta
households in West Java still rely on banks for their
Average Asset ( Rp ) Average Liabilities ( Rp )
funding, which makes up 82% of total debt.
Current Assets : Household Debt : Banks 14,172,833
3. Bodetabek Cash 2,089,595 Household Debt : Non 1,506,023
Banks

Average Asset ( Rp ) Average Liabilities ( Rp ) Saving, Deposit and 13,779,277 Household Debt : Store/ 1,462,759
Checking Acc Dealer
Current Assets : Household Debt: Banks 5,436,380
Insurance, Cooperatives, 2,597,860 Household Debt : Kiosk 6,250
Cash 918,553 Household Debt : Non 1,910,074
Post Office
Banks
Account receivable 5,905,440 Household Debt : Landlord 22,639
Saving, Deposit and 15,637,631 Household Debt : Store/ 1,976,814
Stock, Bond, Mutual Fund 148,810 Household Debt : Relatives 125,298
Checking Acc Dealer
Total Current Asset 24,520,981 Household Debt : Employer 11,905
Insurance, Cooperatives, 915,243 Household Debt : Kiosk 395 Investment 10,238,048 Household Debt : ROSCA/ 49,569
Post Office Friends
Account receivable 5,558,247 Household Debt : Landlord 0 Fixed Assets : Household Debt : Money 20,635
Stock, Bond, Mutual Fund 328,063 Household Debt : Relatives 470,593 Lender
Total Current Asset 23,357,737 Household Debt : Employer 31,621 Gold and Jewelry 3,909,800 Household Debt : Others 148,527
Investment 9,051,059 Household Debt : ROSCA/ 85,692 Vehicle 41,542,785 Total Others Debt 1,847,581
Friends House and buildings 250,522,599 Total Debt 17,526,437

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 Article II - Household Balance Sheet Survey : Significant Indicators in Financial System Stability Surveillance

Average Asset ( Rp ) Average Liabilities ( Rp )

Based on the household balance sheet structure for

Land 121,388,179 residents in Central Java, fixed assets (mainly houses

Total Fixed Asset 417,363,362 Net Worth 449,200,522 and buildings) are the largest component of total
Other Assets 14,604,568
Total Assets 466,726,959 Total Liabilities and Equity 466,726,959 assets, with a share of 94.28%. Liquid assets,
investments and other assets represent 5.08%,
From the household balance sheet structure for D.I. 0.41% and 0.23% respectively. In terms of liquid
Yogyakarta, fixed assets (mainly houses and buildings) assets, the largest components are savings, term
are again the largest component of total assets, with deposits and checking accounts with a share of 50%
an 89.42% share. Liquid assets, investments and of total liquid assets. Meanwhile, referring to liabilities,
other assets account for 5.25%, 2.19% and 3.13% nearly all household necessities are funded by private
respectively. With regards to liquid assets, the largest capital (net worth) with a share of 98.11% of total
components are savings, term deposits and checking liabilities. Apart from private capital, households in
accounts totaling 56.19% of total liquid assets. Central Java depend on banks for their funding,
Meanwhile, concerning liabilities, the largest amounting to 76.67 % of total debt. The shares of
component is capital (net worth) with a 96.24% share debt to non-bank financial institutions and other
of total liabilities. In addition to private capital, debts are 8.63% and 14.70% respectively.
households in D.I. Yogyakarta depend on banks for 6. East Java
their funding needs, making up 80.87% of total debt.
Average Asset ( Rp ) Average Liabilities ( Rp )
The shares of debt to non-bank financial institutions
Current Assets : Household Debt : Banks 5.386.946
and other debts are 8.59% and 10.54% respectively. Cash 2.343.074 Household Debt : Non 634.727
Banks
5. Central Java
Saving, Deposit and 13.704.406 Household Debt : Store/ 1.308.552
Checking Acc Dealer
Average Asset ( Rp ) Average Liabilities ( Rp ) Insurance, Cooperatives, 1.458.087 Household Debt : Kiosk 0
Current Assets : Household Debt : Banks 4,776,312 Post Office

Cash 1,245,918 Household Debt : Non 537,350 Account receivable 4.218.410 Household Debt : Landlord 0

