GOVERNOR'S ADDRESS

OPTIMIZING POTENTIAL,
STRENGTHENING RESILIENCE

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BANK INDONESIA'S
ANNUAL MEETING

JAKARTA, NOVEMBER 22"4 2016


BANK SENTRAL REPUBLIK INDONESIA,

GOVERNOR'S ADDRESS

OPTIMIZING POTENTIAL,
STRENGTHENING RESILIENCE

BANK INDONESIA'S
ANNUAL MEETING

2OIO

JAKARTA, NOVEMBER 22"¢ 2016

Table of Contents

Greetings...

Preface.

Developments in Global Economies.

Developments in Domestic ECONOMY......csessceesseseseeseesseeeseee

Economic Policy Challenges and Direction...

Economic Potential.

Basic Function and Principle of Policy.

Bank Indonesia's Policy Direction.

Policy Coordination......

Bank Indonesia's Internal Strengthening...............

Economic Prospect...

CONCLUSION... eee


Optimizing Potential,
Strengthening Resilience

Agus D.W. Martowardojo
Governor of Bank Indonesia

Governor's Address
Bank Indonesia Annual Meeting of 2016
Jakarta, 22" November 2016

His Excellency,
+ The President of the Republic of Indonesia, Head of State: Mr. Joko Widodo
Distinguished Guests,

+ Leaders of State Institutions: PR, DPR, DPD, BPK, the Supreme Court,
Constitutional Court, and Judicial Commission

+ Cabinet Ministers and Head of Government Agencies

+ Commissioner of the National Police, Attorney General, and Chairman of KPK

+ Chairman, Deputy Chairman and Board of Commissioners of OJK

+ Chairman and Board of Commissioners of LPS

+ Chairman, Deputy Chairman and Members of Commission XI of DPR

+ Provincial Governors from throughout Indonesia

+ Former Governors of Bank Indonesia

+ Members of the Board of Governors of Bank Indonesia

+ Leaders of the Banking Industry and Non-Bank Corporations

+ Academicians, Economists, and Leaders of National Media

+ Ladies and Gentlemen


Optimizing Potential, Strengthening R
Bank Indonesia's Annual Meeting 2

Assalamualaikum Wr. Wb.,
Greetings to alll,

Om Swastiastu,

Namo Buddhaya,

Praise be to Allah SWT, God the Almighty, as

it is upon His blessings that we may all

gather here today, ina good health, at the "2016 Annual Meeting of Bank Indonesia".

lam grateful and deeply honoured by the presence of His Excellency the President,

and all other distinguished guests, here at t!

he the "2016 Annual Meeting of Bank

Indonesia". The presence of His Excellency the President and of distinguished

guests testify to our commitment to crea

te synergy, to develop the national

economy, and to strive towards equitable welfare for for the nation.

This commitment will hopefully encourage t!
the resilience of our economy, and to furthe
and competitive national economy.

This evening, allow me to present the Bank

he optimization of the potentials and
r promote a more efficient, productive

ndonesia's perspectives on the latest

economic condition and the prospects, under the theme "Optimizing Potential,

Strengthening Resilience". In our view, the
unfavourable global economic development.
domestic economy.

theme is relevant as response to the
, and the positive achievements of the


Developments in Global Economies

Developments in Global Economies

Our latest assessment concludes that
the the global economy continues
to weaken, which is followed by the
continuation of the low commodity
prices, and the declining of capital flows
to emerging countries. The momentum
for global economic recovery that we
initially anticipated would begin this
year has yet to materialize and is visibly
weakening in a number of areas

We estimate global economic growth
in 2016 to be at around 3.0%, which is
lower than in 2015 of 3.2% (Figure 1). In
the developed countries, the United
States (US), which was_ previously
expected to be the engine of global
economic growth, has yet to be solid
in its development up to the First Half
of 2016. Recovery in Europe and Japan
has also yet to strengthen. The Brexit
Referendum that led the UK out of the

Figure 1. World GDP and Global Commodity Prices
% yoy
6

- World GDP -= Oil & Gas and Non-Oil & Gas Commodity Prices
(Right Scale)

European economic zone even has the
potential to reduce Europe's economic
prospects in the medium term.

