Download Dr Sri Mulyani Indrawati

MINISTER OF FINANCE
REPUBLIC OF INDONESIA
Dr. Sri Mulyani Indrawati
Minister for Finance, Republic of Indonesia
Session 1: Financial Tsunami: Reconsidering the Role of Macroeconomic
Policy
“Can the tools of conventional macroeconomic policies be enough to
reverse the downturn of the global economies: Challenges for the
Authorities.”
Bank Indonesia 7th Annual International Seminar, Nusa Dua, 13 June, 2009
Introduction
Ibu Miranda, Distinguished Panelists, Ladies and Gentlemen,
Evoking the metaphor of a tsunami seems apt when discussing the global
financial crisis. The speed and magnitude with which it swept the world caught
everyone by surprise. And even though the crisis did not result in the same
immediate death and destruction as the tragic December 2005 tsunami, it has
brought with it despair and ruin for many millions of the globe’s citizens.
In the tsunami’s wake there has been much soul searching and reconsideration
of the role of macroeconomic policy making.
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For me, the question of whether the tools of conventional macroeconomic
policies are enough to reverse the economic downturn, which is at the heart of
my presentation today, is not a hypothetical question. It is a question that
economics and finance officials around the world have had to answer. And I
strongly believe that the global economic downturn as a result of global
financial crisis can be reserved.
Flashback: The Origins of the Crisis
We took the view that to respond effectively we first had to understand that the
crisis was not a stand-alone event. It was the cumulative effect of many years
of macro, financial, and regulation policy choices — many of which were
beyond our borders and beyond our control. In particular, the crisis shows us
the limits of the ‘invisible hand’ in the real world. We see how the ‘invisible
hand’ helped in the demise of Lehman Brothers, Bear Stearns and other major
financial houses, and along with them the hard earned savings of many millions
of people.
As we have witness from that crisis chapter, unregulated global financial
markets had fueled irresponsible efforts to create financial innovations, many
without proper value assessment. On the other hand, a long period of very loose
monetary policy, under-assessment of risk, and persistent global imbalances has
provided ample liquidity that triggered a bubble in the financial sector. All of
these factors combined with moral hazards of the financial managers and
decision makers had made excessive risk taking behavior and there was no clear
risk exposure of financial expansions.
The resulting damages were clear. When the bubble burst, the intermediary
function of financial institutions was disrupted. Financial institutions balance
sheets were under pressure due to dry up of liquidity, exchange rate volatility,
increasing NPL, and potential erosion of capital. The worsened condition of
financial institution has triggered panic behavior due to increase risk
perceptions and this was soon become a global phenomenon. Emerging
countries in particular were victimized due to capital outflow and increase risk
perceptions. Their corporate and sovereign bond yields were pushed upward,
and their local currencies and stock indexes were plunged.
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The crisis in the financial sector was then transmitted to the real sector. The
disruption of credit channel has caused widespread economic downturn because
global aggregate demand dropped due to slower consumption. The global
export and investment level were then pushed downward due to the rising
insecurity of future income and demand.
Responses to the Crisis
Distinguished ladies and gentlemen,
Based on that understanding on the origins of the crisis and how it is
transmitted, and what are the impacts, we believe that conventional proactive,
counter-cyclical macroeconomic policies are required for this type of economic
crisis. Specifically, we target our monetary policies to stabilize the external
balance, while the fiscal policies will be aimed to stabilize the internal balance
of the macroeconomic system.
Indonesia decided early on a course of counter-cyclical economic policies. We
based our action on the premise that the immediate task is to restore confidence
and the aggregate demand. This includes provide an increasing coverage of
deposit guarantee to maintain the consumer confidence to the banking sector,
increasing liquidity by lowering interest rate, and having fiscal expansion to
stimulate the real economy.
Thankfully, we are not alone in doing this. Other economies took a similar
view, especially the systemically important economies of the U.S., Japan, China
and major European economies. In our region, Australia, Singapore, and others
also enacted counter-cyclical policies to boost confidence and to get the real
economy run again.
We took our mantra internationally. At the G20 Finance Ministers and Central
Bank Governors meeting in Brazil last year, the G20 Leaders meeting in
Washington and London, the World Bank/IMF annuals, ASEAN and
ASEAN+3, and other major events, we urged the use of counter-cyclical
measures. We actively and assertively lobbied for explicit acknowledgement in
outcome documents of the need to enact expansionary policies and to avoid
actions that worked to ‘beggar-thy-neighbour’.