Banks Stock, Bond, Mutual Fund 1.940.200 Household Debt : Relatives 212.000
Total Current Asset 23.664.177 Household Debt : Employer 7.900
Saving, Deposit and 8,311,627 Household Debt : Store/ 804,410
Investment 5.805.538 Household Debt : ROSCA/ 58.286
Checking Acc Dealer
Friends
Insurance, Cooperatives, 2,451,280 Household Debt : Kiosk 292
Fixed Assets : Household Debt : Money 700
Post Office
Lender
Account receivable 3,840,979 Household Debt : Landlord 0
Gold and Jewelry 4.126.520 Household Debt : Others 148.527
Stock, Bond, Mutual Fund 892,200 Household Debt : Relatives 52,900
Vehicle 34.236.390 Total Others Debt 1.735.965
Total Current Asset 16,742,004 Household Debt : Employer 1200
House and buildings 219.749.584 Total Debt 7.757.637
Investment 1,339,525 Household Debt : ROSCA/ 39,330
Land 78.583.960
Friends
Total Fixed Asset 336.696.454 Net Worth 361.758.772
Fixed Assets : Household Debt : Money 440 Other Assets 3.350.240
Lender Total Assets 369.516.409 Total Liabilities and Equity 369.516.409
Gold and Jewelry 3,719,063 Household Debt : Others 17,200
Vehicle 28,022,390 Total Others Debt 915,772
House and buildings 238,762,016 Total Debt 6,229,433 Taken from the household balance sheet structure
Land 40,048,548
for East Java, fixed asset (mainly houses and buildings)
Total Fixed Asset 310,552,017 Net Worth 323,162,133
Other Assets 758,020 dominate total assets, with a share of 91.12%. Liquid
Total Assets 329,391,566 Total Liabilities and Equity 329,391,566
assets, investments and other assets make up 6.40%,

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 Article II - Household Balance Sheet Survey : Significant Indicators in Financial System Stability Surveillance
1.57% and 0.91% respectively. As regards liquid
assets, the largest components are savings, term
deposits and checking accounts with a share of
57.91% of total liquid assets. Concerning liabilities,
nearly all household necessities are self funded (net
worth) with a 97.90% share of total liabilities. In
addition to private capital, households in Central Java
rely on banks for their funding, representing 69.44%
of total debt. The shares of debt to non-bank financial
institution and other debts are 8.18% and 22.38%
respectively.
IV.2. Ratio Analysis
Loca t ion Total Liabilities/Total Asset Total Liabilities/Current Asset
(%) (%)
West Sumatera 2.12 28.95
West Java 2.84 29.25
Bodetabek 4.13 51.40
Central Java 1.89 37.21
DIY 3.76 71.48
East Java 2.10 32.78
• Total Liabilities/Total Asset Ratio Analysis
This ratio shows the ability of total assets to cover
household liabilities. If this ratio is less than 1 (= 100%)
then the household»s liabilities are smaller than its total
assets. Put another way, the household can still apply
for a larger loan. Based on the survey it can be seen
that all households in the survey area could apply for a
larger loan. Households in Bodetabek have the highest
ratio, whereas those in Central Java have the lowest.
Total Bank Liabilities/Current Asset Ratio Analysis
This ratio reveals the ability of liquid assets to cover
household liabilities. Should this ratio be less than 1
(= 100%) then the household»s liabilities are smaller
than its liquid assets. This means that the household
can still apply for a larger loan. The survey results
show that all households in the survey area could still
apply for another loan. Households in D.I. Yogyakarta
have the highest ratio, whereas those in West
Sumatera have the lowest.
Total Bank Liabilities/Fixed Asset Ratio Analysis
This ratio demonstrates the ability of fixed assets to
cover household liabilities. If this ratio is less than 1 (=
100%) then the household»s liabilities are smaller than
its assets. Therefore, the household can still apply for
a larger loan. From the survey it can be seen that all
households in the survey area could still apply for a
larger loan. Households in Bodetabek have the highest
ratio, whereas those in Central Java have the lowest.
Ratio
Total Bank Liabilities/Current Asset Total Bank Liabilities/Fixed Asset
(%) (%)
18.36 2.40
24.09 3.26
23.27 4.68
28.53 2.01
57.80 4.20
22.76 2.30
Total Liabilities/Core Income Ratio Analysis
This ratio shows the ability of a household»s primary
income to cover its liabilities. Survey results indicate
that all households in the survey area could apply for
a loan.
Bank Liabilities/Core Income Ratio Analysis
This ratio denotes the ability of household»s primary
income to cover its liabilities to the bank. Survey results
show that households in D.I. Yogyakarta and Central
Java have a greater ratio than households in other
areas.
Non-Bank Liabilities/Core Income Ratio Analysis
This ratio demonstrates the ability of a household»s
income to cover its liabilities to non-bank financial
institutions (such as cooperatives or other
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 Article II - Household Balance Sheet Survey : Significant Indicators in Financial System Stability Surveillance

