speech bm CEO 260209
KEYNOTE SPEECH
“DEALING WITH THE GLOBAL ECONOMIC CRISIS”1
Budi Mulya
DEPUTY GOVERNOR of BANK INDONESIA
The Honorable CEO John Clements Consultants Indonesia, Mr. Andi Mohammad Hatta
The Honorable Guest Speaker, Mr. Perry Bedinger
Distinguished Guest, Ladies and Gentlemen
Assalamualaikum Warrahmatullahi Wabarakatuh and Good Morning
The world is now in the seized of a major economic downturn. The principal cause
of the economic slowdown was the collapse of the global credit boom which has
affected asset values, credit conditions, and consumer and business confidence around
the world. The immediate trigger of the crisis was notably the collapse of the U.S.
subprime mortgage and intensified when a widespread loss of confidence took place in
the wake of the collapse of the Lehman Brothers. Following Lehman, a number of large
financial institutions have failed, came to the brink of failure, or was acquired by
competitors under distressed circumstances.
A further tightening of credit standards manifested itself in disruptions to trade
credit and insurance, and in a tightening of lending for consumer and business spending.
These effects seem to have been transmitted very quickly around the world through the
trade channel, as businesses cut back on production in response to reduced orders. Falls
in exports and production were particularly pronounced for durable goods. Businesses
and consumers made a big adjustment to their spending levels in response to the shock
to confidence, and businesses cut production and inventories in response to the fall in
demand and tighter credit.
International Monetary Fund on its World Economic Outlook Update releases in
January 2009 is projected to fall to 0.5 percent in 2009, its lowest rate since World War
II, and represents a downward revision of about 1.75 percentage point from earlier
projection. Despite wide-ranging policy actions, financial strains remain acute, pulling
down the real economy.
1
Addressed at CEO Breakfast Forum, Shangri-La Hotel Jakarta, 26 February 2009
1
Distinguished Guest, Ladies and Gentlemen
A wave of aggressive globalization coupled with financial liberalization in recent
decade seems to accelerate the impact of the crisis. As an open economy, we are not
immune to the impacts of the crisis. As global credit crunch reached its pinnacle on the
last October, our domestic market started to deal with a psychological blow.
Deleveraging process is observed in our domestic assets as well as the global risk
aversion heightened. Since October 2008, foreign ownership on our government bond
(SUN) and Bank Indonesia Certificate (SBI) recorded a sharp 22% and 65% drop and at
the same time steepened the yield curve. This was also observed in the stock market
where the index dropped sharply from its peak of 2810 in 2007 to 1300 yesterday. In
the money market, the development is also uneasy. The average volume of daily
interbank money market transaction declines. Though, rupiah liquidity is ample, banks
are reluctant to lend each other as the counterparty risk heightened. As a consequence,
the spread of interbank rate widened. This also applies for US dollar funding.
In the goods market, the contraction of global demand coupled with sharp drop
on commodity prices lead to a negative adjustment on export. Risk aversion on the
financial sector combined with declining export performance, and negative markets
sentiments put pressures to our external balance and build scarcity on the actual US
dollar supply in the domestic forex market. As a consequence, substantial rupiah
exchange rate deprecation since October 2008 cannot be avoided.
We are facing the waning access of corporations and banks to sources of
financing. Higher cost of funding that lead to credit market dysfunction has led to tighter
financial conditions overall. While, growing perception on gloomy economic prospects
and information asymmetries concerning the foreign exposure, build up perception on
rising default risk and hampers potential offshore financing.
Distinguished Guest, Ladies and Gentlemen
Nevertheless, on our view there are some key elements that have been absent of
market consideration. First, crisis is not isolated to our economy only. It is a worldwide
phenomenon. Second, amidst such inauspicious surroundings, Indonesia is certainly not
in the worst position compared to other countries. In general, our macro posture is not
bad. Our banking industry also remains robust in the midst of heavy pressures.
