Assalamu alaikumwr. Wb, Very good morning to all of you, Honourable speakers, Distinguished Guests, Ladies and Gentlemen,

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1 Opening Remarks Dr. Hartadi A. Sarwono, Deputy Governor of Bank Indonesia The 9 th Bank Indonesia Annual International Seminar Nusa Dua-Bali, December 9 th, 2011 Assalamu alaikumwr. Wb, Very good morning to all of you, Honourable speakers, Distinguished Guests, Ladies and Gentlemen, 1. I am honoured to be here today, having the opportunity in welcoming you, to the 9 th Bank Indonesia annual international seminar. I would like to express our appreciation for accepting our invitation, even during your busy schedules, you are able to come and share your expertise as well as your experiences pertinent to policies issues we are facing nowadays. 2. This year, we are pleased to conduct a seminar entitled The Intensifying Global Financial Turmoil: How Should Emerging Economies Respond?. A very timely topic, taking into account the uncertainty in the current global developments. Ladies and Gentlemen, 3. I believe we all agree that nowadays emerging countries are paying much attention to the growing uncertainty in the Euro zone accompanied by financial market disruption and potential global economic downturn. In this opportunity, I would like to introduce my friends Mahmood Pradhan from IMF come down here from Washington DC. He will update you on how IMF sees the most recent challenges on global economic outlook. In IMF office, he is now in charge in on Euro Zone. Let us congratulate him to his new appointment.

2 4. We are unsure how long the crisis in Europe triggered by sovereign debt crisis and unfolding banking crisis in European countries, as well as the slowing recovery in the US will persist. Uncertainty remains widespread although some policies have been introduced. It seems that recovery does take time. Lessons learned from the Asian Crisis 1997/1998 taught us that there are no such instant solutions to return to a sustainable track. 5. Nonetheless, as we all aware, some uncertainties remain before the policies become fully effective. Latest development indicates that the effect of uncertainty is quickly spreading out through the financial market channel, and prompting capital reversal from emerging economies. This has resulted in volatility of emerging economies currencies, as well as sluggish performance on bond and stock markets. 6. The impact through several other channels also requires very close monitoring. The credit channel need attention as it relates to the availability of credit line to banking and private sectors in emerging countries. Awareness is also needed on the trade channel. Slowing down economic growth in European countries and the US will undermine exports and eventually economic growth in emerging countries. Exports from developing countries, particularly commodity exporter countries, will continue to slide in the event of a correction to commodity prices. However, on a brighter note, a commodity price correction due to weak global demand will somewhat ease global inflationary pressures. 7. The prevalence of uncertainties in the global economy indeed poses a big challenge to policy makers in emerging countries, including Indonesia. We should provide a rigorous policy response to tackle the hurdles. To this end, I am of the view that the prevailing policy strategy should be more prudently crafted in order to mitigate the risk. The implementation of monetary and countercyclical macro-prudential policy mix is necessary in managing the economy in the case of global economy downturn and destabilizing financial

3 market. We will explore many policy options and learn from each other during today seminar. Ladies and Gentlemen, 8. Please allow me to briefly share with you Indonesia s recent economic development and policies in dealing with the recent uncertainties. 9. Broadly speaking, we are happy to say that Indonesia s economy remains resilient to confront with current heightening global uncertainty. The economy still charted a strong growth of 6.5% (yoy) in Q3-2011, supported by a more balanced source of growth through continued strength of private consumption and improved investment activities. Exports remain strong to contribute the economic growth. The robust economic growth indicates that the impact of slowing down global economy on domestic demand remain limited. We expect favourable development will persist for the rest of the year to promote economic expansion around 6.5% for 2011, and continue to chart strong growth for 2012 around 6.3%-6.7%. 10. It is equally important to note that the robust economic growth was also accompanied by declining trend of inflation, in line with declining global commodity prices, adequate supply and lower inflation expectation. Recently, inflation continued to fall to around 4.15% (yoy) in November We expect inflation towards the end of 2011 to remain low, reaching slightly below 4%, down from around 7% last year. For 2012, we expect inflation to stay under control in the range of inflation target 4.5%+1%. 11. Banking industry remains sound and well capitalized with improving banking intermediation. Capital adequacy ratio (CAR) is 17%, well above the 8% minimum level. Gross non-performing loan (NPL) is below 5%. We believe that te impact of the European crisis on the banking sector remains small, due to

4 the fact of the limited direct exposure of Indonesia s banks to the US and Europe. Ladies and Gentlemen, 12. As we have noticed, the escalation of crisis in Euro area, particularly in the second half of 2011, has triggered larger volatility in the financial market. In this regard, Bank Indonesia recently has taken decisive actions to maintain the stability in financial market. A twin intervention strategy in the FX market and government bond market simultaneously has been activated. 13. In the foreign exchange market, Bank Indonesia provides foreign exchange liquidity to the market in order to mitigate excessive rupiah volatility that may hamper currency stability. With this strategy, Rupiah, while experiencing some depreciation, remained manageable and moved in line with other regional currencies. 14. On the government bond market, central bank used some of the rupiah absorbed from the FX market to purchase bonds in the secondary market. Intervention strategy in the bond market stabilized government price from further drop. The yield of government bonds, as represented by 10-year bonds, has already returned to a reasonable level of 6.3%, after rising to around 8% in September BI s strategy in the bond market, besides having positive impact in smoothing government bond market volatility, also buttressed BI s policy to accumulate government bond to be used as a monetary instrument in the open market operations. Currently, we have been very active in utilizing government bond as our reverse repo instrument in day to day open market operation.

5 16. Furthermore, over the last three monetary policy board meetings, Bank Indonesia has cut its policy rate (known as BI Rate) by 75 bps from 6.75% to 6.00%. The decision to reduce BI Rate was taken in line with the downward trend in inflationary pressures and also as part of our effort to narrow the interest rate term structure. In addition, we expect this decision could also alleviate the impact of deteriorating global economic outlook on our domestic economic activity. We also believe that lower interest rates coupled with the possible upgrade of our credit rating to investment grade will also boost the quality of capital inflows to Indonesia, hence becoming more productive and longer term. 17. Looking ahead, Bank Indonesia will remain vigilant of uncertainty in the global economy. In this regard, we are committed to maintain growth momentum in the face of down side risks of global economic slowdown, contain inflationary pressures, and endeavour to enhance the resilience of financial market in the face of capital reversals. 18. Bank Indonesia will take decisive actions and continue to stand ready to provide liquidity to the financial market as required. We will also consistently make adjustments to its monetary policy stance in order to maintain macroeconomic stability and mitigate a potential decline in domestic economy, without jeopardizing the overriding priority of maintaining inflation within its target corridor, namely 4.5%±1% in Distinguished Guests, Ladies and Gentlemen, 19. Surely, there will be a lot of works that needs to be done. However, I am cautiously optimistic for the prospects and the role of emerging countries amid this period of global shocks. My optimism also extends to this seminar, which will produce plenty of fresh ideas regarding appropriate policy responses.

6 20. Before concluding my remarks, I would like once again to extend my sincere gratitude to all distinguished speakers who have dedicated their valuable time with us today, and the audience for coming and joining the discussions. 21. For that reason, without further ado, let us now proceed with the conference. I wish you all a pleasant and fruitful discussion. I thank you Wassalamu alaikumwr. Wb Dr. Hartadi A. Sarwono