Ratio
Loca t ion Total Liabilities/Core Income Bank Liabilities/Core Income Total Non-Bank Liabilities/Core Income Interest Payment/Core Income
(%) (%) (%) (%)

West Sumatera 13.02 8.25 4.76 1.73

West Java 18.59 15.31 3.28 0.38
Bodetabek 15.54 7.03 8.50 1.90
Central Java 25.33 19.42 5.91 1.44
DIY 31.47 25.45 6.02 10.08
East Java 15.94 11.07 4.87 2.66

microfinance institutions as well as pawnshops).
Survey results evidence that households in West Java
have the highest income ability to cover non-bank
liabilities compared to households in other areas.
Meanwhile, households in Bodetabek have the lowest
ability to cover non-bank liabilities in terms of income
compared to households in other areas.
Interest Payment/Core Income Ratio Analysis
This ratio reveals the proportion of household»s
primary income used to repay interest on a loan. The
survey shows that among households in all sample
locations, households in West Java have the smallest
proportion of interest repayment liability. In other
words, households in West Java have the best income
ability to cover the interest on loans. Meanwhile, with
the largest proportion of loan interest repayment
liabilities, households in DIY have the lowest income
ability to cover such liabilities.
(Total Installment + Interest Payment) / Total Income
Ratio Analysis
This ratio indicates the proportion of a household»s
primary income used to pay the initial loan and its
interest. Survey results show that among households
in all survey locations, those in West Java have the
smallest proportion of loan installment repayment
liabilities (4.816%). In other words, households in
West Java have the best income ability to cover loan
installments. Meanwhile, households in Bodetabek
have the largest proportion of loan installment
repayment liabilities, with a ratio of 22.485%.
Consequently, households in Bodetabek have the
lowest income ability to cover loan installments.
(Total Installment + Interest Payment) / Current Asset
Ratio Analysis
This ratio shows the ability of liquid assets to cover
loan installments (principal and interest). Survey
results show that among households in all survey
locations, households in West Java have the smallest
loan installment repayment liabilities (9.950%).
Therefore, households in West Java have the best
income ability to cover loan installments. Meanwhile,
the largest proportion of loan installment repayment

Ratio
Loca t ion (Total Installment + Interest Payment)/ (Total Installment + Interest Payment)/ Collateral / Agreed Bank Loan
Total Income (%) Current Asset (%)

West Sumatera 5.53 13.95 -

West Java 4.82 9.95 3.14
Bodetabek 22.49 82.25 1.40
Central Java 10.89 20.17 -
DIY 12.58 35.11 1.64
East Java 10.92 26.76 11.46