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Regarding the unconventional macroeconomic policies
Distinguished ladies and gentlemen,
The current financial crisis has some distinctive features that might not allow
the government to merely rely on conventional policies. In particular, the
banking sector and its intermediary function has always been a focus of our
attention.
In a normal time, the Central Bank use monetary operations to affect market
interest rates, and thereby manipulating how the economy works. During this
time of market failure, however, we might need to exercise some
unconventional policies, such as expanding central bank intermediary function
to offset the decline of banking sector intermediation. Some unconventional
approach might also be done regarding the effort to cleanse toxic assets.
To have the economy run again, we need major banks to start lending and this
will only take place after cleansing financial institution balance sheets of toxic
assets. President Yudhoyono said at the G20 Leaders’ summit that the World’s
major economies need to operationalize as quickly, and as responsibly, as
possible their handling of toxic assets.
In this context, I note that the Head of the IMF recently warned that a failure to
cleanse balance sheets presented one of the biggest risks to recovery, and this
warning have been taken seriously by the G20.
The US stress test on banking sector was a first step to identify the bank
healthiness as well as how much capital is needed to endure a worst-case
scenario of crisis. The result which had been published this month provides
better result compared to market perception. Such test is a bold move to
increase transparency and improve market confidence to the banking sector, as
well as avoiding irrational behavior due to information asymmetry. In fact, the
stress-test result allowed some financial groups to repay sooner their liquidity
support that have been received from the government.
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Ladies and gentlemen,
The story does not stop here. The Indonesia’s government has combined
assertive domestic efforts with active international economic diplomacy to
ensure a solid platform to withstand the crisis and to lay the foundations for a
better future.
We also took to the global stage our view that there was a mismatch between
regulation and innovation. To achieve full recovery of the banking system we
need to address the problem of the lack of regulations and monitoring
mechanisms. We required better disclosure and transparency to match market
developments and market dynamism, and capture financial risks better.
We also strongly felt that we need changes to the global financial architecture.
In our view, multilateral development banks and international financial
institutions needed to fill the void left by the flight of funds to the U.S., Europe
and other developed economies. These same institutions also needed to offer
‘useable’ products.
As a member of the G20, and as co-chair with France on the Working Group on
Multilateral Development Bank reform, we pushed the case for a
recapitalization of MDBs and RDBs. This resulted in a tripling of the Asian
Development Bank’s capital, which was secured at the ADB Annuals in Bali,
Indonesia, May 2009. We also advanced the case for improved governance and
quota arrangements.
The G20 also produced some other notable outcomes, such as the expansion of
the Financial Stability Board (formerly the Financial Stability Forum) and the
strengthening of its mandate. In our view, regulators cannot simply be ‘paper
tigers’, we need to give them the tools needed to do what is required to keep
market players operating with appropriate market disciplines and in an open,
transparent and honest fashion.
The 1997-1998 financial crisis triggered an overhaul of Indonesia’s financial
sector. The current government has continued with financial reforms and also
with anti-corruption efforts and bureaucratic reforms. It is noteworthy, that in
the recently released World Competitiveness Yearbook 2009, Indonesia
recorded a ranking of 26th overall in the government category.
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In the area of monitoring, Indonesia maintains a firm position that credit rating
agencies require our continued close monitoring. There must be no tolerance for
conflicts of interest. International regulators must set the highest standards of
governance for credit rating agencies, and the agencies must comply with best
international practice. These sentiments also apply to funds managers and those
offering products such as hedge funds.
Kick-starting a return to two-way trade has been another priority of the
Indonesian government. The world must vigilantly keep on the path of open
trading regimes and work to promote trade and investment. Together, we
should redouble our efforts to conclude the Doha round of the World Trade
Organization negotiations. In today’s crisis environment, all members should be
prepared to concede more than they otherwise might have been prepared to do.
And all countries, but especially the wealthy, should fully consider how
agricultural subsidies affect developing and emerging economies.
Distinguished Ladies and Gentlemen
Before I finish, I wish to briefing touch on what we have actually done
domestically and some of the key economic indicators to demonstrate that this
government has done more than just talk about solutions, to reach over 4% GDP
growth this year, and up to 6% in 2010.
