Indonesia achieves low overall compliance with international standards and codes, with a score of 38.33 out of 100 in our Standards Compliance Index. The country achieves a relatively high level of compliance for the three standards on macroeconomic policy and data transparency. In the areas of institutional and market infrastructure, however, Indonesia's compliance with international norms is less promising. Indonesia's legal framework to combat money laundering and terrorist financing is deficient in several key areas despite the country's recent attempts to the contrary. Although the country's corporate governance regime has a sound legal framework, its effective implementation has been questioned by the World Bank in its assessment of Indonesia. Indonesia has been assigned an 'intent declared' compliance level for its Payment Systems, Accounting and Auditing practices as the authorities have clearly identified their willingness to comply with international standards in these areas. Standards regarding financial regulation and supervision all share a common theme - there is a strong intent on the part of the regulators to implement international standards but there is little evidence of actual adoption or implementation of these standards. For instance, in the case of banking supervision, the Bank Indonesia, the banking sector supervisor, conducts regular self-assessments of Indonesian banks' adherence to the Basel Core Principle. However, comprehensive results of these self-assessments are rarely made public making it difficult to assign a higher compliance level for the country.

Macroeconomic Policy and Data Transparency

Indonesia subscribed to the International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS) on September 24, 2003. Based on information provided on the IMF's SDDS website, Indonesia meets SDDS requirements for periodicity, coverage, and timeliness of data, although it does avail of the flexibility option with regards to timeliness and periodicity for employment and unemployment data, and timeliness for data on wages and general government. Further, Indonesia also fulfills SDDS requirements for the access dimension, except for exchange rates and population data, where there is no mention of the SDDS requirement for advance dissemination of release calendar. Further, simultaneous release to all interested parties is only available upon request for the national accounts data category. Information on the IMF's SDDS website also shows that Indonesia does not meet all SDDS requirements for integrity of data, as several data categories lack information about provision of information about revision and advance notice of major changes in methodology. The country clearly addresses the confidentiality of individually identifiable information for all data categories except for general government (public sector operations) and central government operations. With regards to the quality of data, information provided on the IMF's SDDS website indicates that Indonesia fulfills the SDDS requirements. More »

Oxford Analytica (OA), in its 2006 Report on Monetary Policy Transparency, states that Indonesia's overall score is "Compliance in Progress," which remains unchanged from the previous year. Among the improvements over the period monitored was a new monetary policy framework that is now in line with the Central Bank of Indonesia's (BI) inflation-targeting framework. The BI is considering whether its Board of Governors, which oversees monetary policy, should release its minutes to all stakeholders. As required by the BI Law No. 2 of 2004, a Bank Indonesia Supervisory Board (BISB) has now been established. While the BISB has no role in monetary policy, its principal objective is to provide support to the legislature in conducting its surveillance of the BI's accountability, independence, transparency, and credibility. The agency faces some limitations as it does not have clear terms of reference or an allocated budget. BI Law No. 3 of 2004 requires that the majority of BI's banking supervision responsibilities be shifted to a new, independent institution called the Financial Services Authority Institution (FSAI), but discussions about the establishment of the agency never reached an agreement. This has resulted in the BI retaining its banking supervision activities and deferring the transfer of responsibilities to 2010. More »

Indonesia is given an "Enacted" rating in OA's 2006 Fiscal Transparency report. In its 2006 Report on the Observance of Standards and Codes on Fiscal Transparency in Indonesia, the IMF notes that the country has significantly improved over the past years by introducing a legal and administrative framework to promote transparency. However, much more needs to be done in all areas of fiscal transparency. The 2006 Open Budget Index gave Indonesia a score of 41% out of a possible 100%, suggesting that citizens' access to information about the budget can be improved. The enactment as well as the implementation of the State Finance Law, the Treasury Law, and the State Audit Law in 2003-2004 has laid out a strong foundation for further fiscal management reform. OA reports that the enactment of the 2006 State Audit Law helped to substantially improve auditing transparency, and the Supreme Audit Commission intends to seek authorization from the Constitutional Court to conduct audits of the Tax Office. OA notes that it is still unclear how roles and responsibilities are divided between government levels. Expenditure allocations for central and local governments are not clearly defined, and there is a considerable lag in data reporting by subnational governments. The IMF report recommended reforms for the central government budgetary sector and an increased reform in the general government. The government plans to implement a medium-term expenditure framework in 2008 and identify government accounts not presently overseen by the treasury in order to better monitor the budget. More »