2
On our view, economic slowdown will be more obvious in 2009, particularly
during the first semester. Amidst of the crisis, our economy would still able to grow
around 4%. However, the downside risk is still high. Along with the declining domestic
demand and the fall of commodity prices, inflation pressures would be milder around
the range of 5%-7%. The restrained domestic demand would also slash demand for
imports that help to rebalance the BoP, mainly in the second semester. We project, the
current account deficit to be below 1% of GDP.
Regarding the capital account, there are worries concerning the burden of private
sector foreign debt matured in 2009. I would like to confirm that the burden is within
our reach. The outstanding of debt mature in 2009 is US$17.4 billion. However, our
consolidated data shows that the debt is dominantly consist of trade financing and
revolving type of foreign loan agreement, that embed relatively low default risk. Some
of non-revolving debt are also affiliated and connected to parent companies that are
expected to have more opportunity to be rolled-over.
Concerning our international reserve adequacy, currently Bank Indonesia and the
Government are working hand in hand to negotiate a financial arrangement both
bilateral and multilateral, such as under Bilateral Swap Arrangement (BSA) and under
Chiang-May Initiatives. We are sure that these features will support the stability of
rupiah exchange rate in the near future.
In the banking sector, the resilience of our domestic banking industry is sufficient.
Though decreasing, the capital adequacy ratio (CAR) is projected well above its
minimum limit. Slow economic growth will precipitate a rise in NPL in 2009. However,
we are sure that the level would still consider within safe boundaries.
Considering the recent speculation concerning the settlement of structured
products involving a number of banks, let be briefly assure you that the risk of potential
loss due to unwinding process, both for customer and for banks, is low. Our data shows
that the notional amount of outstanding structured product has been drop significantly
from around US$3.5 billion in Dec-2008 to US$2.6 billion in Jan-2009 and the actual
potential lost should be lower. Bank Indonesia’s new regulations that restrict banks
from such practices have been proven effective. Further potential lost has also been
limited, as the new regulation is also put provision of contract restructuring and our
mediation effort has also been effective in resolving a number of cases.
3
Distinguished Guest, Ladies and Gentlemen
It is impossible to know how protracted or severe the crisis would be.
Nevertheless, what we do know is that economic downturns don’t last forever. So
despite the gloomy circumstances, it’s important to ask the question: what are the
factors that can contribute to an upturn in due course? So let me counterbalance with
factors that, over time, can be expected to contribute to an upturn.
A great deal depends on the success of the policy responses. Countries’
experiences have shown that a structural financial crisis such as is occurring now will
have lasting impacts on the real sector. Sluggish economic growth will continue for
several periods despite liquidity returning to normal. It suggests that a sustained
economic recovery will not be possible until the financial sector’s functionality is
restored and credit markets are unclogged.
Market liquidity is at the heart of central banks’ financial stability concerns
because it is a precondition for market efficiency and also because its sudden
disappearance from markets may degenerate into systemic crisis, as evidenced by the
recent turbulence, which resulted in the abrupt drying up of liquidity on the bond
markets.
Furthermore, fiscal stimuli have to be introduced concomitantly with financial
sector strengthening. They will not catalyze sustainable economic growth if not bolster
by a reawakening of private and business sector activities. Furthermore, the private
sector will only be roused if supported by a fully functioning financial sector. As such,
measures to repair and reinforce our financial sector must be taken along with the
introduction of fiscal stimuli. Fiscal stimuli are a key step in preventing the further
deterioration of economic activities in the short term. Within its authority but
constrained by capacity limits, Bank Indonesia will take any and all measures required.
In our great nation, banks remain a reliable source of financing for the business sector,
and thus, tidying up and strengthening our banking sector must remain a priority for
continuous implementation.