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 Article II - Household Balance Sheet Survey : Significant Indicators in Financial System Stability Surveillance
liabilities belongs to households in Bodetabek with
a ratio of 82.253%. As a result, households in
Bodetabek have the lowest income ability to cover
loan installments.
Collateral/Agreed Bank Loan Ratio Analysis
This ratio reveals the amount of credit approved
compared to the collateral value. Should this ratio be
less than 1 then the approved loan is higher than the
collateral value. The limit for this ratio is 1.25.
Exceeding the limit shows that such a province has
the potential to apply for a larger loan. Survey results
confirm that households in West Java, Bodetabek,
D.I. Yogyakarta and East Java have the potential to
apply for larger loans compared to their current ones.
VI. CONCLUSION
The Household Balance Sheet Survey was conducted
in six locations, namely West Sumatera, West Java,
Bodetabek, Central Java, D.I. Yogyakarta and East Java.
The survey successfully composed a household balance
sheet as of November 2007 at both the provincial and
municipal levels. The Household Balance Sheet structure
in DIY comprises of current assets, investments and fixed
assets on the assets side and bank debt, non-bank financial
institution debt, other debts and net worth on the liabilities
side (liabilities and equities). From its composition, the
assets» side of the household balance sheet is dominated
by fixed assets (particularly assets in the form of houses
and buildings), whereas on the liabilities side, debt is
dominated by bank debt, which makes up 69.67% on
average of total debt.
Generally, households throughout the survey location
have the potential to apply for larger loans. This is
evidenced by the ratio of total liabilities/total assets, total
liabilities/current assets, total bank liabilities/current assets,
and total bank liabilities/fixed asset. Survey results also
confirm that based on primary income, all households in
the survey location are able to meet their liabilities to both
banks and non-bank financial institutions. This is reflected
by the ratio of total liabilities/core income, bank liabilities/
core income and non-bank liabilities/core income.
Meanwhile, referring to total income and liquid assets,
households in the six survey locations are able to meet
their repayments of the principal loan and its interest. This
is demonstrated by the ratio of (total installment + interest
payment) / current asset.
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 Article II - Household Balance Sheet Survey : Significant Indicators in Financial System Stability Surveillance
References
Penelitian dan Pengembangan Ekonomi Universitas Gadjah
Mada, 2007. Laporan Akhir Household Balance Sheet
Survey Daerah Istimewa Yogyakarta 2007
Pusat Kajian Dinamika Sistem Pembangunan Universitas
Brawijaya, 2007. Laporan Akhir Survei Neraca Rumah
Tangga Propinsi Jawa Timur 2007
Center for Banking Research Universitas Andalas, 2007.
Laporan Pelaksanaan Survey Neraca Rumah Tangga
2007 di Sumatera Barat
Laboratorium Studi Kebijakan Ekonomi Universitas
Diponegoro, 2007. Laporan Akhir Survei Household
Balance Sheet Wilayah Jawa Tengah Tahun 2007
Laboratorium Penelitian, Pengabdian Pada Masyarakat dan
Pengkajian Ekonomi Universitas Padjajaran, 2007.
Laporan Akhir Survei Household Balance Sheet
86
Laboratorium Studi Manajemen Universitas Indonesia,
2007. Survey Neraca Rumah Tangga Bank Indonesia:
Analisis Temuan
Lee, Kevin and Paul Mizen (2005), ≈Household Credit and
Probability Forecast of Financial Distress in the United
Kingdom∆
Rinaldi, Laura and Alicia Sanchis Arellano (2006),
≈Household Debt Sustainability: What Explains
Household Non Performing Loan? An Empirical
Analysis, Working Paper no.570, European Central
Bank, January 2006.
 Glossary

Glossary

87
 Glossary

This page is intentionally blank

88
 Glossary

Glossary

Bank Indonesia Real Time Gross Settlement (BI-RTGS): Financial Safety Net: framework to strengthen financial
Electronic transaction settlement in real time where system stability through four key elements: i) bank
accounts are debited and credited multiple times per day. regulation and supervision; ii) lender of last resort; iii)
deposit insurance; and iv) crisis management.
Business continuity management: Risk management to
ensure critical functions during disruptions as well as having Financial system stability: refers to a state in which a
an effective recovery process. financial system, consisting of financial institutions and
markets, functions properly. In addition, the participants,
Capital Adequacy Ratio (CAR): The ratio of a bank»s total
such as firms and individuals, have confidence in the
regulatory capital to its risk-weighted assets.
system.Ω
Credit risk: the risk of loss due to a debtor»s possibility of
Flight to safety: switching funds from banks considered
default, or non-payment of a loan.
less safe to safer banks.
Crisis Management Protocol (CMP): A framework that
Four-eyes principle: credit approval considering business
details the measures, roles and responsibilities of the
prospects and risk management.
relevant authorities in handling a crisis to minimize the
resultant economic losses. Lender of last resort: the function of a central bank in
extending credit to banks to overcome liquidity problems
Exchange Traded Fund (ETF): A type of mutual fund with
caused by a mismatch in funds and to prevent systemic
characteristics similar to open-end companies where the
crisis.
unit is traded like a stock on an ecchange. ETF consist of a
combination of open-end and closed-end funds. Liquidity Risk: risk that an institution will not be able to
execute a transaction at the prevailing market price because
Failure to settle: a mechanism which obliges participants
there is, temporarily, no appetite for the deal on the other
of the clearing system to provide a pre-fund to anticipate
side of the market.
liabilities emerging at the end of the day.
Mark to market: Evaluating the price or value of a security,
Financial Deepening: the development of the financial
portfolio, or account on a daily basis, to calculate profits
sector; the increased provision of financial services with a
and losses or to confirm that margin requirements are being
wider choice of services geared to all levels of society.
met.
Financial Sector Assessment Program: a joint program by
Market risk: the risk that the value of an investment will
the IMF and World Bank to assess the resilience of a
decrease due to the movements in market factors.
country»s financial system and its adherence to international
standards.