Institutional and market infrastructure

There is insufficient information publicly available as to Indonesia's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank. Prior to August 20, 1998, Indonesian corporate and personal bankruptcies were governed by a 1905 Bankruptcy Ordinance enacted during the Dutch colonial period. The Bankruptcy Law of 1998 aimed to modernize the bankruptcy system and promote the fair and expeditious resolution of commercial disputes. Santoso et al. note in 2004 that although considered a step in the right direction, the 1998 Law was perceived by many as too creditor-friendly because it allowed the creditor to initiate a bankruptcy regardless of the amount of debt versus the amount of debtor's assets. This was seen as making it too easy to force solvent companies into bankruptcy. In 2004, a new Law on Bankruptcy and Suspension of Payment was adopted which established the criteria for who can file bankruptcy petitions. Although Santoso et al. observe that there are still problems with the amended law, the issue of effective implementation presents a much more substantial problem. In his 2006 publication, S. Mandala of the Ministry of Law and Human Rights notes that on August 2, 2005 a Judicial Commission was created to address the weaknesses in the judicial system. More »

As noted in the 2003 Asian Development Bank (ADB) report, prior to 1994, Indonesian Accounting Standards (PSAKs) were based on the U.S. Generally Accepted Accounting Principles (GAAP) in effect as of 1965. In 1994, however, the Seventh National Congress of the Indonesian Institute of Accountants (IAI) endorsed the International Accounting Standards (IASs), now the International Financial Reporting Standards (IFRSs), as the basis for domestic financial reporting. Since 1994, the IAI, with the assistance of the Indonesian Government, the World Bank, and the ADB, has worked to harmonize PSAKs with IFRSs. However, differences still exist. Some of the PSAKs still reflect the pronouncements of the U.S. GAAP, and the adoption of IFRSs is out of step with IFRSs. In 2005, the World Bank conducted an assessment of accounting and auditing practices in Indonesia. It recommended that Indonesia improve its national accounting standards and practices by fully adopting IFRSs, issuing related guidelines, and providing necessary training for the practitioners. It was noted that the authorities were planning to fully adopt IFRSs by 2008. As far as the oversight of the profession is concerned, the World Bank pointed out its fragmented nature and suggested reorganizing and enhancing the existing system with a view to strengthening enforcement. At the time of the World Bank assessment, the Ministry of Finance had prepared a draft of the Public Accountancy Law, which was expected to address the issue of legal liability of accountants and independent public oversight system. More »

Business culture in Indonesia is based on relationships rather than rules, largely as a result of the high incidence of concentrated ownership, family-owned businesses, and controlling shareholders, as noted in the World Bank's 2004 Report on the Observance of Standards and Codes (ROSC) on Indonesia's compliance with the Organization for Economic Cooperation and Development (OECD) Corporate Governance Principles. The first Code of Good Corporate Governance was developed under the National Committee for Corporate Governance (CCG). The CCG was replaced in 2004 by the National Committee on Governance (NCG), which is responsible for strengthening, disseminating, and promoting good corporate governance principles in the private sector. In 2006, the NCG issued a new Code of Good Corporate Governance. While Indonesia has an elaborate system of corporate governance rules, corporate governance practices often fall short of the OECD's recommendations. In its 2004 ROSC, the World Bank recommended improving the effectiveness of implementation and enforcement of legislation and regulations to improve the corporate governance framework. It further advised establishing nomination committees and a cumulative voting system, ensuring disclosure and transparency in annual reports and financial statements, and improving the roles and responsibilities of the audit committees. The principal law governing stock corporations in Indonesia is the 2007 Company Law No. 40, whereas stock markets are mainly regulated under the 1995 Capital Market Law No. 8. The Jakarta Stock Exchange and the Surabaya Stock Exchange were integrated into the Indonesia Stock Exchange in December 2007. More »

