Indonesia: 2006 Article IV Consultation and Fifth Post-Program Monitoring Discussions: Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Indonesia

International Monetary Fund
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Despite security risks and some major natural disasters, Indonesia has continued to make steady economic progress in recent years. Recent sound macroeconomic management has calmed inflation pressures, though financial markets remain volatile. In the short term, activity should regain momentum but there are downside risks. There is scope for fiscal policy to support activity in 2006, while still firmly pursuing reduction of the public debt burden over the medium term. The authorities have done much to reduce macroeconomic vulnerabilities in recent years.
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International Monetary Fund
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Published on
Aug 23, 2006
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Business & Economics / International / Economics
Business & Economics / Money & Monetary Policy
Political Science / Public Policy / Economic Policy
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Establishing a stable financial system with a sound oversight framework is critical for an offshore financial center such as Turks and Caicos Islands (TCI)—a British Overseas Territory. Although the economy relies mostly on tourism, the financial system’s (largely offshore) assets amount to about 450 percent of GDP. TCI is home to a large number of small, niche U.S.-based reinsurance companies, but banks account for a large part of the system’s assets. The FSC is an integrated supervisor overseeing all financial institutions. The territory uses the U.S. dollar and does not have a central bank. TCI recently suffered from major domestic financial distress, highlighting the unique challenges of the territory. The severe recession that started in 2009 led to a sharp increase in nonperforming loans (NPLs). In this context, a large indigenous bank failed, and depositors have so far recovered 40 percent of their claims. Furthermore, in 2014 a local insurance company was liquidated, a delayed consequence of the failure of a large regional insurer. Branch-based operations in TCI made it difficult to adequately protect TCI policyholders, who have recovered 20 percent of claims so far. Contagion to the rest of the financial system was limited. In the near term, TCI banks on aggregate seem to have the capacity to withstand a range of adverse scenarios, but one bank shows signs of weak governance. Banks are foreign owned and operate a traditional business model with high capital buffers. While legacy nonperforming loans (NPLs) remain high and credit has been contracting since the crisis, demand-side issues appear relatively more relevant: the contraction is concentrated in the construction sector, and banks have sufficient capital to write off most of the existing NPLs. Stress tests underscore the importance of credit and concentration risk together with real estate collateral valuation, and most banks have sufficient capital to withstand a range of adverse shocks. Regarding liquidity, key risks are from customer deposits and, for some, intragroup funding. Since most of liquid assets are claims on group affiliates, ensuring their continued availability is the key for managing liquidity risks. Weak governance in one large bank is an important vulnerability, so the FSC should remain vigilant.
In 1971, President Nixon imposed national price controls and took the United States off the gold standard, an extreme measure intended to end an ongoing currency war that had destroyed faith in the U.S. dollar. Today we are engaged in a new currency war, and this time the consequences will be far worse than those that confronted Nixon.


Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries' stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis worse than the panic of 2008.

Currency wars have happened before-twice in the last century alone-and they always end badly. Time and again, paper currencies have collapsed, assets have been frozen, gold has been confiscated, and capital controls have been imposed. And the next crash is overdue. Recent headlines about the debasement of the dollar, bailouts in Greece and Ireland, and Chinese currency manipulation are all indicators of the growing conflict.

As James Rickards argues in Currency Wars, this is more than just a concern for economists and investors. The United States is facing serious threats to its national security, from clandestine gold purchases by China to the hidden agendas of sovereign wealth funds. Greater than any single threat is the very real danger of the collapse of the dollar itself.

Baffling to many observers is the rank failure of economists to foresee or prevent the economic catastrophes of recent years. Not only have their theories failed to prevent calamity, they are making the currency wars worse. The U. S. Federal Reserve has engaged in the greatest gamble in the history of finance, a sustained effort to stimulate the economy by printing money on a trillion-dollar scale. Its solutions present hidden new dangers while resolving none of the current dilemmas.

While the outcome of the new currency war is not yet certain, some version of the worst-case scenario is almost inevitable if U.S. and world economic leaders fail to learn from the mistakes of their predecessors. Rickards untangles the web of failed paradigms, wishful thinking, and arrogance driving current public policy and points the way toward a more informed and effective course of action.

From the Hardcover edition.
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