Distinguished Guest, Ladies and Gentlemen
On the back of this reasoning, substantial set of expansionary measures have
been taken through conventional monetary and fiscal policies. Bank Indonesia has
4
responded forcefully to the negative impact of the crisis. Bank Indonesia began to ease
monetary policy since December 2008 by reducing the BI Rate. The reduction has been
reached a cumulative of 125 basis points by the February 2008 at 8.25%.
However, as I mentioned earlier, a widening credit spreads, segmentation in
banking industry, more-restrictive lending standards, and credit market dysfunction
have worked against the monetary easing and led to tighter financial conditions overall.
Thus, in addition to easing monetary policy, Bank Indonesia has made use of a range of
additional tools to ease credit conditions and support the broader economy.
These are closely tied to the central bank's traditional role of provider of shortterm liquidity to sound financial institutions. Over the course of the crisis, Bank
Indonesia has taken a number of extraordinary actions to ensure that financial
institutions have adequate access to short-term credit. In fulfilling its traditional lending
function, Bank Indonesia enhances the stability of our financial system, increases the
willingness of financial institutions to extend credit, and helps to ease conditions in
interbank lending markets, thereby reducing the overall cost of capital to banks.
Distinguished Guest, Ladies and Gentlemen
Extraordinary times call for extraordinary measures. Responding to the very
difficult economic and financial challenges we face, Bank Indonesia has gone beyond
traditional monetary policy making to develop new policy tools to address the
dysfunctions in the nation's credit markets. Once global credit flows have returned to
normal, fund flows to developing countries will gradually return to normal too.
We have to assure ourselves that we can be among the first to benefit from the global
financial awakening. In my view, the key lies in positioning Indonesia to be considered as
a safe and convenient place to conduct business and investment. We have to affirm
investors that our macro economy is properly managed and sustainable, and that our
financial sector is robust. This is our joint responsibility.
Thank you very much for your kind attention. May you have a fruitful discussion.
Billahi taufiq wal hidayah wassalamu ‘alaikum wa Rahmatullah wa Barakatuh.
Jakarta, 26 February 2008
5
“DEALING WITH THE GLOBAL ECONOMIC CRISIS”1
Budi Mulya
DEPUTY GOVERNOR of BANK INDONESIA
The Honorable CEO John Clements Consultants Indonesia, Mr. Andi Mohammad Hatta
The Honorable Guest Speaker, Mr. Perry Bedinger
Distinguished Guest, Ladies and Gentlemen
Assalamualaikum Warrahmatullahi Wabarakatuh and Good Morning
The world is now in the seized of a major economic downturn. The principal cause
of the economic slowdown was the collapse of the global credit boom which has
affected asset values, credit conditions, and consumer and business confidence around
the world. The immediate trigger of the crisis was notably the collapse of the U.S.
subprime mortgage and intensified when a widespread loss of confidence took place in
the wake of the collapse of the Lehman Brothers. Following Lehman, a number of large
financial institutions have failed, came to the brink of failure, or was acquired by
competitors under distressed circumstances.
A further tightening of credit standards manifested itself in disruptions to trade
credit and insurance, and in a tightening of lending for consumer and business spending.
These effects seem to have been transmitted very quickly around the world through the
trade channel, as businesses cut back on production in response to reduced orders. Falls
in exports and production were particularly pronounced for durable goods. Businesses
and consumers made a big adjustment to their spending levels in response to the shock
to confidence, and businesses cut production and inventories in response to the fall in
demand and tighter credit.
International Monetary Fund on its World Economic Outlook Update releases in
January 2009 is projected to fall to 0.5 percent in 2009, its lowest rate since World War
II, and represents a downward revision of about 1.75 percentage point from earlier
projection. Despite wide-ranging policy actions, financial strains remain acute, pulling
down the real economy.