Developing countries also need to
continue to be monitored. China, as
one of Indonesia's export destinations,
continues to consolidate and
rebalance its economy. We estimate
that China's economic growth in 2016
will likely continue to be restrained
despite improvements and a 6.6%
growth, but this achievement is lower
compared to growth achieved in
previous years of above 7% (Figure 2)

Likewise for India's economic growth,
which in previous periods was
fairly impressive, seemed to lose its
momentum in the recent periods.
Meanwhile, Brazil and Russia's
performance also needs to continue
to be monitored despite the fact that
the pressure of a decline has begun to
recede.

Figure 2. China's Economic Growth
% Contribution

apace

© Primary Industry ® Secondary Indu:

Source: National Bureau of Stat


Optimizing Potential, Strengthening Resilience
Bank Indonesia's Annual Meeting 2

Figure 3. Capital Flow To Emerging Markets

USD Billion

Global financial crisis in 2008 i
outflo

ational Finance (IF)

As in previous years, the global
economy, which has yet to strengthen,
had an impact on the continuation
of low global commodity prices. We
estimate Indonesia's non-oil & gas
export commodity prices in 2016
will slighty be higher the 2015 levels.
Meanwhile, world oil prices continue
to follow a declining trend brought
about by the increasing oil supply from
OPEC and the US

Positive expectations has begun to
be seen in coal and palm oil (CPO),
which in recent months has begun
to increase. However, this price
increase was largely driven by reduced
production as opposed to increased
demand.

The global economy, which has not

strengthened, and the anticipation of
the Fed Fund Rate's hike once again

Figure 4. Emerging Market Potential Output

= Total Factor
3 Productivity
cTFP)

= Labor
1 - capital

-- Output

2 2013-14

Source: World Economic Outlook Database

led to lingering high uncertainty in the
global financial markets. Market players
continue to focus on the uncertainty of
the anticipated Fed Fund Rate's hike,
which up to November 2016 continues
to be maintained at a level of 0.25-
0.50%. This is in addition to the
impact brought about by geopolitical
uncertainties that includes the US
presidential elections. These various
uncertainties subsequently led to the
decline in capital flow to the emerging
markets and followed by global fund
outflow volatility. (Figure 3).

In our view, these various global
economic changes in 2016 reinforce
indications of structural problems in
the global economy. Problems that
in our view contributed to decline in
economic productivity in numerous
countries and subsequently reduced
the global economy's potential output,


Developments in Global Economies

Figure 5. GDP vs World Trade Volume
% yoy

20

Figure 6. Projected World GDP
% yoy

50)

2000 2002 2004 200 2010 -2012--«204-«2016

- World Gop _

World Trade Volume

Developments in Global Economies
including those of the emerging markets
(Figure 4).

One structural problem of the global
economy that we need to highlight
and affects emerging markets such as
Indonesia, is the diminishing impacts
of the global economic growth on
the world trade. Data shows that the
relationship between world GDP with
the volume of world trade is not as
strong as it was in previous years (Figure
5). World economic growth elasticity
towards world trade that since early
2000 was within the range of around 1.3
has weakened and in the last five years
elasticity that occured was only around
0.9

Various studies have argued that there
are a number of factors that led to
this condition. One of these states

2010 20H "2012 "2013 "2014 "2015

- Actual - = WEO April 2015 - - WEO October 2015

WEO April 2016

= WEO October 2016

that this phenomenon was caused by
the decline in global investment and
increased global trade protectionist
issues. Moreover, declining Global
Value Chain (GVO), which among
others was brought on by a maturing
process, mastering technology and
reshoring process, also further receded
the relationship between the both
elements

Structural global issues subsequently
needs to be further monitored due to its
implication on the completion process,
which certainly cannot be carried
out within the short-term. In other
words, we will continue to face global
economic downturn within a longer
timeframe, which may risk spreading to
the emerging markets, including Asia.
The global economic recovery up to
2020 is expected to continue to remain
below 4% (Figure 6).

najor countries, such as China
Meanwhile, the reshoring
e US and declining

US, is a result of al mastery that allows
mainly occuring in the US is driven by the impact of
within the US.


Optimizing Potential, Strengthening Resilience
Bank Indonesia's Annual Meeting 2

Figure 7. Economic Growth Contribution
% yoy
8

ao on I Sow.

