Bank Indonesia Highlights 3 Major Challenges Threatening Financial System Stability

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Bank Indonesia Reports Surge in Corporate Financing Demand Driven by Mining and Construction Sectors (photo: reuters - Ajeng Dinar Ulfiana)

Bank Indonesia (BI) has identified three significant challenges that continue to impact Indonesia’s financial system stability. Deputy Governor Juda Agung outlined these challenges and emphasized their importance.

The first challenge revolves around the persistent uncertainty in the global economy and financial markets. While interest rates in developed countries, particularly in the United States (US), are expected to decline in the latter half of 2024, the uncertainty surrounding the timing and extent of these rate cuts remains.

This uncertainty leads to volatility and continues to hinder foreign capital inflows into emerging markets like Indonesia. Additionally, geopolitical tensions worldwide and the fragmentation of global trade further contribute to this uncertainty.

Juda highlighted the upcoming general elections in over 50 countries, including the US, as a factor that could lead to drastic changes in global political policies. Issues such as the property crisis and weak consumption in China also pose significant challenges to global economic growth and financial stability.

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The second challenge pertains to the risks associated with the digitalization of the financial system. While digitalization facilitates access, promotes financial inclusion, and deepens money markets, it also introduces new risks. These risks include increased interconnectivity among banks and the emergence of new business models whose risks may not be fully understood. Cyber risks are also a significant concern in the digitalization process.

Juda emphasized the importance of recognizing and addressing these risks, citing examples like Silicon Valley Bank in the US, which illustrate potential unknown business model risks. Effective management of these risks is crucial for maintaining financial system stability.

The third challenge involves transitioning towards a green economy. This transition presents various risks, including policy transition risks, credit risks associated with debtors’ abilities, and reputation risks if emission reduction policies are not implemented effectively. These risks need to be carefully managed to ensure a smooth transition towards a sustainable and environmentally friendly economy.

Bank Indonesia is actively working to address these challenges and ensure the stability of Indonesia’s financial system. By closely monitoring global economic developments, promoting responsible digitalization, and facilitating the transition towards a green economy, BI aims to safeguard financial stability and support sustainable economic growth in Indonesia.