‘Big Bang’ versus ‘Go Slow’: Indonesia and Malaysia

Abstract

Two recent changes in the management of the Indonesian and Malaysian economies have altered the economic environment in which their central banks operate and the instruments used to control monetary aggregates. First, adjustment programmes adopted in these countries since the early 1980s have moved the management of their economies to a more market-based system. In general, these adjustment programmes have changed each country’s development strategy from a policy of state-led, import-substituting industrialization (ISI) to one of private-sector-led export orientation (EO). Second, both countries have improved the infrastructure of their financial markets by adopting the CAMEL (capital adequacy, asset quality, management, earnings and liquidity) system, under which capital adequacy, asset quality and liquidity are the key variables. On capital ade-quacy, both countries use the risk-based-capital guidelines for all banks as suggested by the Basle Supervisors’ Committee in 1987. The guidelines bring a full range of on- and off-balance-sheet assets into the risk-based system. A harmonized risk-weighting system has been developed to assess the different degrees of risk associated with each category of assets.