2016

Demand (Excludes Inventory) == Net Exports

tics Indonesia

Developments in Domestic Economy

As an open economy, Indonesia's
economy is not immune from
the unfavorable global condition.
However, our national economy has
the flexibility to adjust and respond to
the global economic risks

ndonesia's economy continues
to grow 5.02% (yoy) up to the Q3
2016, which represents an increase
compared to that achieved in 2015
(Figure 7). Bank Indonesia estimates
ndonesia's economic growth in 2016
to be at around 5%. This amount is
much lower than our initial estimates
submitted at the end of 2015 of
around 5.2%-5.6% brought about by
the the global economy's impact that
was actually much lower than initially
projected.

However, this amountis still considered
to be impressive in comparison with
the other countries that continued to
struggle to boost its economic growth
(Figure 8).

Figure 8. Economic Growth of Peer Countries

'yoy

hil hu

2015 22016

= Brazil em India =m Indonesia" me Malaysia® mp Russia
South Africa mm Thailand @-@ Turkey «= Vietnam'

Data shows that the flexibility of
Indonesia's economy is mainly driven
by domestic demand. Domestic
demand as of Q3 2016 continues
to follow an upward trend thereby
minimizing the impact of a decline in
the external sector's performance
Moreover, non-food household
consumption has already registered
an upward trend since 2011. In line with
this, the role of Rupiah lending as a
source of domestic financing is also in
an upward trend.

In regional terms, a number of
provinces have registered growth
of above 6%, such as the regions of
Sulawesi, Bali, and Nusa Tenggara
(Figure 11). This condition is driven by
the positive impact of the economic
transition taking hold in these regions,
from a previous dependence on
raw commodities to value-added
commodities through the construction
of smelters and industrialization of
the agricultural sector. Despite this,
a number of provinces Sumatra,


opments in Domestic Economy

Kalimantan and Papua continues
to grow below 4% thereby requiring
continued attention.

Inflation also continues to be maintained
within a low and stable level. We project
inflation for 2016 will be in the target
range of 3.0-3.2%, which is lower than
that achieved in 2015 of 3.4% (Figure
9). This low inflation is also attributed
to the consistency of monetary policy
and coordination with the Government
to control prices of volatile foods
and strategic commodities. In spatial
terms, inflation is also low with Java, a
number of areas in Eastern Indonesia
and Lampung registering inflation of
below 3% (Figure 12). Meanwhile, high
inflationary pressure mainly occured in
North Sumatra and West Sumatra that
registered rates of above 5%.

Two aspects at the very least drove the
national economy's flexibility in response
to the global economic downturn. The
first factor deals with consistency in
maintaining economic stability. The
outcome of this consistency is reflected

Figure 9. Inflation and Its Components

% yoy

2014

2008
2010
2012

2016"

ME CPI Inflation (Right Scale) «mm Core
== Government Administered Prices amp Volatile Food

in inflation that continues to be low and
stable (Figure 11), the Rupiah's exchange
rate that continues to be under control,
the current account deficit (Figure 10)
and 2016 budget deficit that remains
to be within a healthy level, as well
as the banking sector's resilience and
a strong financial system. Apart from
these consistency factors, economic
stability also attributed to a stable
political situation and conducive
domestic environment supported by
the parliaments and national security
institutions.

The preserved economic _ stability
and the controlled economic _ risks
subsequently provided the basis for the
businesses to move freely to respond
the existing conditions.

The second factor deals with the
impact of the Government and Bank
Indonesia's countercyclical policies.
The sizeable fiscal stimulus, including
infrastructure spending, supported

sectors that are directly related to the
construction

government, such as

Figure 10. Current Account Balance

% PDB

2000 2002 2004 2006 2008 2010 -2012«2014~-«2016

nk Indonesia


Figure 11.2016 Regional Economic Growth

(Cumulative up to Q3 2016)

North

Sumatera 4a

51

West
Sumatera
5.4

Belitung
Islands
36,
Smet @

Bengkulu
5.2

gPDRB < 0,0%
0,0% < gPDRB = 4,0%

4,0% < gPDRB =< 6,0%

6,0% < gPDRB < 8,0%
gPDRB > 8,0%

4 Riau islands

Kalimantan
-0.8
West
Kalimantan
Bangka 5.4 Central

Kalimantan

Central Java

DI. Yogyakarta
5.0

West Nusa
Tenggara

75

Source: BPS-Statistics Indonesia, processed data

investment. Government's deregulation
and debureaucratization through a
number of policy packages as part of the
structural reform efforts, also positively
contributed to enhance _ business
confidence in Indonesia.

