Designing Financial Safety Net A.Prasetyantoko ATMA JAYA School of Economics and Business

Transcription

1 Designing Financial Safety Net A.Prasetyantoko ATMA JAYA School of Economics and Business International Seminar Befriending with the "Boom-Bust" Cycle, Jakarta, 23 September 2914, Indonesia Deposit Insurance Corporation (IDRC)

2 The Nature of Crisis Two Basic Questions Is crisis exogenous or endogenous? How should financial safety net be designed? Proactive or reactive? Holistic (systemic) or partial? How is the compatibility of the domestic financial safety net with international (legal) framework? Frameworks Carmen Reinhart: Boom-bust cycle is long-lasting in the history of mankind. Crisis always has common symptoms, causes, and aftermaths. Crisis usually is triggered by financial liberalization Lending boom fueled by foreign debts, usually in short-term debts. Capital inflow increases current account deficit. The quality of debt deteriorates significantly

3 Capital inflows This time is different? For Emerging Countries? Source: IMF, 2013

4 Private debt is higher than public debt Starting from Q , the private debts is higher than government debts in Indonesia, due to the increasing global financial supply following global financial crisis Public vs Private Debt (in million USD) Government and Central Bank Private Source: CEIC

5 Foreign Currency Debt Debt denominated by foreign currency is dominant. There is a lack of domestic source of capital External Debt: Domestic vs Forex (in million USD) External Debt: IDR External Debt Forex Source: CEIC

6 Long-term debts Most of debts are still in long-term debts. In regard to maturities, the debt is quite safe ,000 Debts by Maturities (in million USD) , , , , ,000 0,000 Short Term Long Term

7 Private Debt Grows Fast The growth of private debt is higher than public debt, starting from Q Growth of Debt: Public and Private (in %) ggovernment Source: CEIC gprivate

8 200,00 Growth of Debts : IDR vs Forex (in %) 150,00 100,00 50,00 0,00-50,00 gexternal Debt: IDR gexternal Debt Forex

9 Short-term debt fluctuates Short-term debts grow higher than long-term debt following global financial crisis. 80,00 Growth Debts by Maturities (in %) 70,00 60,00 50,00 40,00 30,00 20,00 10,00 0,00-10,00 gshort-term debt glong-term debt Source: CEIC

10 This time is different? Following global financial crisis, current account deficit increases ,000 Current Account Deficit (in USD million) , ,000 0, , , ,000 Current Account Capital and Financial Account Source: CEIC

11 Indonesia: 1997/98 Crisis The origin Micro : currency mismatch and maturity-mismatch Macro : implicit guarantee (fixed-exchange rate), bad governance The Mechanism Exchange rate depreciation Bank-runs and panic Bail-out and moral hazard The Impact - real economic crisis (economically collapsed) political change

12 The cost of crisis... Indonesia 1997/98 crisis is one of the costliest in the world Source: Reinhart and Rogoff (2008)

13 Source: Reinhart and Rogoff (2008)

14 Source: Reinhart and Rogoff (2008)

15 This Time IS NOT different History never repeats itself exactly, but all historical facts have precedents (Dumenil and Levy, 2004) Hyman Minsky (a Keynesian financial economist) Crisis is embedded within the (capitalist) economies Instability is a normal result of modern financial capitalism There is a Financial Instability Hypothesis (FIH) Similarities pattern of 1997 and 2007 crisis

16 Financial Safety Net Related to Early Warning System (EWS) Financial Safety Net (FSN) should be proactive rather than reactive. It is too late to let the instability evolves. "This time is different" Syndrome is risky FSN should be a holistic (systemic) approach rather than partial ("The Big Picture ) It should recognize the linkage between macro and micro variables, the dynamic and the mechanism of the crisis. It is a "Balance-sheet Effect" mechanism FSN should be systematically related to EWS

17 International Standard FSN should be compatible with international (legal) framework There is an imperfections of international finance market. Certitude on sovereign or public and private debt is very important. It is about the centrality of willingness to repay the obligation. Arbitrage among sector across countries become an important issue for investors (increasing panic behavior).

18 Macro-micro linkage Macro variables External balance: trade balance, current account, BoP Internal balance : fiscal Growth pattern : asymmetric sectoral development Political-economic system Micro variables Composition of debt (forex) Maturity Quality of firm balance sheet (finance and non-financial institutions) Interaction How the dynamics and the inter-correlation among these variables

19 Next Challenges Global imbalances" Source: Financial Times, 2008; Wall Street Journal, 2009

20 Respond to the Crisis now Crisis 1997/98 Law No.23/1999 on Indonesian Central Indonesia. Law No.24/1999 on Foreign Exchange. Crisis 2007/8 Replacing law LPS Replacing Law BI FPJP Replacing Law JPSK Law No.21/ on Financial Supervisory Board.

21 Policy Responses

22 + Architecture of Institution Need clarity and certainty on legal basis OJK Menkeu BI LPS

23 Discussion Why Perppu JPSK is still debatable until now? Our (political) misbehavior: good policies are only possible during the very bad time (bursting), but not during the good time (booming). Financial Safety Net should be embedded during the cycle, start from the very beginning (during booming time). Proactive measures should be designed to anticipate the bursting situation. The late respond is not acceptable. Proactive respond should be appreciated (not be politicized)

24 Political concensus is needed Perppu JPSK should be revisited. If there is no legal basis, the coordination among financial authorities becomes uncertain FSN is a part of the systematic financial regulation. It is embedded on the financial system. It is very important to increase the certitude of the financial market behavior An architecture of regulation as a part of FSN: A set of regulation to mitigate capital inflows is necessary to respond to the global imbalances. It is in line with the Law 24/1999, even within the capital liberalization system.

25 Legal Basis should be syncronized Replacing Law No 4/ 2008 : Financial Safety Net (JPSK) The role of OJK should be mentioned explicitly Law No.21/2011 : Financial Supervisory Board (OJK) Coordination with BI is a big concern. It should be firmly designed. Concern on the internal governance of OJK. It should be explicitly mentioned.

26 far from being the exception, crisis are the norm, not only in emerging but in advanced industrial economy (Roubini, 2010) Thank You