Indonesia’s Shift to Comprehensive Risk Assessment Boosts Resilience
Jakarta, Indonesia
In response to the 1998 Asian financial crisis, the Indonesian government embarked on a path towards fiscal conservatism, gradually adopting an asset and liability management (ALM) approach. This holistic view of the sovereign balance sheet enables the government to better manage risks and prepare for global economic shocks.
Integrating Data for a Fuller Understanding
The journey began with integrating data from the central bank, state-owned enterprises (SOEs), and sub-national entities into a single document, providing a fuller understanding of the country’s exposure to risks. The Ministry of Finance then established a Sub-directorate under the Directorate of State Financial Risk Management (DSFRM) to gather information, run analyses, and produce the sovereign balance sheet annually.
Critical SOEs Included in Currency Risk Exposure Analysis
To further strengthen risk assessment, the ministry included critical SOEs such as:
- Pertamina
- Perusahaan Listrik Negara
- Five construction companies
in the currency risk exposure analysis. The scope of monitoring has also expanded to include solvency and liquidity risks.
Unique ALM Approach
Indonesia’s ALM approach is unique among countries, with only a few nations adopting a comprehensive balance sheet framework. This shift has enabled the government to develop a:
- Balance Sheet Vulnerability Index
- Track contingent liabilities
- Employ financial derivatives to hedge residual risks
According to Heri Setiawan, Director of State Financial Risk Management, “Having the framework in place will help with planning and mitigation of external shocks to the economy.”
World Bank’s Government Debt and Risk Management Program
The World Bank’s Government Debt and Risk Management (GDRM) Program played a significant role in Indonesia’s transition to ALM. The program provided:
- Technical assistance
- Training
- Implementation support to the authorities
Satu Kahkonen, Country Director for Indonesia and Timor-Leste at the World Bank, noted that “Implementing the full ALM approach is a marathon, not a sprint.” She praised Indonesia’s gradual but steady progress in adopting this approach, which has brought significant benefits to the country.
Significance of Robust Risk Management Frameworks
The COVID-19 pandemic has highlighted the importance of robust risk management frameworks. Indonesia’s comprehensive balance sheet approach enables the government to effectively track and mitigate fiscal risks, ensuring greater resilience in the face of global economic uncertainty.