Flow of Funds

As the Indonesian economy continues its steady growth and, in many ways, becomes more integrated in the world economy, the development of a national payment system has received a lot of attention as a smooth payment system is crucial for almost all daily economic activities—between domestic parties and between countries.

Learning from the hard lessons of the Asian 1997–1998 financial crisis, the Government of Indonesia (GoI) pursued a new development-financing strategy that focused more on domestic and private sector financing (relying on the private sector for 85% of financing). Since 2005, government securities have also become a major source of financing for budget deficits. Figure 1 [ PDF 14.3KB | 1 page ] shows that since 2005, the government has relied on securities financing to close the budget deficit. The role of non-securities financing (e.g., privatization, external loans) dropped sharply from 2005 onwards.

Several measures have been adopted to implement the new strategy. First, the GoI issued government securities to finance a banking recapitalization program in May 1999 (tradable on 1 February 2000). Then, toward the end of 2002, the government issued marketdetermined bonds for the first time to finance budget deficits. Consequently, the state budget became exposed to a market environment. Next, in 2004, the government issued its first international bonds. Table 1 [ PDF 14.3KB | 1 page ] shows domestic and international debt securities issued by the GoI and the Indonesian corporate sector (including financial institutions).

Second, the GoI tried to reduce external debt by focusing on obtaining soft loans and grants, rather than commercial overseas loans. The ratio of outstanding government debt to gross domestic product (GDP) declined until June 2008, when it was recorded at 39.4% (compared to 88% in 2000). This was the result of the negative growth of net external debt (see Figure 2 [ PDF 17.7KB | 1 page ]).

Net government securities have increased since 2005. Their apparent decline in 2008 was due to an increase in government loans, (obtained to finance bigger budget deficits in order to fight the impacts of the global financial and economic crisis). Government debt (up to November 2008) was distributed as follows (see Figure 3 [ PDF 15.6KB | 1 page ]).

The above description of the current flow of funds in Indonesia shows that substantial changes have occurred due to the government's new development-financing strategy. The domestic capital market has grown in terms of both market capitalization (for equity and bonds) and daily transaction volume. In addition to the government's new strategy, which focuses primarily on domestic debt and private sector financing, an improved business and economic climate in the country has resulted in a significant increase in daily transactions. Table 2 [ PDF 17.7KB | 1 page ] shows how much the flow of funds in Indonesia has increased since 2000.

All indicators in Table 2 confirm that Indonesia's financial development has been experiencing progress, resulting in a higher volume of large value transactions and morevolatile flows of funds. The most recent data shows that total transactions have reached 46,000 trillion rupiah (Rp) (Bank Indonesia 2007f). This represents the highest transaction value in the previous 10 years. It is obvious that the increased number of transactions, volatility, and linkages between local and foreign financial markets—indicated by higher transaction values in export-import activities—necessitates a change in the policy guidelines to accommodate market requirements.

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