The relaxation of Bank Indonesia's
monetary policy has improved the
domestic demand. In the last year,
Bank Indonesia has reduced its
benchmark rate by up to 150 bps
and Minimum Reserve Requirement
(GWM) of up to 150 bps. The monetary
policy's relaxation is also applied in


opments in Domestic Economy

North Sulawesi
6.0

Gorontalo
6.4

oe I =.
entra T
Sulawesi

12.0
West mn

Sulawesi

57 Southeast

Sulawesi
South 61
Sulawesi
74

mee ¥ 1"
East Nusa
& Tenggara
5.2

synergy with macro-prudential policy As a note, we have reformulated
through relaxation of Loan To Value the monetary policy's operational
(LTV) for property loan and Financing framework by replacing interest rate
To Value (FTV) for property financing, policy from the BI Rate to the BI 7-day
as well as increasing the GWM-Loan Reverse Repo Rate on 19 August
To Funding Ratio (LFR) limit from a 2016. This is carried out to strengthen
previous of 78% to 80%. monetary policy transmission

effectiveness and promote deepening


Figure 12. 2016 Regional Inflation (up to October 2016)

a
3.9

West
Sumatra
61

I

South
Sumatra
Bengkulu 42

57
Inf = 5.0%

4.0% < Inf < 5.0% Lampung

3.0% < Inf < 4.0%

Inf < 3.0%

Source: BPS-Statistics Indonesia, processed data

of the financial markets. We are
grateful that through the support,
coordination, and trust of various
parties this policy can be effectively
implemented. BI 7-day Reverse Repo
Rate currently is within the 4.75% level,
which in our view is consistent with the

Riau Islands

Kalimantan
3.1

West
Kalimantan
3.6

Bangka
Belitung
Islands

Central
Kalimantan

DI. Yogyakarta

27
West Nusa

Tenggara
29

achivement of the inflation target and
macroeconomic stability.

Amidst the global economic situation
that has yet to strengthen, the
domestic economy's flexibility has
been duly recognized by a number


opments in Domestic Economy

North Sulawesi
0.78

North
Maluku,
2.9

Gorontalo
23

Ta
Central ain
Sulawesi

_ ere

West e

Sulawesi
31
@ Op southeast
Sulawesi
South 4
Sulawesi
3.2

ms Y=
East Nusa
BQ Tenggara
29

of global ratings agencies. Fitch ability to grow solidly, backed by the

Ratings, Moody's Investors Service, robust domestic demand. In terms of
Japan Credit Agency, and Rating investment climate, we appreciate the
and Investment Information Inc government's efforts in promoting the
maintained the Indonesia's Investment Indonesia's Ease of Doing Business

Grade Rating in 2016 due to its ranking from 106 to 91.


Optimizing Potential, Strengthening Resilience
Bank Indonesia's Annual Meeting 2

Economic Policy Challenges and
Direction

The prospects for the - global
economy's conditions that have
yet to recover and some risks in the
commodity and the financial markets,
will continue to pose a challenge to our
economy going forward. Challenges
that we must continue to strive to find
comprehensive solutions to mitigate
the impact of global economic
conditions on the domestic economy.

We view global challenges as one
that increasingly needs to be closely
monitored so as to ascertain its impact
on the national economy as we
continue to face various short-term
and domestic structural challenges
that have yet to be resolved and may
potentially slow the economic recovery
process.

