Bismillahirrahmanirrahim, Assalamu alaikum warahmatullahi wabarakatuh,

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1 KEYNOTE ADDRESS BY DR. DARMIN NASUTION GOVERNOR OF BANK INDONESIA AT THE INDONESIA INVESTMENT FORUM JAKARTA, 29 SEPTEMBER 2010 Bismillahirrahmanirrahim, Assalamu alaikum warahmatullahi wabarakatuh, Peace be upon us, Let us start by expressing our gratefulness to God almighty. I am honored to be here today having the opportunity to deliver a keynote in this very special conference, the Indonesia Investment Forum During the worldwide contraction, Indonesian economy still enjoyed a positive growth of 6.0% in 2008 and 4.5% in 2009, mainly due to high and inclusive growth of domestic demand particularly consumption. We are now at end the the third quarter of 2010, the period of increasing challenges for the Indonesian economy. In the second quarter of 2010, our economy grew by 6.2% amidst persistent risks from global uncertainties, particularly with regard to the slowdown in China's 1

2 economy and the bleak outlook for US economic recovery. The major improvement was a result from increase in exports and investment, while private consumption has remained strong. By far, the economic data has led us to believe that our economy, in line with the global development, is moving toward better state. I would like to reassure you that Indonesia s economic outlook is indeed still favorable. Bank Indonesia s latest projection shows that the 2010 growth will reach the upper level of % range and in 2011 will be %. Furthermore, the economy is expected to gradually return to the trend growth rates of around 7.0 percent thereafter, supported by the upturns in export growth following ongoing global economic recovery as well as investment acceleration. Stable rupiah is expected to damp pressure from higher commodity prices and pave the way towards lower inflation expectation. Renewed inflationary pressures have been noted with CPI inflation in August reaching 0.76% (mtm) representing an annual rate of increase in the CPI at 6.44% (yoy). Alongside this, core inflation in August 2010 came to 4.53% (yoy). Going forward in 2011, apart from uncertainties in food prices, inflationary pressures could also be spurred, partly, by an increase in demand. We will keep a close watch on the rising inflationary pressure and do any necessary monetary policy responses. While taking careful note in those concerns, we are still confident with the current level of policy rate, 6.5%. 2

3 On the external side, our strong balance of payment posted a significant surplus of USD 5.4 billion in the second quarter of Key to this surplus has been positive contributions from both the current account and the capital-financial account. The current account surpluses of USD 1.8 billion have been resulted from the upbeat performance in non-oil-and-gas trade balance, gas trade balance and the current transfer. Within the same period, the capital-financial account recorded a surplus of USD 3.3 billion. All major components of the capital-financial account - direct investment, portfolio investment and other investments - recorded a surplus. As of August 2010, inflows of FDI capital were up significantly, although portfolio capital inflows remain dominant in line with positive foreign investor views of the Indonesian economy outlook. This has contributed to a sizeable accumulation of official international reserves, the total of which has approached USD 81.3 billion, providing Indonesia with strong cushion against external shocks. Favorable development of the economic fundamentals along with ample market liquidity will increase the stability of financial sector, especially in banking industry. This industry has been run prudently, reflected in the well-maintained capital adequacy ratio of 16.55% and safe level of gross non-performing loans of 3%, the July 2010 figures show. The intermediary function effectiveness is significantly improving, indicated by by high credit expansion of 20.29% (yoy) as of August The latest figures on Indonesia s external debt, both public and private, are showing a stable condition. Total outstanding of external debt 3

