Impact of the Current Crisis on Capital Flows and Payment Systems

Until recently, many people supported the “decoupling”⁷ myth. Now, however, it is recognized that no country will be left unscathed by the current global crisis. As the worst may still come, some of the data presented here is very preliminary, even for determining the overall impact of the global financial and economic crisis on the Indonesian economy. Since Indonesia's development financing relies on debt securities and the private sector, it is very vulnerable to external shocks that disrupt foreign capital flows. Most foreign funds in Indonesia's financial market are invested in short-term instruments (that mature less than one year) and could flow out of the country easily.

Figure 7 [ PDF 27.1KB | 1 page ] illustrates Indonesia's gross capital inflows and outflows in 2004–2008. Since June 2008, the country has experienced a downward trend in gross capital inflows due to foreign investors' declining appetite for emerging market financial assets. In terms of gross capital outflows, other investment assets contributed to volatility toward the end of 2008. These recorded large deficits at the end of December 2008 as a result of increases in Nostro accounts (domestic banking accounts in foreign banks), whereas in the third quarter of 2008, these assets had booked a surplus (Bank Indonesia 2008a).

During 2008, the Indonesia Stock Exchange (ISX) index also experienced massive fluctuations due to foreign investor misgivings (at the time, foreign investors accounted for almost 60% of total market capitalization in Jakarta). At the end of 2008, the ISX index recorded a 51.17% drop. Market capitalization for equity at the end of year fell by 46.42%. Net equity foreign purchases during 2008 experienced volatile movement, as Figure 8 [ PDF 27.1KB | 1 page ] illustrates. Domestic investors, whose actions had mirrored foreign investor behavior (herding), also contributed to the sharp drop of the ISX index in 2008.

As mentioned briefly above, the total transaction value of RTGS in 2008 declined by 7.7% from 2007. Declining activity in the stock market, foreign exchange market⁸ and inter-bank money market in response to the global economic downturn may have caused the drop.

In terms of the management of SKBNI, one domestic bank could not continue its clearing activities in the fourth quarter of 2008 due to its exposure to the global financial crisis. In response, Bank Indonesia established a “no money no game” policy for debit clearing transaction settlement (Bank Indonesia 2007a). Overall, however, despite heavy pressure on Indonesia's flow of funds, no significant disruption of Bank Indonesia's administration of electronic fund transfers through either BI-RTGS or SKBNI materialized. Some banks have been exposed to modest liquidity problems, particularly due to inter-bank market segmentation,⁹ but they were able to maintain some liquid assets such as government securities and Bank Indonesia Certificates.

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