“DEA
LING WITH GLOBAL FINANCIAL CRISE
S”
Welcome Remarks by Miranda S. Goeltom, Acting Governor, the Central Bank of Indonesia, delivered at the 7th Bank Indonesia Annual International Seminar ―Global
Financial Tsunami: What Can We Do?” Nusa Dua, Bali, June 13-14, 2009
Honorable Minister Indrawati, Gov. Atiur Rachman, and Jacob Frenkel, Distinguished Speakers, Guests and Participants,
Ladies and Gentlemen,
Good afternoon and greeting to you all,
It is indeed an honor and a great pleasure for me to welcome all of you to this
the 7th Bank Indonesia Annual International Seminar, entitled ―Global Financial
Tsunami: What Can We Do?‖. Let me also welcome our distinguished guests and participants from abroad to our country and especially to Bali. I hope that you will
have the time to experience this beautiful island while you are here. I also extend
sincere gratitude and thanks to all speakers who will share their valuable time and
insights over the next two days.
Ladies and Gentlemen,
Global Financial Crisis
We are meeting today in challenging times. The global economy is being
drawn deeper into the most serious crisis in our life time. So devastating has the
global financial crisis been it was billed as the most dramatic since the Great
Depression of the 1930s. The most commonly used objective to describe the current
which has become global, and the range of unconventional measures taken by
authorities around the world. This has been demonstrated in the policy responses
taken to overcome the crisis, which is incredibly complex and certainly costly. IMF
projected global economic growth to plummet from 3.2% in 2008 to -1.3% in 2009,
whereas economic growth in developed countries is estimated to be even worse,
contracting to -3.8%. IMF also predicted that total losses stemming from the current
global financial crisis will reach US$4 trillion, two-thirds of which is from the
banking sector.
In such a deep global crisis, we must seek ways to survive and, subsequently,
return to our previously hard won growth and stability. This is exactly the time when
collective action is needed most, so that we can survive this global financial tsunami,
and emerge stronger. Given the depth and systemic nature of the crisis, a wait-and-see
approach or simply hoping that recovery will take place on its own is utterly
unacceptable.
Ladies and Gentlemen,
Common Historical Perspective of the Crisis
In the past, when the world caught a cold, Indonesia and countries in the region
got pneumonia; today it is the other way around, our countries got a cold while the
developed world is suffering from bird-flu. While Indonesia and countries in the
region have withstood the effect of an international crisis like never before, that is no
reason for complacency.
History teaches us that various crises have occurred repeatedly in line with the
natural business cycle. We recognize several types of financial crisis, such as a
currency crisis, debt crisis or banking crisis. Examples of a currency crisis include the
ones that plagued countries under the European Monetary System (EMS) in 1992-93
1978-81 and 2001-02, as well as Russia and Brazil in 1998-99; and banking crises
beset countries across Europe and the US in the 19th century and early 20th century.
On several occasions, banking crises were also accompanied by a currency crisis,
such as that which struck East Asian countries: Thailand, Korea, Malaysia and
Indonesia in 1997-98. This phenomenon of a currency crisis and concomitant banking
crisis became known as a twin-crisis. Globally, with increasing synergy between
macroeconomic variables, crises have become multidimensional, which is true for the
ongoing global financial crisis.
Meanwhile, the length of the cycle and duration of its effects are basically
identifiable. From a number of empirical facts it can be concluded that although crises
are occurring repeatedly, there is no indication that they will transpire periodically, as
a characteristic of the actual business cycle itself. However, empirical observations of
Western European history over the last 400 years show that financial crises occur, on
average, at approximately 10-year intervals. Meanwhile, regarding the economic
recovery process out of a financial crisis, a recent study demonstrates that a deep and
protracted financial crisis affects the price of assets, output growth and level of
unemployment. In this case, the affect of a financial crisis on a decline in employment
and house prices lasts an average of 5 to 6 years, whereas the affect on output is
shorter at an average of 2 years.
The current global financial crisis is a stark warning to us concerning how the
dynamics of the global economy and its risks are highly interconnected. In this case,
contagion not only spreads through linkages in trade and finance but also through
complex interaction among various risks, as depicted in the near-perfect correlation of
market and asset classes that was uncorrelated when conditions were benign, and
eventually amplified uncertainty and lead to a more difficult decision-making process.
While there are numerous cases that can explain why and how financial crises
transpire, there are many fundamental issues that we are yet to understand. To this
crisis that force public authorities to institute not only short-term but also long-term
policy responses.
Ladies and Gentlemen,
Policy Responses
We are all in the agreement that the global crisis requires a global solution.
Global concerted action is thus needed to offset a further worldwide recession by
organizing collaborative fiscal stimuli to boost public and private demand. Global
cooperation should also be expanded from the financial sector to the real sector in
order to provide more comprehensive measures for the recovery of global economic
growth. Efforts should be made to enhance cooperation in trade financing, and step up
cooperation at the regional and international level. For policymakers, the
unprecedented challenge is to avert a deeper recession. What has deeply concerned us,
every policymaker worldwide, and is to be avoided at almost any cost, is the vicious
downward spiral between the financial sector and real sector.