4 in July 2010 was USD billion, USD 109 billion for public and USD 77.9 billion for private. Q external debt vulnerability was improved vis-a-vis the previous quarter; the Q2 ratio of debt-to-gdp was 29.0% and the short-term-debt-to-reserves ratio was 44.1%. The year of 2010 seems to be filled with a continuous series of good news as the acknowledgements of previous hard works. Our optimism is also supported by latest assessment in the perception indicators such as yield spreads, sovereign ratings, CDS spreads, and Credit Risk Classification (CRC) - OECD. Without intending to be too big for my boots, please allow me quote The World Economic Forum s Global Competitiveness Report which was released on September 9, Indonesia is now in the 44 th position. It posts an impressive gain of 10 notches, mainly driven by a healthier macroeconomic environment and improved education indictors. Indonesia managed to maintain a relatively healthy macroeconomic environment throughout the crisis. While most other countries saw their budget deficits surge, Indonesia kept its deficit under control. Public debt remains low at 31 percent of GDP, and savings rose to 33 percent of GDP. Moreover, Indonesia has improved across all education-related indicators included in the GCI. From rating agencies, Japan Credit Rating Agency (JCRA), Ltd on July 13 rd, 2010 upgraded Indonesia's sovereign rating to Investment Grade from BB+ to BBB- with stable outlook. In its report, JCRA mentioned that 4

5 this first upgrade to reach investment grade in the last 13 years reflects enhanced political and social stability, sustainable economic growth, alleviated public debt burden as a result of prudent fiscal management, reinforced resilience to external shocks stemming from the reserves accumulation and improved capacity for external debt management, and efforts made by the current administration to outline the framework to deal with structural issues such as infrastructure development. Moreover, on June 21 st, 2010 Moody s Investors Service revised the outlook of Indonesia s foreign and local-currency Ba2 sovereign debt ratings, from stable to positive. Organization for Economic Cooperation and Development (OECD) upgraded Indonesia s Credit Risk Classification (CRC) from category 5 to 4 on April 2 nd, Indonesia was the only country of 161 countries that is given a CRC upgrade in the latest OECD committee meeting in April The main factor supporting the upgrade is a list of Indonesian impressive macroeconomic indicators, as the economy is one of the most resilient amid the global financial crises and one of few countries that experienced positive economic growth in This upgrade would significantly improve Indonesia s credit standing in front of the creditor countries especially the credit exports creditor countries which eventually would decrease the debt burden. Prior to this upgrade, Standard & Poor s upgraded Indonesia s longterm foreign currency rating from BB- to BB with positive outlook in March 12 nd, 2010, which indicates that Indonesia has a good possibility to be 5

6 upgraded within a year, or even faster. The main factor supporting this decision are steadily improving debt metrics and growing foreign currency reserves which reduced vulnerability to shock with continued cautious fiscal management. Also, Fitch Ratings upgraded the Republic of Indonesia s sovereign rating from BB to BB+ with stable outlook earlier in January 25 th, The rating action reflects Indonesia s relative resilience to the severe global financial stress test of which has been underpinned by continued improvements in the country s public finances. We do realize that it is not going to be an easy task to be sustained, but Indonesia will put everything to move forward, generate higher growth and reach the investment grade. Overall, so far we have proved that we have a strong willingness to improve the condition. However, despite these achievements, challenges are waiting in front of us and hence much improvement and breakthroughs are still needed. We are now focusing to facilitate and promote longer term investments, maintain markets confidence especially on short-term investment, and thus prevent the economy from sudden reversal. Attracting more significant long term capital inflows while having a stable exchange rate are the biggest challenge for a stable macroeconomic condition. Gaps in infrastructure are acknowledged and rooms to improve the investment climate are detected. Indonesian government has taken steps 6

7 to address different aspects of investment climate through policy reform packages covering key areas of concerns, mainly from private investors, such as taxes, customs, investment frameworks, and the financial sector. On the institutional transformation, the government is working to set up institutional frameworks, coordinating mechanisms and enhanced governance. On the provincial side, a number of sub-national governments have undertaken major reforms in their public sector systems, introducing among others, the performance-based budgeting and one-stop public services. Indonesian investment coordinating board (BKPM) has formed the one-stop-shop system (PTSP) to cut bureaucratic red tape and allow investors to process business licenses faster. I am very optimistic on the direction of the Indonesian economy ahead, the improvement in investment climate and therefore expect that you all share that same view. Before I complete my remarks, I would like to extend my sincere gratitude to the organizer and all distinguished speakers who have dedicated their valuable time with us today, just to share. For that reason, let us now proceed with the conference. I wish all of you a fruitful and enjoyable discussion. Thank you. Wassalamu alaikum Wr. Wb. Dr. Darmin Nasution 7