1
Addressed at CEO Breakfast Forum, Shangri-La Hotel Jakarta, 26 February 2009
1
Distinguished Guest, Ladies and Gentlemen
A wave of aggressive globalization coupled with financial liberalization in recent
decade seems to accelerate the impact of the crisis. As an open economy, we are not
immune to the impacts of the crisis. As global credit crunch reached its pinnacle on the
last October, our domestic market started to deal with a psychological blow.
Deleveraging process is observed in our domestic assets as well as the global risk
aversion heightened. Since October 2008, foreign ownership on our government bond
(SUN) and Bank Indonesia Certificate (SBI) recorded a sharp 22% and 65% drop and at
the same time steepened the yield curve. This was also observed in the stock market
where the index dropped sharply from its peak of 2810 in 2007 to 1300 yesterday. In
the money market, the development is also uneasy. The average volume of daily
interbank money market transaction declines. Though, rupiah liquidity is ample, banks
are reluctant to lend each other as the counterparty risk heightened. As a consequence,
the spread of interbank rate widened. This also applies for US dollar funding.
In the goods market, the contraction of global demand coupled with sharp drop
on commodity prices lead to a negative adjustment on export. Risk aversion on the
financial sector combined with declining export performance, and negative markets
sentiments put pressures to our external balance and build scarcity on the actual US
dollar supply in the domestic forex market. As a consequence, substantial rupiah
exchange rate deprecation since October 2008 cannot be avoided.
We are facing the waning access of corporations and banks to sources of
financing. Higher cost of funding that lead to credit market dysfunction has led to tighter
financial conditions overall. While, growing perception on gloomy economic prospects
and information asymmetries concerning the foreign exposure, build up perception on
rising default risk and hampers potential offshore financing.
Distinguished Guest, Ladies and Gentlemen
Nevertheless, on our view there are some key elements that have been absent of
market consideration. First, crisis is not isolated to our economy only. It is a worldwide
phenomenon. Second, amidst such inauspicious surroundings, Indonesia is certainly not
in the worst position compared to other countries. In general, our macro posture is not
bad. Our banking industry also remains robust in the midst of heavy pressures.
2
On our view, economic slowdown will be more obvious in 2009, particularly
during the first semester. Amidst of the crisis, our economy would still able to grow
around 4%. However, the downside risk is still high. Along with the declining domestic
demand and the fall of commodity prices, inflation pressures would be milder around
the range of 5%-7%. The restrained domestic demand would also slash demand for
imports that help to rebalance the BoP, mainly in the second semester. We project, the
current account deficit to be below 1% of GDP.
Regarding the capital account, there are worries concerning the burden of private
sector foreign debt matured in 2009. I would like to confirm that the burden is within
our reach. The outstanding of debt mature in 2009 is US$17.4 billion. However, our
consolidated data shows that the debt is dominantly consist of trade financing and
revolving type of foreign loan agreement, that embed relatively low default risk. Some
of non-revolving debt are also affiliated and connected to parent companies that are
expected to have more opportunity to be rolled-over.
Concerning our international reserve adequacy, currently Bank Indonesia and the
Government are working hand in hand to negotiate a financial arrangement both
bilateral and multilateral, such as under Bilateral Swap Arrangement (BSA) and under
Chiang-May Initiatives. We are sure that these features will support the stability of
rupiah exchange rate in the near future.
In the banking sector, the resilience of our domestic banking industry is sufficient.
Though decreasing, the capital adequacy ratio (CAR) is projected well above its
minimum limit. Slow economic growth will precipitate a rise in NPL in 2009. However,
we are sure that the level would still consider within safe boundaries.
Considering the recent speculation concerning the settlement of structured
products involving a number of banks, let be briefly assure you that the risk of potential
loss due to unwinding process, both for customer and for banks, is low. Our data shows
that the notional amount of outstanding structured product has been drop significantly
from around US$3.5 billion in Dec-2008 to US$2.6 billion in Jan-2009 and the actual
potential lost should be lower. Bank Indonesia’s new regulations that restrict banks
from such practices have been proven effective. Further potential lost has also been
limited, as the new regulation is also put provision of contract restructuring and our
mediation effort has also been effective in resolving a number of cases.
