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MINISTER OF FINANCE REPUBLIC OF INDONESIA
Dr. Sri Mulyani Indrawati
Minister for Finance, Republic of Indonesia
Session 1: F inancial 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.
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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.
F lashback: 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 ‘invisiblehand’ 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.
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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.
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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.
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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.
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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.
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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.
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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.
