Indonesia is preparing a government regulation in lieu of law on financial system reform to accommodate a deeper crisis situation due to the pandemic, said finance minister on Tuesday (08/25) - Photo by Finance Ministry Office

JAKARTA (TheInsiderStories) – In the midst of improving the domestic financial system, the Indonesian Financial System Stability Committee (FSSC) remains wary of potential widening escalation of trade tensions between the United States (US) and China which can reduce the volume of world trade and slow down global economic growth prospects, which then squeeze commodity prices including oil.

In its last meeting last week, the Committee considered, in addition to global pressure, from within the country, the financial system would be disrupted if the government was unable to maintain a momentum of economic growth that was still above 5.0 percent and improve the current account deficit (CAD) which had fallen sharply last year and worst in history.

According to the Committee, the current domestic financial system stability is supported by the banking industry which remains healthy and the financial market is conducive.

The Committee considers that there are three factors that affect the stability of the countries financial system. First, the decline in global financial market uncertainty triggered by the response of a number of central banks from developing countries to loosen monetary policy, including the US central bank’ Federal Reserve which is predicted to reduce interest rates in its meetings during July 30-31.

Second, attracting portfolio investment returns on domestic financial assets. And thirdly, improving perceptions of Indonesia’s economic outlook, along with the increase in sovereign rating by Standard and Poor’s.

“These developments are pushing foreign capital inflows into Indonesia, thereby strengthening the exchange rate and the performance of the market for state bonds and the stock market,” the Committee said.

Going forward, the Committee intends to strengthen policy coordination to maintain financial stability in supporting sustainable national economic growth. This policy coordination is important because it can drive domestic demand and increase exports, the tourism industry and the flow of foreign capital.

One policy manifestation that is considered to be the most significant in maintaining financial stability, the Committee said, is Bank Indonesia’s policy in June to reduce Minimum Mandatory Current by 50 basis points and the BI 7-Day Reserve Rate (7-DRR) policy by 25 bps at July.

In addition, the moderate fiscal performance also helped strengthen Indonesia’s financial system. Realization of the state budget in the first half of 2019 showed a positive performance. The government continues to strive to maintain debt ratios at safe limits, improve the efficiency of debt management, encourage the use of debt for productive activities, and maintain a balance of debt management.

Furthermore, to support the optimization of the service sector in the second half, the Financial Services Authority (FSA) issued a series of policies, including deepening the domestic financial market, empowering micro, small, and medium enterprises, and small communities, and improving the regulation and supervision of the financial services sector.

Finally, the Deposit Insurance Corporation continues to monitor the guarantee coverage both nominal and bank accounts. Based on the latest data, the coverage is still adequate in order to support customer confidence in the banking system.

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