Here is the rewritten article in markdown format:

Indonesia Embraces Risk Management in Finance, Adopting Comprehensive Asset and Liability Approach

In a move to enhance its financial resilience and prepare for global risks, Indonesia has been gradually adopting an asset and liability management (ALM) approach. This comprehensive framework integrates various public sector entities’ assets and liabilities into one document, providing a holistic view of the sovereign balance sheet.

Background

The journey began after the Asian financial crisis in the late 1990s, when the government shifted to a more fiscally conservative approach to mitigate financial shocks. This included extending fiscal risk analysis to account for risks created by other public sector entities and incorporating both assets and liabilities of the central bank, state-owned enterprises (SOEs), and sub-national entities.

Developing an ALM Framework

To better understand its exposure to risks, particularly currency risk, the Ministry of Finance started analyzing the two most significant sources of foreign exchange exposure: central government debt in FX and the FX reserves managed by the central bank. This analysis led to the development of a first approximation of the sovereign balance sheet, which supported the government in mitigating FX exposure and identifying other areas of potential risks.

Establishing an ALM Committee

The ministry established an ALM committee to assess the government’s short-term liquidity needs and provide a forum for sharing ALM information. The committee meets monthly or less as needed with senior management participation under the minister’s direction.

Expanding Scope of Monitoring

Indonesia has also expanded its scope of monitoring by including critical SOEs, such as Pertamina and Perusahaan Listrik Negara (PLN), in the currency risk exposure analysis and broadened coverage to include solvency and liquidity risks. The ministry has also published a report consolidating the Central Government’s balance sheet and critical SOEs for currency, solvency, and liquidity risks.

International Expertise

As part of its asset and liability management approach, Indonesia has brought in international experts through the World Bank’s Government Debt and Risk Management (GDRM) Program. Under this program, Indonesia received extensive training on ALM, including a week-long workshop that brought staff from the central bank and ministry of finance together.

Benefits of Adopting an ALM Framework

Adopting an ALM framework has helped Indonesia better prepare for global risks by developing a Balance Sheet Vulnerability Index, composed of different factors that measure the government’s risk exposure. The country has also developed technical capacity to employ financial derivatives to hedge residual risks and is monitoring contingent liabilities arising from guarantees granted by the government.

Conclusion

The balance sheet approach has facilitated coordination among various actors in managing risks to the balance sheet, making it a valuable tool for planning and mitigating external shocks to the economy. In the age of COVID-19, this approach is particularly relevant as countries face higher debt levels and fiscal risks stemming from SOE and guarantees’ mechanisms.

“Implementing the full ALM approach is a marathon, not a sprint,” said Satu Kahkonen, World Bank Country Director for Indonesia and Timor-Leste. “It’s gratifying to see today the benefits that the gradual but steady implementation has brought to the country.”