On the fiscal and finance front:
 We enacted a range of tax incentives to boost economic activity.
 We targeted job creation through critical anti-poverty programs and
infrastructure projects.
 We accelerated government spending.
 We extended the provision of credit and lending instruments to SMEs.
 We supported the banking and capital market systems by increasing
government funds and offered a limited deposit guarantee scheme.
 We strengthened the Government’s supervisory and enforcement capacity
over capital markets.
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 We also ensured foreign exchange stability, including with two major swap
facilities. One with China totaling US$15 billion and one with Japan for
US$10 billion. And we have worked closely with our ASEAN+3 partners to
speed up the implementation of the Chiang Mai Initiative Multilaterisation.
 On the banking front, Bank Indonesia has lowered interest rates.
Our budget remains in a relatively healthy position, which has allowed us the
fiscal space to advance our stimulus measures in a timely fashion. The situation
was helped by a cooperative parliament that has understood the need for an
expansionary budget. The parliament accepted the argument to increase the
original budget deficit budget of 1% to 2.5% of GDP.
To safeguard our financing requirements we have successfully issued bonds in
2009 and negotiated with key bilateral and multilateral partners, Australia,
Japan, the World Bank and the ADB to guarantee standby loans amounting to
US$5.5 billion. And we have pursued new financing measures such as Syariah
compliant bonds and Yen denominated Samurai bonds.
With these practical measures domestically and internationally, the economy
remains on tract to achieve growth in 2009 of 4% to 4.5%. This stands in stark
contrast to the global contraction of negative 1.3%. The growth has solid
foundations based on increased consumer and government spending, and is
supported by investment. On the supply side, we continue to see strong growth
in construction, transportation and communication, agriculture and utilities.
Other key indicators are also positive. The rupiah has strengthened 10% this
year. The stock market is the third best performing market globally and only
marginally behind the performance of China and India. Foreign exchange
reserves are returning to the level immediately prior to the crisis.
For 2010, we are expecting growth of up to 6%. We target inflation to be at 5
+1, the interest rate continue to falling, and the rupiah to remain steady.
In the World Competitiveness Yearbook 2009 Indonesia jumped from 51 st to
42nd overall, and achieved a respectable 33rd place in the ‘stress test’ category.
The Government values the positive report card. But it also realizes much more
needs to be done, especially with regard to addressing infrastructure
requirements. Our budget stimulus package has identified infrastructure as a
key priority.
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Indonesia’s effort to maintain sound economic policies does not go unnoticed.
While many of our neighbors in Asia have their debt risk outlook downgraded
as a result of deteriorating fiscal position, on the other hand Indonesia’s rating
was upgraded to positive outlook. This means that international market perceive
Indonesia country risk as lower and that our deficit and debt management
framework is credible. Rating agencies also sees that Indonesia have good
macroeconomic framework management as well as effectiveness of pro-reform
policies, both mirroring better government credibility and country’s growth
prospects.
Ibu Miranda, Distinguished Ladies and Gentlemen,
The Government understands that we are not out of the woods yet. There still
remain many issues that need addressing. And, despite some promising signs of
recovery, the global economy is still fragile. We must work diligently to
maintain the balance between ensuring growth while keeping a lid on inflation.
Government intervention might be beneficial to cushion the impact of the crisis
in the short run, but we must strive to restore private sector economic activity
for more sustainable long-run growth. We intend to stimulate greater levels of
private investment through establishing a better investment environment,
improving infrastructure, and maintaining macroeconomic and financial
stability.
On the international front, we will push ahead with our efforts to improve credit
markets, rating agencies, and financial regulators. To prevent future crises, or at
least mitigate the effects of enviable business cycle downturns, we have been
presented with a golden opportunity to reform the global financial architecture.
We must ensure the right balance between market regulation and the need to
support dynamism and innovation. We must also ensure even-handedness with
the surveillance of developed and emerging economies.
I believe it is at times of greatest crisis that we have the greatest need to work
collectively and collaboratively. To make a lasting recovery, we need to exploit
all opportunities to ensure sounder, more equitable and sustainable growth in
the future. And we must not forget other issues of global importance such as
climate change.
Thank you.
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