agus d w martowardojo : strengthening financial system stability amidst global and domestic challenges keynote speech by mr agus d w martowardojo, governor of bank indonesia, at the discussion and launching of the financial stability study book, jakarta, 8 may 2015. * * * the honorable : former governors of bank indonesia, members of the board of governors of bank indonesia, heads of state ministries and institutions, members of bank indonesia supervisory board, representatives associations, representatives of research institutes, observers, and academicians, heads of national banks, speakers and moderators, distinguished invitees and ladies and gentlemen, of businesses, industrial associations, and banking assalamu ’ alaikum warahmatullahi wabarakatuh, good morning and may god bless us all, 1. first of all, let us praise god the almighty for all blessings so that we are given the opportunity and good health to attend this event. insya allah, we will follow a discussion themed “ strengthening financial system stability amidst global and domestic challenges ” and launching of financial stability study book no. 24, march 2015. 2. this fss book reflects the dynamics in the second semester of 2014 and is a part of bank indonesia ’ s routine publications to meet transparency and accountability of implementation of bank indonesia ’ s duties in macroprudential field. 3. in general, the book ’ s contents are the results of bank indonesia ’ s monitoring and analysis of the development and dynamics covering our financial system. this includes description of assessment of potential risks and financial imbalance in financial institutions, financial markets, financial infrastructures, and corporations as well as households. 4. we expect such monitoring and analysis results may help the community and other stakeholders understand macroprudential policies adopted by bank indonesia to maintain and sustain financial system stability. distinguished ladies and gentlemen, 5. we just left 2014, a year full of challenges for indonesia ’ s economy. many events to tell on how indonesia ’ s economy must face unfavorable global economic dynamics and domestic situations. bis central bankers ’ speeches 6. on the global level, we witness that global economic recovery is ongoing, but at an unexpected and unequal speed. such dynamics transforming into global pressure become more apparent when world ’ s commodity prices keep decreasing due to weak global demand, primarily from china. the emerging markets are then influenced and may potentially suffer from rapid capital reversal, including indonesia. 7. within the country, we also observe equally enormous pressures against the economy. domestic

our policy effectiveness will be confined by the pace of recovery and the exit strategy in advance economies, mainly in the us. in the wake of us dollar weakening, letting the domestic currency to appreciate implies inflating the bubbles. on the other side, sterilizing the appreciation to offset the spillovers will also mean putting additional liquidity flush to the financial market, and thus keeping short - term rates lower than is desirable. yet, tightening monetary policy will also be a hard choice since it will elevate the appreciation trend as well as complicate central bank communication on the back of recovery. directly limit capital inflows through regulatory approach is also a hard option. a consensus view on this is that it will only be effective as long as there is a policy uniformity across countries, which is in my view far from doable, since countries with closely aligned agendas – i. e. supporting the recovery – are unable or unwilling to take bold steps in terms of coordinating exchange rate policies. that is primarily because the overriding objective of nearly all parties involved is to maintain some level of exchange rate competitiveness, and that is simply not possible. the same concern was also brought forward in the recent g20 meeting. the challenges for emeap amidst of all of the complexities around the exit strategy issue we face, we still have to end up with best options. simply to say, in the current state of the global financial landscape, it is a big challenge for central banks, mainly in emerging economies, to shape their policies. we cannot put the exit policy merely as a long run issue. rather, current development on this leads me to believe that we have already dealt with its implication since it shapes market perception. therefore, on the absence of ideal policy, it is always relevant for us to find a better escape clause. and on this respect, the way we communicate to the market plays a big role in shaping the right incentives to them while maintaining the pace of the recovery. as a good measure to risk awareness, it is also beneficial for us to always consider the probability of odds scenario to happen. in this respect, let me suggest that regional coordination and cooperation is a key word. while there is much rhetoric on the need for a coordinated exit strategy, such an outcome will be challenging to be delivered given the different recovery rates both in asia particularly emeap countries, and the rest of the world. in the mean time, emeap countries should get ready to receive