Agus D W Martowardojo: Building resilience, diversifying growth
Keynote address by Mr Agus D W Martowardojo, Governor of Bank Indonesia, at the
Euromoney Indonesia Investment Forum, Jakarta, 22 March 2016.
* * *
Honorable speakers, Distinguished guests; Ladies and Gentlemen,....Good Morning.
1. It has always been a great pleasure to be part of the Euromoney Indonesia
Investment Forum. Let me first thank the organizers for inviting me to this prestigious event.
2. This morning, I would like to share my views, on how we should build resilience and
diversify growth engines, and how Bank Indonesia's role in supporting the Indonesian
economy as we venture ahead in the volatile world.
Ladies and Gentlemen
3. The past few years have brought us many economic surprises and challenges. Even
today the global economy is still surrounded by substantial risks and uncertainties.
4. Concerns and uncertainty about the global outlook have weighed heavily on world
financial markets. Last year, Emerging Market have been particularly hard hit and their
currencies have weakened and sovereign credit spreads have continued to widen.
5. Entering 2016 market developments have taken a further turn for the worse.
Concerns about growth and financial stability in China came back to the fore in early January
2016 that struck global investor risk appetite.
6. Coupled with worries about the broader Emerging Market economic outlook and
ample supplies, these concerns affected heavily on commodity prices, with oil and metal
prices falling to their lowest level in years.
7. Indeed, growth in Emerging Markets - while still accounting for over 70 percent of
global growth - declined for the fifth consecutive year.
8. What may be most disconcerting is that the rise in global risk aversion is leading to a
sharp retrenchment in global capital and trade flows. Last year, for example, Emerging
Markets saw about - $735 billion in net capital outflows, compared with - $111 billion in net
capital outflows in 2014.
9. Heavy capital outflows from emerging markets have fed into falling official reserves,
as some EM central banks have consistently intervened to support their currencies.
10. Global trade flows, meanwhile are being pulled down by weak export and import
growth in large Emerging Markets such as China, Russia, and Brazil, which have been under
considerable pressure.
11. Everywhere, inflation has fallen to historical lows. At the recent G20 meetings in
China there was broad recognition of the risk of a prolonged low global demand, and adverse
feedback loops between the real economy and financial markets may engender the global
economy fall into deflation.
12. The global risks of deflation are clearly much more pronounced than before, whose
vicious and self-reinforcing dynamics―in the form of higher real interest rates, falling nominal
GDP, and rising unemployment―are notoriously difficult to combat once they become
deeprooted.
Ladies and Gentlemen
13. Notwithstanding headwinds from (i) the taper tantrum episode in 2013, (ii) the
economic slowdown in China, (iii) the continued fall in commodity prices, (iv) the
normalization of US interest rate policy, and (v) the increased volatility in global financial
markets, the Indonesian economy has thus far held up well, emerge with its economic
standing intact, standing out among the fastest growing and stable emerging economies.
14. Certainly, this has been made possible owing to mix of prudent and consistence
monetary and fiscal policies, exchange rate flexibility - while managing to enact a
comprehensive set of bold reforms, which mutually reinforce each other to bring in
macroeconomic stability while nurturing stronger growth.
15. Growth has continued at a solid pace and remains among the highest in Emerging
Market. Private consumption remains solid with domestic demand compensating for the
slowdown in the external sector.
16. Inflation is well contained at 3.35 percent (yoy), which is within the target of
4±1 percent for the year. Well-managed inflation expectations, lower exchange rate
passthrough, and a small negative output gap, have all contributed to lowering core inflation.
17. Indonesia is convincingly in an era of structurally lower inflation, in my view. This
was evidently reflected from the trajectory of Consumer Price Inflation (CPI) which have been
converging towards Core Inflation.
18. The stability over growth strategy demonstrated in monetary policy tightening since
mid-2013, fuel subsidy reform, and greater exchange rate flexibility, have helped improve the
external position. In 2015, the current account deficit falling to a healthy level at 2.06 percent
of GDP, from - 3.00 percent of GDP in 2014.
19. Furthermore, international reserves continued to be sufficient at US$105.9 billion as
of end-2015, which is equivalent to 7.45 months of imports and official debt repayments.
Ladies and Gentlemen
20. Going forward, Indonesia's economic outlook remains solid. We are confident that
growth will pick up to the 5.2-5.6 percent range in 2016. Domestic demand would be the
main driver of growth, while exports are expected to remain weak reflecting low commodity
prices.
21. Growth will be led by capital spending of the government in the first half of the year,
and by private investment later in the year conditioned on positive reform momentum. Private
investment is fairly pro-cyclical and should therefore improve as public sector infrastructure
spending accelerates and the overall growth outlook improves, in my view.
22. The current account deficit (CAD) is projected to increase to around -2,5 percent of
GDP in 2016, on the back of a pickup in fixed investment and a further deterioration in
commodity export prices, while the balance of payments (BOP) is projected to return to a
surplus.
23. Inflation in 2016 is expected to stay within the 4±1 percent target, backed by well
managed domestic capacity utilization, anchored inflation expectations, and declining
commodity prices.
Ladies and Gentlemen
24. Indonesia, being a small open economy, cannot escape from greater volatility in the
global economy and financial markets. Therefore, positive outlooks, such as the one I just
described, may change quickly as subject to critical risks tilted to the downside.