3
Distinguished Guest, Ladies and Gentlemen
It is impossible to know how protracted or severe the crisis would be.
Nevertheless, what we do know is that economic downturns don’t last forever. So
despite the gloomy circumstances, it’s important to ask the question: what are the
factors that can contribute to an upturn in due course? So let me counterbalance with
factors that, over time, can be expected to contribute to an upturn.
A great deal depends on the success of the policy responses. Countries’
experiences have shown that a structural financial crisis such as is occurring now will
have lasting impacts on the real sector. Sluggish economic growth will continue for
several periods despite liquidity returning to normal. It suggests that a sustained
economic recovery will not be possible until the financial sector’s functionality is
restored and credit markets are unclogged.
Market liquidity is at the heart of central banks’ financial stability concerns
because it is a precondition for market efficiency and also because its sudden
disappearance from markets may degenerate into systemic crisis, as evidenced by the
recent turbulence, which resulted in the abrupt drying up of liquidity on the bond
markets.
Furthermore, fiscal stimuli have to be introduced concomitantly with financial
sector strengthening. They will not catalyze sustainable economic growth if not bolster
by a reawakening of private and business sector activities. Furthermore, the private
sector will only be roused if supported by a fully functioning financial sector. As such,
measures to repair and reinforce our financial sector must be taken along with the
introduction of fiscal stimuli. Fiscal stimuli are a key step in preventing the further
deterioration of economic activities in the short term. Within its authority but
constrained by capacity limits, Bank Indonesia will take any and all measures required.
In our great nation, banks remain a reliable source of financing for the business sector,
and thus, tidying up and strengthening our banking sector must remain a priority for
continuous implementation.
Distinguished Guest, Ladies and Gentlemen
On the back of this reasoning, substantial set of expansionary measures have
been taken through conventional monetary and fiscal policies. Bank Indonesia has
4
responded forcefully to the negative impact of the crisis. Bank Indonesia began to ease
monetary policy since December 2008 by reducing the BI Rate. The reduction has been
reached a cumulative of 125 basis points by the February 2008 at 8.25%.
However, as I mentioned earlier, a widening credit spreads, segmentation in
banking industry, more-restrictive lending standards, and credit market dysfunction
have worked against the monetary easing and led to tighter financial conditions overall.
Thus, in addition to easing monetary policy, Bank Indonesia has made use of a range of
additional tools to ease credit conditions and support the broader economy.
These are closely tied to the central bank's traditional role of provider of shortterm liquidity to sound financial institutions. Over the course of the crisis, Bank
Indonesia has taken a number of extraordinary actions to ensure that financial
institutions have adequate access to short-term credit. In fulfilling its traditional lending
function, Bank Indonesia enhances the stability of our financial system, increases the
willingness of financial institutions to extend credit, and helps to ease conditions in
interbank lending markets, thereby reducing the overall cost of capital to banks.
Distinguished Guest, Ladies and Gentlemen
Extraordinary times call for extraordinary measures. Responding to the very
difficult economic and financial challenges we face, Bank Indonesia has gone beyond
traditional monetary policy making to develop new policy tools to address the
dysfunctions in the nation's credit markets. Once global credit flows have returned to
normal, fund flows to developing countries will gradually return to normal too.
We have to assure ourselves that we can be among the first to benefit from the global
financial awakening. In my view, the key lies in positioning Indonesia to be considered as
a safe and convenient place to conduct business and investment. We have to affirm
investors that our macro economy is properly managed and sustainable, and that our
financial sector is robust. This is our joint responsibility.
Thank you very much for your kind attention. May you have a fruitful discussion.
Billahi taufiq wal hidayah wassalamu ‘alaikum wa Rahmatullah wa Barakatuh.
Jakarta, 26 February 2008
5