Indonesia’s banking sector has staged a turnaround following the Asian collapse in 1997

Becoming the world’s sixth largest economy
Finance

A decade after economic collapse across Southeast Asia, causing inflation spikes and financial turmoil across the region, Indonesia is regaining its grip on the monetary sector.

Economists and banking leaders say the archipelago’s financial practices have matured, allowing inflation to be checked and transactions to be administered with greater efficiency. Banks are increasingly under private ownership and the country’s credit rating has edged up, boosting credibility with investors.

Advances in the finance sector have been considered among the most successful reforms since the crisis, which hammered currencies and stock markets throughout Southeast Asia in 1997. A decade later, economic growth is projected at six percent annually. But Indonesia needs a brisk rate of foreign investment to maintain this pace, government authorities and private sector leaders agree.

The path to economic resurgence began in the midst of the regional crisis. Upon passage of the Bank Indonesia Act in 1998, the central bank went private, freeing it up to exert stricter control over the sector.

Sri Mulyani Indrawati, Minister of Finance, says the central bank has outlined a plan to consolidate the banking sector by 2010. Banking practices must match international standards, she says, and growth needs to be closer to that of India and China, which see 10 per cent annual increases.

In the years following the region-wide crisis, Indonesia welcomed the presence of foreign banks, and Ms Indrawati, who was recognised in 2006 as Minister of Finance of the year by Euromoney magazine, says this has been crucial to growth.
“The combination of national and foreign banks in the sector has really been quite harmonious,” she remarks.

SRI MULYANI INDRAWATI Minister of Finance	BURHANUDDIN ABDULLAH Governor of Bank Indonesia

Inflation in Indonesia stood at 17.1 per cent in 2005, driven by high oil prices. This fell to 6.6 per cent in 2006. Burhanuddin Abdullah, governor of the Bank of Indonesia, says now that this key economic factor is under control, the focus is on foreign investment and Indonesia’s role in the larger Southeast Asian economy.

The Association of Southeast Asian Nations aims to create a European Union-style economic bloc by 2015, and the Union Bank of Switzerland has predicted that Indonesia will be the world’s sixth largest economy by 2050.

“The possibility of Indonesia in the longer-term is actually very great,” comments Mr Abdullah. “To consolidate six per cent economic growth, we need around IDR 930 trillion to be pushed into the economy. Around IDR 150 trillion of this will come from banking sector and around IDR 180 trillion will come from the government so there is still a IDR 600 trillion shortage, which we are hoping will come from foreign and also domestic investment.”

Like Mr Abdullah, Cyrillus Harinowo, commissioner of the Bank of Central Asia, believes that Indonesia’s banking sector will play a crucial role in development. “The Economist reported last December that Indonesia’s GDP now is 21st in the world. In the last three years we have surpassed four countries: Austria, Norway, Poland, and Turkey,” observes Mr Harinowo. “My prediction is that by 2010 we will surpass other countries such as Taiwan, Switzerland, Sweden, and Belgium, which will put us in the league of the 17 biggest countries. Being closer to the top ten economies means that there will be extra responsibilities on the banking system to play a key role in the development of the economy.”