The Indonesian Institute of Accountants (IAI) has been committed to raising professional standards to international levels. Most Public Accountants Professional Standards issued by the IAI are based on the U.S. Statements on Auditing Standards and some International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board. According to the 2005 World Bank assessment of the accounting and auditing practices in Indonesia, the IAI decided to implement ISAs effective 2007. However, in a 2007 self-assessment prepared by the IAI as part of the International Federation of Accountants' Member Body Compliance Program, the IAI stated that it was still in the process of translating ISAs, and that the final adoption of the international standards had been postponed until 2009. Overall, in its assessment, the World Bank commended the Indonesian authorities for the steps taken to enhance financial reporting framework in the country, including strengthening of audit-engagement reviews, the decision to adopt ISAs, and increasing attention to enforcement issues, among other achievements. At the same time, it was noted that the enforcement of the accounting and auditing standards was weak and professional training required further improvement. Enhanced oversight system of the audit profession, enactment of a new Public Accountancy Law, adoption of ISAs and International Financial Reporting Standards, and the introduction of differentiated reporting requirements for small and medium-size enterprises were singled out as priority measures needed to bring Indonesian accounting and auditing practices into line with international best practices. More »

In 2001, Indonesia was added to the Financial Action Task Force (FATF) list of Non-Cooperative Countries or Territories (NCCT), because many serious deficiencies were noted in its anti-money laundering (AML) framework. However, in view of the enactment of an AML Law in 2003 (Law No. 25) and implementation of reforms in the country's AML regime, the FATF removed the country from the NCCT list in 2005 and declared that Indonesia was implementing its AML regime on an ongoing basis. A 2008 report by the U.S. Department of State (DoS) indicates that Indonesia has made some progress in establishing an AML regime in the country; however, it has not yet made concerted efforts to combat terrorist financing. The report also laments that weak human and technical capacity, poor interagency cooperation, and rampant corruption remain significant impediments to the continuing development of an effective AML regime. Other deficiencies in the AML regime in Indonesia include: (1) insufficient legal basis to effectively combat terrorist financing; (2) inadequate law enforcement capabilities in investigating, prosecuting, and convicting money laundering/terrorist financing crimes; and (3) not being yet party to the United Nations (UN) Convention against Transnational Organized Crime. The U.S. DoS report recommends that Indonesia continue strengthening the country's AML regime at the highest governmental level, review and streamline the process of disseminating UN designations for terrorists, and identify, freeze and seize terrorist assets. A proposed amendment to the AML Law, per the report, still falls short when measured against international standards. Despite the rather negative outlook portrayed by the 2008 U.S. DoS report, there is little information publicly available addressing Indonesia's compliance with the FATF's recommendations on anti-money laundering and combating the financing of terrorism. More »

In its 2007 Financial Stability Review, the Bank of Indonesia (BI) categorizes the Bank Indonesia Real-Time Gross Settlement (BI-RTGS) system as the country's systemically important payment system. Other systems such as the clearing system and card-based instruments are defined as system wide important payment systems (SWIPS) according to information provided on the BI website. The Executives' Meeting of East Asia-Pacific Central Banks and Monetary Authorities in a 2002 report notes that in general, the BI-RTGS largely complies with the Committee on Payment and Settlement System's Core Principals for Systemically Important Payment Systems (CPSIPS). In a 2007 report, however, the BI observed that it conducted a self-assessment of the BI-RTGS system in which it concluded that several of the CPSIPS were not being observed. The self-assessment is not publically available. Therefore, we are unable to provide the specific findings and corresponding remedies found in the report. The BI's 2007 report, however, indicates its intent to work towards complying with the CPSIPS. To that effect, the BI has improved elements of the BI-RTGS system's security, such as system reliability. On the regulatory front, the BI's role was redefined to that of a regulator, administrator, and supervisor. The BI has announced on its website its intention to implement the next generation of the RTGS system. According to the BI's 2007 report, most large transactions are settled through BI-RTGS, and during the first semester of 2007 the system processed close to 93% of all settlements. More »