Short-term challenges derive from the

effects of the fiscal stimulus that has yet
to attract private investment, particularly

Figure 13. Time Deposit and Lending Rates

for non-construction investments. Non-
construction investment growth up to
Q3 2016 remains low. Our assessment
indicates that this condition is related
with business consolidation at the
private sector by enhancing efficiency,
both in production activities as well as
in managing loans

The monetary policy easing's effects
on the banking sector has not been
fairly transmitted. The effects of the
decline in policy rates on lending rates
was registered to be smaller than the
decline in deposit rates. The decline in
lending rates from the beginning of the
year up to September 2016 has only
reached 60 bps, which is lower than
the decline in deposit rates that has
already reached 108 bps (Figure 13)

The ongoing consolidation by the
private sector and limited decline in
the lending rate subsequently affected
loan growth performance that was
not as strong as expected before. The

Figure 14. Credit Growth and NPL
wbyoy %,

2013 2014 2015 2016"

2013 2014 2 2016
- NPL Right Scale)


Economic Policy Challenges and Direction

banking sector's loan growth up to Q3
2016 only arrived at 6.5% (yoy), which is
substantially lower than that achieved
in 2015 of 10% (yoy). Low credit growth
was also influenced by bank's tighter
credit policy in response to increasing
NonPerforming Loan (NPL) (Figure 14)

In regional terms, the Kalimantan
region registered the lowest loan
growth compared to other regions
and was followed by the highest
NPL (Figure 15). This was caused by
the performance of the mining and
manufacturing sector within this region
that has yet to recover. Slow loan
growth in other regions were caused
by, among others, loan to the trading
sector.

Meanwhile, domestic structural
challenges were closely linked to a
number of aspects in the real sector,
particularly in terms of supply, and in
the financial sector. In terms of the real
sector, we registered challenges linked

Figure 15. Regional Credit Growth and NPL

Credit Growth (% yoy)

with export product composition
that are largely dependent on natural
resource products, market structure
and trade system that requires to
be more efficient, and the role of the
manufacturing industry that continues
to decline. In terms of the financial
sector, the challenges continues
to come from unvaried domestic
financing structure, unbalanced bank's
funding structure, as well as shallow
financial market

Amidst looming uncertainty that affects
global conditions, the presence of
these cyclical and structural challenges
requires us to constantly strive to seek
strategies that simultaneously can
optimize existing domestic potential
while reducing various challenges
that continues to surface. In this
regard, therefore it becomes relevant
that going forward our policy will be
aimed at optimizing various domestic
potential to reinforce the national
economy's resilience

NPL (%)
6

Sumatra

Source: Bank Indonesia

2014 2015 2016

Sulampua - Balinusra


Optimizing Potential, Strengthening Resilience
Bank Indonesia's Annual Meeting 2

The strengthening and optimalization
of the domestic potential does
not mean that we retreat from the
global constellation. This means that
we need to improve and prepare
ourselves by utilizing the existing
domestic potential, thereby serving as
a firm basis to leverage the domestic
economy once the global economy
recovers

In terms of the domestic sector, we
need to continue to build a strong
national industry so that once the
global economy recovers we will get
the benefit for our economy. In terms
of the external sector, we need to
prepare some leading sectors that
are competitive in the global market.
Competitiveness that is backed by
productivity and not merely in terms of
nominal factors such as the exchange
rate.

Strengthening and optimizing this
domestic potential is subsequently
directed towards reinforcing the
national economy's resilience. This
potential includes the huge potential
sources of domestic financing, as
reflected in the results of the Tax
Amnesty program

Optimizing financing sources can
strengthen the economy's resilience
from the aspect of fiscal sustainability,
corporate sector's resilience, and

external sector's resilience in the form
of declining dependence on foreign
debt. We believe the economy's
resilience will be strengthened
with effective implementation of
deregulation policies that can resolve
many structural issues.

Economic Potential

We registered that there are at least 3
(three) economic potential that needs
to be optimized to support Indonesia's
economic resilience. The first potential
is the high level of trust and strong
confidence of the economic agents
to the government and policy makers
We believe that the results of the Tax
Amnesty program is unlikely to be
accomplished without the high level
of trust on the government's policy
direction and Indonesia's economic
prospects.

Macroeconomic policy management
discipline, including fiscal policy
management with a realistic target and
medium to long-term vision, as well
as monetary policy that is committed
to maintain macroeconomic stability
in our view serves as one of the main
elements for trust and confidence of
these economic agents. In addition,
the confidence of the economic agents
is also driven by the implementation
of the government's structural reform
policies.


