Financial Crime World

Indonesia Embraces Asset and Liability Management to Enhance Financial Risk Management

Indonesia has been gradually adopting an asset and liability management (ALM) approach to manage financial risks, in a move aimed at bolstering its financial resilience.

Fiscal Risks and Challenges

The country’s government debt remains conservatively low, but the Ministry of Finance recognizes that fiscal risks can arise from various sources, including:

  • Public debt
  • Macroeconomic shocks
  • Contingent liabilities

To better understand these risks, the ministry has integrated data from the central bank and state-owned enterprises (SOEs) into a single sovereign balance sheet.

Comprehensive Approach to Risk Management

This comprehensive approach allows the government to identify areas of potential risk and mitigate foreign currency exposure. The journey towards ALM began with the establishment of a sub-directorate within the debt management office responsible for asset and liability management.

Implementing ALM

To further expand its monitoring program, Indonesia has brought in critical SOEs, including:

  • Pertamina
  • Perusahaan Listrik Negara (PLN)
  • Five major construction SOEs

The government has also broadened the scope of risk analysis to include solvency and liquidity risks.

Support from International Experts

Indonesia’s move towards ALM has been supported by the Government Debt and Risk Management (GDRM) Program, a World Bank initiative sponsored by the Swiss State Secretariat for Economic Affairs (SECO). Under this program, Indonesia received extensive training on ALM and implementation support from international experts.

Benefits of Adopting ALM

Adopting an ALM framework will enable Indonesia to better prepare for global risks and enhance its financial resilience. The country has developed a Balance Sheet Vulnerability Index, which measures risk exposure and drives policy actions.

Additionally, Indonesia is developing the technical capacity to employ financial derivatives to hedge residual risks and monitoring contingent liabilities arising from government guarantees.

Improved Transparency and Coordination

While implementing ALM is a complex task, Indonesia’s gradual approach has yielded benefits, including improved transparency and coordination among public sector entities. As the country continues to navigate the challenges posed by COVID-19, its ALM framework will be crucial in tracking fiscal risks and mitigating external shocks to the economy.

“We believe that implementing an asset and liability management approach is a marathon, not a sprint,” said Satu Kahkonen, World Bank Country Director for Indonesia and Timor-Leste. “It’s gratifying to see the benefits that our gradual but steady implementation has brought to the country.”