Through Perppu 1/2020, President Joko “Jokowi” Widodo has expanded the authority of the central bank, the state’s insurer (LPS), as well as the state’s financial services authority (OJK) to allow these institutions to prepare and react accordingly to the COVID-19 pandemic and its impact to Indonesia’s financial stability.
In order to maintain the stability of the Indonesian financial system, President Joko Widodo issued Government Regulation in Lieu of Law Number 1 of 2020 on State Financial Policy and Financial System Stability for the Mitigation of the Corona Virus Disease 2019 (COVID-19) Pandemic (Perppu 1/2020), which came into force on March 31, 2020.
Perppu 1/2020 grants additional authority to the Central Bank of Indonesia (BI), the Indonesia Deposit Insurance Corporation (LPS), and the Indonesia Financial Services Authority (OJK). These three institutions, along with the Ministry of Finance, are the main institutions that comprise Indonesia’s Financial System Stability Committee (KSSK), which was established in 2016. The authorities thus provide the KSSK with more powers to handle financial system stability issues stemming from the COVID-19 pandemic. These powers, as stipulated by Perppu 1/2020, are:
Central Bank of Indonesia (BI)
- Grant short-term liquidity loans or short-term liquidity financing based on sharia principles to systemic and non-systemic banks.
- Granting Special Liquidity Loans to systemic banks that are experiencing liquidity crisis and do not meet the requirements for providing short-term liquidity loans or short-term liquidity financing based on sharia principles.
- Purchase long-term Government Bonds and / or Government Sharia Bonds within the primary market for handling financial system problems that endanger the national economy, including Government Bonds and / or Government Sharia Bonds issued for specific purposes, especially in the context of the co-19 pandemic.
- Purchase/repurchase of state securities owned by the LPS for the cost of handling the solvency problems of systemic and non-systemic banks.
- Regulating the obligation to receive and use foreign exchange for residents, including provisions concerning the transfer, repatriation and conversion of foreign exchange in order to maintain macroeconomic and financial system stability, which will be regulated by a BI regulation (PBI).
- Providing funding access to corporations / private entities through the repurchase of government bonds or state sharia securities owned by corporations / private sector through banks.
Indonesia Deposit Insurance Corporation (LPS)
- Preparations for the handling of the crisis and increasing the intensity of joint-preparations with the OJK for handling bank solvency issues.
- Taking action:
- Sale / repurchase of Government Securities owned by the BI;
- Issuance of debt securities;
- Issuance of loans to other parties; and or
- Issuance of loans to the Government, in the event that the LPS is expected to experience liquidity crisis for handling failed banks;
- Making a decision to make or not save a bank other than a Systemic Bank (failed bank) by considering, among others, economic conditions, the complexity of the bank’s problems, the need for handling time, the availability of investors, and / or the effectiveness of handling bank problems and not only considering the estimated costs as the lowest (least cost test).
- Making a decision to make or not save a bank other than a Systemic Bank (failed bank) by considering, among others, economic conditions, the complexity of the bank’s problems, the need for handling time, the availability of investors, and / or the effectiveness of handling bank problems and not only considering the estimated costs as the lowest (least cost test).
- Formulating and implementing a deposit guarantee policy for a group of customers by considering the source of funds and / or deposit allocation, as well as the amount of value guaranteed for those groups of customers that is regulated by the Government Regulation.
Further provisions regarding the implementation of the authority of the LPS in the framework of implementing measures to deal with financial system stability issues are to be regulated by a Government Regulation.
Perppu 1/2020 further grants the Government the authority to provide loans to the LPS, which may be carried out in the event that the LPS experiences liquidity problems that endanger the national economy and financial system as a result of the COVID-19 pandemic.
Indonesia Financial Services Authority (OJK)
- Provide written orders to financial service institutions to conduct mergers, consolidations, expropriations, integration and / or conversions.
- Determine exemptions for certain parties from the obligation to carry out the transparency principle within the capital market in the context of preventing and handling financial system crisis.
- Set the provisions regarding the use of information technology in holding General Meeting of Shareholders or other meetings based on the provisions of the legislation that must be carried out by financial service industry players.
Further provisions regarding the implementation of the authority of the Financial Services Authority in the framework of implementing financial system stability policies are regulated by an OJK Regulation (POJK).
Any activities violating the authority of the OJK as mentioned above will be subject to criminal sanctions, as follows:
- For individual persons: Minimum terms of imprisonment of four years and maximum fines of IDR 10 billion or minimum terms of imprisonment of 12 years and maximum fines of IDR 300 billion; and
- For corporations: Minimum fines of IDR 1 trillion.
The powers granted to the KSSK as a whole allows the government to maintain the stability of the financial system by injecting liquidity as needed to the market. Finance Minister Sri Mulyani already mentioned in a recent remote press conference that the economic impact of the COVID-19 pandemic would be substantial, with Indonesia’s GDP projected to slow down to the -0.4 - 2.3% range.
“Extraordinary times require extraordinary policy and action. That is why we need extraordinary action and policy, or actions and policy that we wouldn’t think about taking on otherwise normal situations,” she warned.
It should be noted that while a Perppu is legally binding at the time of issuance, the government must still submit the Perppu to the Parliament for it to become law. The Parliament has the power to reject the Perppu and force the government to retract it. In this regard, the Perppu has been handed over to the Parliament on April 2, 2020, and, as of the time of writing, is still being deliberated by lawmakers.