89
 Glossary
Non-performing loans (NPL): a loan that is in default or
close to being in default categorised as sub-standard (SS),
doubtful (D) and loss (L)
Operational risk: the risk of loss resulting from inadequate
or failed internal processes, people and systems, or from
external events.
Profit taking: the selling of assets or securities by investors
at a high price to receive profit.
Redemption: selling of a bond before maturity.
Regulatory capital: the minimum capital required applied
to banks set by the regulator.
Risk-control system: is a system to control risk implemented
through bank policy and procedure in line with sound risk
management principles.
Risk-free assets: an asset whose future return is known
with certainty. However, such assets remain subject to
inflation risk.
Risk mitigation: efforts to reduce the possibility and effects
of risk.
Restructuring: the act of improving loan conditions by
applying several options: i) adjusting the covenants to
provide additional financing; ii) converting all or partial
interest as new loans; iii) converting all or part of the loan
as equity for the bank in the company with or without
rescheduling or reconditioning.
90
Subprime mortgage: a type of mortgage made out to
borrowers with low credits ratings. As a result interest on
subprime mortgagesΩis often charged at a higher rate than
a conventional mortgage in order to compensate for
carrying more risk.
Sudden reversal: sudden capital outflows.
Systemically Important Payment Systems: are those that,
in terms of the size or nature of the payments processed
via them, represent a channel in which shocks could
threaten the stability of the entire financial system.
Stress testing: is a simulation technique used on asset
and liability portfolios to determine their sensitivities to
different financial situations. Stress-testing is a useful
method of determining how a portfolio will fare during a
period of financial crisis.
Undisbursed Loans: are loans that have been agreed but
are yet to be withdrawn.
Volatility: is the relative rate at which the price of a security
moves up and down. Volatility is found by calculating the
annualized standard deviation of daily change in price. If
the prices of securities move up and down rapidly over
short time periods, it has high volatility. If the price almost
never changes, it has low volatility.
Yield: The rate of income generated from a stock in the
form of dividends, or the effective rate of interest paid on
a bond, calculated by the coupon rate divided by the bond»s
market price. Furthermore, for any investment, yield is the
annual rate of return expressed as a percentage.
Financial Stability Review
No. 10, March 2008

DIRECTOR

Halim Alamsyah Wimboh Santoso

COORDINATOR & EDITOR

Agusman

WRITER

Ardiansyah, Linda Maulidina, Ratih A. Sekaryuni, Pipih Dewi Purusitawati, Wini Purwanti,
Endang Kurnia Saputra, Ita Rulina, Ricky Satria, Fernando R. B, Noviati, Cicilia A. Harun,
Sagita Rachmanira, Reska Prasetya, Elis Deriantino, Primitiva Febriarti, Hero Wonida,
Mestika Widantri, Heny S.

COMPILATOR, LAYOUT & PRODUCTION

Ita Rulina Ricky Satria Primitiva Febriarti

CONTRIBUTOR

Directorate of Bank Supervision 1

Directorate of Bank Supervision 2

Directorate of Bank Supervision 3

Directorate of Sharia Banking

Directorate of Credit, Rural Bank Supervision and SMEs

Directorate of Banking Investigation and Mediation

Directorate of Bank Licensing and Banking Information

Directorate of Accounting and Payment System

Directorate of Economic Research and Monetary Policy

Directorate of Monetary Management

Directorate of Reserve Management

DATA SUPPORT

Suharso I Made Yogi Tita Hapsari