Economic Potential

The second potential that has surfaced
and deserves special note in 2016 is
the emergence of ample sources of
economic financing. We extend our
appreciation to the Government for
its success to unravel this potential
through the Tax Amnesty program. Up
to 14 November 2016, this program has
successfully collected tax payments
amounting to Rp94.8 trillion, with
repatriated funds amounting to
Rp142.7 trillion and declared funds of
Rp3,773.2 trillion. The accomplishment
deserves to be appreciated since the
Tax Amnesty program is the most
succesfull program in the world.

We view that this potential can serve
as the solid momentum for the
Government to accelerate tax reforms
in Indonesia. The broadened tax base
is expected to be followed by tax
intensification in order to boost the role
of tax as the source of development
financing

In Indonesia, the role of tax in the
development financing only reached
1% of GDP in 2015, which is lower
compared to that achieved by a
number of countries in the region
such as Singapore and Malaysia that
achieved around 14% of GDP. We are

confident that the tax intensification
through the benefit of a wider tax
basis, will serve as a solid ground for
the efforts to widen fiscal space to
support economic growth, without
jeopardizing the sustainability of its
prospects.

The third potential is digital technology
that has rapidly developed. In 2016, we
witnessed that the sharing economy
and digital economy has_ sharply
increased as reflected in Fintech and
e-commerce activities. This positive
development will, if it is used properly,
enhance efficiency and support
domestic economic activities.

These three potentials that emerge in
2016 will, if it is effectively and optimally
empowered, strengthen and boost the
benefits from the existing domestic
resource potential, specifically human
and natural resources

The sizeable population represents
a huge market potential to support
domestic demand through household
consumption. Moreover, this huge
market potential will readily serve to
be the driver for more sizeable added
value if it is subsequently followed by
an increase in domestic production
activities.


Optimizing Potential, Strengthening Resilience
Bank Indonesia's Annual Meeting 2

In this context, the demographic
bonus that is represented by a
larger number of productive-aged
population compared to senior
citizens and children will serve as
potential from the labor perspective
and a large consumer base in line
with the growth of the middle class in
Indonesia. This demographic bonus
will, if adequately managed, provide
opportunities for Indonesia to become
more prosperous.

However, it should be noted that the
demographic bonus which will reach
its peak in the next fifteen years will
lose its momentum after those period,
which is in line with the increasing
dependency level of the population
(Figure 16). As a consequence, we are
raving against the time in utilizing each
aspect of the potential

Figure 16. Dependency Ratio

%
100

= Old-Age = Child =Total

We also. specifically noted the
importance of women's participation
in economic development. The
population of women in the world
today comprise of more than a half
of the world's population, but their
contribution to the economy is still far
below their potential. Many studies
have shown that the performance
of the economy will increase when
women's potential in the labor market
is properly utilized.

Efforts to increase women's
participation in the economy also
serves as a challenge for Indonesia
Data show that female labor
participation compared to male labor
in 2016 declined and was lower than in
neighboring countries (Chart 17). This is
a challenging figure since the potential
of Indonesian women to contributing
in the economy is quite substantial,
especially in reviving the real sector.

Figure 17. Ratio of Female to Male Labor Force

Ratio to Male

100

2011 2012 2013

2015 2016

Indonesia - Thailand - Malay Phillipines - Vietnam


sic Function and Principle of Policy

Diagram 1. Vicious Circle

Weakened
GDP Growth

Decline in
Credit Growth

Increased
NPL

The World Bank's Survey (2016) reveals
that the ratio of female business
ownership in Indonesia is higher
compared to the same ratio at a global
level, particularly for micro and small
businesses. The survey also found
that most of the bank and non-bank
financial institutions perceives female
owned businesses as profitable (Graph

Figure 18. Perception of Female Clients in Indonesia Depositors

%

Non-Bank

Increased

Capital
Outflow
Rupiah's
Depreciation
Declining Corporate
Performance

_

18). However, financing for micro and
small businesses operated by women
is still limited.

Basic Function and Principle of Policy

Going forward, we need to continue
to promote economic growth so as to
avoid the emergence of vicious circle
risk. The economic downturn poses
a risk that may affect corporate and
financial sector performance, thereby
requiring efforts to strengthen the
economic resilience (Diagram 1).