Amidst such ramifications and negative feedback, we need to anticipate that this
unfolding crisis will take considerably longer than previously envisaged. In my
opinion, it is of utmost importance to seek deeper understanding of at least three
inter-related issues: (1) the underlying structural weaknesses, (2) the merit of policy
response; and (3) the underdeveloped institutional structure and system. Those three
issues, I believe, are inherent in this ongoing crisis.
Much has been accomplished. Wide-ranging and often unconventional policy
responses have been taken to contain the downturn in output. In the near term, we are
already doing much involving the provision of fiscal stimuli and liquidity to contain
the financial crisis. While underlining the importance of fiscal stimuli, we also need to
ensure long-term fiscal sustainability. Along with this, measures to repair and
growth. We must remember that the economy will only recover if supported by a
functioning financial sector.
Despite the inevitable current preoccupation with the near-term, we also need to
remain focused on the structural reforms required to achieve higher sustainable output
growth and to strengthen the long-term capacity. With greater potential for
unexpected short-term economic risks, policy focus must be anchored towards
long-term economic interests. The implementation of such policy signals is our
commitment to stay focused on the long-term and press ahead with the structural
reform agenda.
But, will appropriate macroeconomic policies and a strengthened regulatory and
supervisory framework be able to prevent future financial crises? I personally think
that we should not simplify the issues and presume that better regulations, more
effective supervision and longer-term stability-oriented macroeconomic policy would
suffice to eliminate the cyclical features of the financial system and the build-up of
financial imbalances in the future. I strongly believe that market participants have an
equally important role to play – and self-interest – in addressing some of the emerging
weaknesses in the financial system and in strengthening market discipline. In this
regard, better flow of information in the market would enable authorities to safeguard
financial stability and other prudential aspects, as well as reduce the procyclicality
impacts of financial sector behaviour. Therefore, there will be more resilience and we
will be better prepared when new shocks hit in the future.
Recently, there have been some early signs of success. There is evidence of
stability returning to financial markets. It seems that the financial markets are
gradually moving back towards conditions that may be able to support the economic
recovery when it eventually begins. Global equities climbed to their highest levels of
the year, oil rose to around $70 a barrel, the Baltic Dry Index –an indicator of
shipping activity— has risen sixfold from its December nadir and corporate bond
touched fresh six-month highs. The latter indicator can be seen as a sign of economic
optimism as investors abandon the safety of government bonds for riskier assets.
There has been speculation that a trough has possibly been reached in few
countries, providing evidence of ―green shoots‖. We also witness many signs of a slowing in the pace of contraction and increasing expectations of an economic
recovery. These positive financial and economic indicators encouraged hopes that
―the Great Recession‖ might be coming to an end. Finally, it seems there is ‗a light at
the end of the tunnel’. Has the crisis reached rock bottom? Have we passed the worst? Is the crisis behind us? And if so, should we now concentrate more on the ‗exit
policy‘ and related measures to alleviate the mounting inflationary pressures??
Ladies and Gentlemen,
In line with the above empirical and policy perspectives, we are gathering today
to confer salient issues that have emerged during the recent financial tsunami. In the
first session we will discuss the effects of the global financial crisis on the economy,
which differ primarily due to differences in the driving factors behind the crisis. A
related issue to be raised here is as follows: ‗are accommodative monetary policy,
financial innovation boom and insufficient financial regulation considered as the
factors behind the shocks?‘. Session 2 will discuss further how policymakers can avoid a prolonged slump? Should a new paradigm of monetary and banking system
be found to avoid repercusions from the financial crisis? From a market perspective,
Session 3 will explore how the development of the financial market has provided a
significant contribution to various innovations in advanced financial products, thus
triggering moral hazard and escallating asymmetric information in the financial
market. As noted, a critical lesson learned from the current crisis is the need for a
more rigorous continuity plan in the financial sector. Session 4 will therefore focus on
building effective crisis resolution and management covering the wide array of macro
presentations will deliver substantial measures for reshaping the future financial
system, including the needs to expand the perimeter of financial regulations.
Ladies and Gentlemen,
Let me conclude my brief remarks by saying that from the point of view of an
emerging economy central banker, such as myself, we are indeed living in changing
times. Dealing with this global financial crisis is of paramount importance. Many of
our working assumptions are constantly being challenged by this new reality. This
requires sound policy judgements on our part and, more importantly, courage to
implement bold measures which perhaps no one has instituted previously.
Therefore, the challenge ahead is to get the action plan implemented
expeditiously, decisively and concertedly with equal allertness of the challenges to
establish a proper and adequate exit policy. Despite the daunting tasks that we are
assuming, I would prefer to remain sanguine. I recognize we need to remain vigilant
and stand ready to make changes along the way as we may encounter the unexpected.
I sincerely hope that this Seminar will be fruitful in generating valuable insight
and new ideas in dealing with global financial crises. Therefore, I guess you will
agree with me that it is interesting to listen and learn from the vast experience of a
world known economist and former IMF Chief Economist, a noted and well regarded
former central bank governor, and Chairman of Group of Thirty, Dr. Jacob Frenkel.
Before I close my remarks, let me bring up an interesting note about Bali. The
water found here on this paradise island is extremely addictive; once you have tried it
once you will succumb to the island‘s exotic wonders and return time and time again.
So, once is never enough. I urge you to make the most of your visit and explore the
magnificent sights, tastes and sounds of the island, with the hope that the memories
you take away are unforgettable.
Thank you, and let me now turn the floor to my dear friend Jacob to deliver his