Financial Regulation and Supervision

A 2007 report by the IMF mentions that since the financial crisis of the 1990s, Indonesia has made rapid strides in aligning its banking sector supervisory practices with international standards. Over the years, BI, the banking sector supervisor, has diligently conducted self-assessments of its supervision practices against the Basel Core Principles (BCPs). In its 2006 Banking Supervision Report the BI alludes briefly to a 2005 self-assessment which indicates that Indonesia is compliant with ten BCPs; largely compliant with thirteen; materially non-compliant with one; and non-compliant with one. Apart from this reference made to a self-assessment in the 2006 Banking Supervision Report, there is little further information publicly available addressing Indonesia's compliance with the BCPs. The IMF's 2007 report states that, in 2005, the BI introduced a tightening of certain prudential regulations relating to loan/asset classification and provisioning, in adherence with BCP requirements. However, the report adds that, in 2006, the BI modified these classification standards, thereby undermining the BI's credibility. Nevertheless, according to a 2006 report by Goeltom, one of several medium-term policies put forth by the BI is to create an effective system for bank regulation and supervision, in line with international standards. More »

According to the World Bank's 2006 report on the Role of Non-Bank Financial Institutions, weaknesses were identified in Indonesia's equity market regarding enforcement of transparency, information disclosure, and corporate governance, as well as administrative sanctions for violation. Furthermore, at the time of the assessment, the securities regulator had limited and unclear powers to supervise the capital markets and market participants and to enforce issuer compliance. It also seemed to face important constraints in resources and staff. However, as noted in the Asian Development Bank's 2006 Country Strategy and Program report, regulations and supervisory practices for the non-bank financial sector are gradually being strengthened and brought into line with the international standards. Still, further efforts are needed for Indonesia to comply with International Organization of Securities Commissions Objectives and Principles of Securities Regulation. Following the merger of the Capital Markets Supervisory Agency (Bapepam) with the Financial Institution Directorate General into the Indonesian Capital Market and Nonbank Financial Service Supervisory Agency (Bapepam-LK) in 2004, the Financial Services Authority was created in 2007 as an integrated supervisory authority for the financial sector in Indonesia. Furthermore, the Jakarta Stock Exchange and the Surabaya Stock Exchange were integrated into the Indonesia Stock Exchange in December 2007. The main law governing stock markets in Indonesia is the 1995 Capital Market Law. More »

Following the Asian financial crisis of 1997 the Government of Indonesia, with the support of international financial institutions, has embarked upon the reform of its financial sector in order to alleviate the consequences of the crisis and initiate a long term reform program. According to a number of publications by the ADB, which has been actively involved in the reform process, the regulatory and supervisory framework for the financial sector is inadequate, although steps are being taken to improve compliance with international standards, including Insurance Core Principles promulgated by the International Association of Insurance Supervisors. Under the Financial Governance and Social Security Reform (FGSSR) Program launched by the ADB in December 2002, the Government of Indonesia introduced a number of measures aimed at reinforcing supervision and regulation of the insurance sector. Specifically, the Ministry of Finance issued decrees on business conduct, auditing, solvency, and licensing of the insurance companies. As far as the establishment of the unified regulator is concerned, the 2006 ADB Country Strategy Plan for Indonesia for the period of 2006-2009 notes that the initial date for the establishment of the Financial Services Authority was postponed from 2003 to 2010. As the first step in the creation of the unified financial sector regulator, in November 2004, the Government of Indonesia merged the directorate for insurance and pensions under the Ministry of Finance with the capital market regulator, Bapepam, creating a non bank financial sector regulator called Bapepam LK. The supervision of the banking sector remained the responsibility of the Bank of Indonesia with a view to further merge the two regulators. In the 2006 Country Strategy Plan, the ADB reiterated its commitment to support the Indonesia's financial sector reform program, which was to be carried out through a second and third FGSSRs. One of the expected outcomes of these programs is to strengthen insurance supervision in line with international best practices. More »

Legend:

Credit Ratings

Moody's Ba3/Stable

Fitch BB/Stable

Standard & Poor's BB-/Stable

Macroeconomic Data

2007 GDP (Current Prices): 432.944 billion USD (IMF)

2007 GDP (Per Capita): 1,925 USD (IMF)

2008 GDP (Growth Forecast): 6.1% (IMF)

2008 Inflation (CPI): 7.1% (IMF)

2007 Unemployment: 9.7% (CIA)

2006 Foreign Direct Investment

FDI (Inward): 5.556 billion USD (UNCTAD)

FDI (Outward): 3.418 billion USD (UNCTAD)

2006 Official Development Assistance

ODA (Received): 1,405 million USD (OECD)

ODA (Disbursed): N/A million USD (OECD)