Optimization of various domestic
potential to promote economic
resilience should refer to to the three
basic function of public policy, namely
(l) stabilization function, (II) allocation
function, (Ill) distribution function.
These three functions needs to be
supported by policy makers through
strengthening the regulations.


Optimizing Potential, Strengthening Resilience
Bank Indonesia's Annual Meeting 2

Within this context, various policies that
are aimed at resource allocation can
be utilized as instrument of economic
stabilization through countercyclical
policies and also as a tool to promote
equitable distribution of economic
development outcomes.

We support the government's efforts
to maintain a balance between
strengthening the role of government
spending as a countercyclical policy
instrument with efforts to maintain
fiscal sustainability. In this context,
we view that efforts to increase the
composition of capital expenditure,
particularly infrastructure projects,
should be maintained. This step is
needed to preserve economic stability,
while simultaneously ensuring the
resource allocation efficiency.

Inthe short term, infrastructure projects
will boost the purchasing power of the
society, including the bottom layer
group, as the projects can absorb
sizeable amounts of labor. In line with
this, vocational education to address
labor demands for infrastructure
projects as well as industry, also needs

to be reinforced. In the medium to long
term, we believe that the emphasis on
infrastructure spending will positively
improve the economy's efficiency and
productivity.

In line with the spirit to maintain
stability and promote efficient resource
allocation, the spending aiming to
strengthen the social safety net policy
through the fulfillment of basic needs
in health and education also needs
to continue. This policy will sustain
the purchasing power of middle and
lower layers of society. In line with
this, we believe that strengthening the
institutions that are responsible for the
implementation of the social safety
net program will support government
efforts to provide social protection.

The various steps mentioned above
will lead to improvements if it is also
coupled with the policy aiming to
promote distribution to reduce income
gap and expand labor absorption
Recently, the Gini Ratio disparity
indicator has already shown a sloping
trend in recent years thereby posing a
challenge for us to reduce it to a lower
level (Figure 19)


sic Function and Principle of Policy

In addition to the high level of disparity,
the absorption of economic growth on
the work force is still low. Data shows
that the absorption of the economy
on the work force is declining (Figure
18). In this regard, structural reforms,
particularly to address economic
productivity, has become vital to
elevate the economy to a higher level
which in turn will absorb more work
force.

Inline with efforts to promote equitable
distribution of economic development
outcomes, Bank Indonesia has
welcomed the Government's initiative
to explore the eminent sectors. The
diversification of source of economic
growth, both in sectoral as well as
spatial terms, will create a buffer for the
economy. On spatial terms, regional
development needs to be harmonized
with the characteristic of each region
considering that the region may have
diverse potential (Diagram 2)

Figure 19. Gini Ratio
Rasio
0.45
0.43

oat

2008 2010 202

On a sectoral basis, the promoted
leading sector is the maritime
considering the fact that Indonesia
is the largest archipelago country
in the world. Policy direction in this
sector indeed represents a challenge
since the contribution of the non oil
& gas maritime subsector's remains
insignificant compared to other island
nations (Figure 21)

Current account, which in recent
years registered a deficit, was also
contributed by services account
deficit, particularly derived from
maritime transportation services
(Figure 22). Once drawn _ further,
various factors that led to this deficit
can be to two sizeable parts, namely
port infrastructure support and ship
industry development that has yet to
strengthen.

Figure 20. Labor Force Participation

Thousands of Laborers (Labor Force Participation per 1% GDP)

2010-2012

average

2013-2016
average


Optimizing Potential, Strengthening Resilience
Bank Indonesia's Annual Meeting 2016

Diagram 2. Regional Potential

SUMATRA

+ Development of maritime and shipping industry

+ Optimize capability and plantation industry processing
(palm oil, rubber, coffee)

+ Strengthening tin, coal, and petroleum industries

+ Develop potential for the biomass industry

JAVA

+ Enhance competitiveness of the manufacturing
industry (automotive, textile, and textile product,
socks, food-beverage, chemical, agroindustry,
paper)

+ Development of the creative and handicrafts
industry, as well as enhance MSME competitiveness

+ Development of big cities towards smart city

Notes:

Coffee or Cocoa Petroleum or

Plantation Natural Gas
Palm Natural and
Oll Processed

Rubber

KALI