25. While global financial markets in recent weeks appear to be coping better, risks and
vulnerabilities could elevate at some time in the future. Monetary policy developments in
advanced economies will continue to shape EM capital flows in important ways, particularly
volatile portfolio flows.
26. The fact that the long-awaited beginning of the Fed's interest rate hiking cycle did
not spark excessive market volatility was encouraging, given the long road of policy
normalization that lies ahead for the Fed. Nonetheless, we have to be mindful with the
unpredicted shifts in investor expectations of Fed tightening speed which again would likely
to spark periods of volatility in coming quarters.
27. Hence, in an unforgiving global environment we need to make ourselves as resilient
as possible to ride the waves, being prepared and well equipped with buffers and policies to
cope with adverse shocks, and require a high degree of vigilance and ingenuity.
28. On domestic front, we should also acknowledges that there remain key challenges,
including (i) low productivity in the agriculture sector, (ii) land acquisition problems for
infrastructure projects, and (iii) bottlenecks at the local government level.
29. The headwinds blowing from abroad and challenges at home calls for a
broadbased policy mix focused on the need to manage short-term vulnerabilities and to boost
potential growth as well as diversify growth engine in the medium-term.
30. In the short term, we face the inescapable task to reduce some vulnerabilities to put
Indonesian economy on a strong footing to deal with some turbulence on the external front
ahead. Countries with large current account and fiscal deficits, high levels of FX corporate
indebtedness, and questionable macro policy frameworks typically come under particular
pressure in the event of global market risk-off.
31. Over the medium term, we need a mix of mutually-reinforcing demand and supply
policies, which both supports growth in the short term and essentially lifts "potential growth"
over the longer term.
32. At the current juncture, both fiscal and monetary policies are sharing burden to lift
aggregate demand. Nonetheless, in tandem with demand-side policies, we need to boost
supply side in order to unlock the long-run potential growth through structural reforms.
Without structural reform long run growth prospects will be inadequate.
33. In this context, a wide ranging reform initiatives taken to address long-standing
infrastructural bottlenecks and improve the business climate are currently seem gaining
traction, with the government continuing to emphasis on a more consistent basis the need to
improve implementation.
34. Structural reforms to close the infrastructure gap, streamline business regulation,
improve the trade and investment regime, enhance the functioning of the labor market, and
foster human resource development, remain critical to strengthen the export base connected
to global values chains, create jobs, and raise growth potential.
35. And, this can benefit greatly from the favorable demographics, abundant natural
resources, and large domestic market. Hereafter, provided that we could unwaveringly
sustain the reforms' momentum, I am convinced that GDP growth will turn up above
6,0 percent in the medium term.
Ladies and Gentlemen
36. I hope we are now in the same page about the need of Indonesia to move forward
with structural reform. This brings me to the final part of my address about Bank Indonesia
commitment to safeguard economic resiliency and sustainable growth path.
37. We believe the relatively tight monetary stance of 2015, which reflected the our
emphasis on stability, allowing exchange rates flexibility, together with modest use of
international reserves to ensure orderly market conditions, has enabled the economy to
weather external turbulence, bring inflation back to within the target, without putting much
risk on growth.
38. Against the background of much lower inflation and a small negative output gap, the
Board Meeting carefully adjusted the degree of policy stance to ensure sufficient support to
domestic demand since December 2015. Indeed, with a more volatile and uncertain external
environment, calibrating monetary policies towards supporting growth have become a
delicate task.
39. Moving forward, priority would continue to be placed on stability, although with policy
calibrated carefully and gradually to support economic growth.
40. We will remain vigilant and stress the importance of monitoring risks to price stability
closely, while stand ready to respond if external pressures resume or inflationary pressures
reemerge. This holds particularly true given the high volatility of food prices as well as
potential pressure on the financial account in an uncertain external environment.
41. To help manage external financial volatility, we will further progress on financial
market deepening as a continued priority, allowing exchange rate volatility as automatic
stabilizer while its extreme movements will be carefully managed through judicious foreign
currency interventions, and preserving the relatively comfortable international reserves as the
first line of defenses.
Ladies and gentlemen,
42. To end my address, allow me to conclude that with a strong buffer, Indonesia has
fared well from external headwinds. However, this does not mean we can be complacent.
43. As the world economy is in transition to a new steady state, we are still facing
greater volatility ahead. Hence, we have to continuously build a robust macroeconomic policy
management -primarily well-tailored, consistence, and prudent monetary and fiscal policy
mix-, which should be underpinned by a well implemented structural reforms.
44. We are convinced that with maintaining reform momentum would shore up public
confidence and create investment-friendly environment. Apart from that, it would allow the
country to diversify economic growth away from its reliance on natural resources, in a better
position to withstand against global shock, and ultimately to sustain its economic growth in
the longer term.
45. We applaud the government bold steps and moving rapidly in implementation of
many of the reforms initiatives. At the same spirit, Bank Indonesia will continue to strengthen
coordination with government to ensure that monetary policy, fiscal policy, and structural
reform mutually support each other, to preserve macroeconomic stability and achieve a
strong and sustainable growth.
46. I hope that this investment forum will also provide us with a clearer understanding
and pave way for effective preparation to meet future challenges as well as to smooth our
journey towards the sustainable growth.
Thank you very much.