Speech of the Deputy Governor of Bank Indonesia Handover Ceremony at the Bank Indonesia Representative Office in Aceh Province Banda Aceh, 20 th October 2015 Distinguished Governor of Aceh Province, Mr Zaini Abdullah; The Communication Forum of Aceh Regional Leaders; Distinguished Chairman of the People s Representative Council of Aceh, TGK H Muharuddin; Regents and Mayors of Aceh province; Chairman of the Financial Services Authority (OJK) Representative Office in Aceh; Members of Regional Inflation Control Teams (TPID); Leaders of the banking community, academics, religious leaders, entrepreneurs and the media; Leaders and staff from Bank Indonesia; Ladies and Gentlemen Good morning, 1. Before commencing my speech here this morning, I would like to thank the Lord God Almighty for bestowing His blessings that we can all congregate here today to welcome Zulfan Nukman at the Bank Indonesia Representative Office in Aceh to replace Ahmad Farid. 2. Replacing the Chief Representative at Bank Indonesia is an ongoing dynamic that ensures the organisation of Bank Indonesia remains motivated and performs well,
thereby supporting the function, tasks, role and responsibility of Bank Indonesia in terms of developing the economy nationally and regionally. Ladies and gentlemen; 3. According to our observations, the global economy will remain blighted by widespread uncertainty through to yearend 2015. Current global dynamics are driven by the two locomotives of economic growth, namely the United States and China. 4. US economic gains this year prompted concerns over a proposed Federal Funds Rate hike. Uncertainty regarding the magnitude and timing of the hike triggered shocks on global financial markets and saw the US dollar appreciate broadly. 5. The normalisation policy of the Federal Reserve could trigger a deluge of capital outflow and, thus, pressures on financial markets in the region, including Indonesia, after maintaining inflows of cheap funds thanks to the policy of the Federal Reserve to flood the market with billions of US dollars, otherwise known as quantitative easing, in order to recover from the crisis that befell the United States in 2008. 6. On the other hand, the economy of China, which has recorded double-digit growth for the past two decades, has begun to moderate over the last few years. China s economy expanded at just 7% during the first two quarters of 2015. The downturn has reduced demand for goods from China, which ultimately perpetuated the international commodity price slide. For a number of economies that rely on primary commodities, such as Indonesia, this implies the upcoming challenges of economic recovery will become increasingly burdensome.
Ladies and Gentlemen: 7. Due to economic developments over the past several months, concerns have emerged in Indonesia that current conditions are heading towards another crisis similar to that experienced in 1998. In response, I would like to reassure that the economic foundation of Indonesia is currently much stronger than in 1998. 8. During the economic crisis of 1998, economic growth in Indonesia contracted to - 13.7%, with inflation peaking at 77.6% and the BI rate jumping to 57%, while the position of reserve assets was just USD23.76 billion. 9. Furthermore, exchange rate volatility saw the US dollar hit Rp16,650, which brought down the banking sector and forced numerous banks to close. Conditions were further exacerbated by non-performing loans (NPL) that reached 483.6% and the Capital Adequacy Ratio (CAR) of banks at just -15.7%. 10. Looking at conditions today, however, economic fundamentals are much sounder than in 1998. The economy of Indonesia achieved positive growth of 4.67% (yoy) in Q2/2015 and is projected to accelerate to 4.85% (yoy) in Q3. 11. In line with positive economic growth, inflationary pressures were well controlled through to September 2015. Nationally, deflation of 0.05% (mtm) was recorded in September, or 2.24% (ytd) cumulatively for the year or 6.83% (yoy) on an annualised basis. Based on inflation through to September 2015, Bank Indonesia is satisfied that the inflation target of 4±1% in 2015 will be achieved.
12. The position of reserve assets is also much stronger now than back then. In September 2015, reserve assets stood at USD101.7 billion, equivalent to 6.8 months of imports and servicing public foreign debt, which is well above the international adequacy standard of around three months. Bank Indonesia perceives the current position of foreign exchange reserves as sufficient to maintain external sector resilience and preserve sustainable domestic economic growth moving forward. 13. Rupiah volatility is also not as severe as during the crisis in 1998. At that time, the rupiah depreciated 48% in a brief period of time. Conversely, from January until the first week of October 2015, the rupiah depreciated just 8.32%, which was still not as acute as that recorded in other countries, such as Brazil (41.70%), Turkey (24.71%), Malaysia (18.31%) and Chili (11.41%). 14. Bank Indonesia, as the monetary authority, constantly maintains rupiah stability and we are avowedly committed to market intervention in order to stabilise the rupiah in line with the currency s fundamental value, which bolsters macroeconomic and financial system stability. 15. In terms of the banking sector, the latest indicators show that the banking system is far more resilient now than in 1998. The Capital Adequacy Ratio (CAR) averaged 20.68% for the industry in August 2015. Credit and deposit growth, despite moderating slightly, still achieved 10.95% and 13.24% respectively. Meanwhile, nonperforming loans (NPL) remain relatively low and stable at 2.76% of total credit.
Ladies and Gentlemen: 16. Monitoring current macroeconomic and banking conditions, we strongly urge against concerns of a repeat of the 1998 crisis. Nevertheless, as the monetary, macroprudential and banking system authority, Bank Indonesia vigilantly monitors global and domestic economic performance. 17. We are also keenly aware that the economy of Indonesia continues to confront a variety of onerous global and domestic challenges. Externally, Indonesia must remain cognisant of the uncertainty overshadowing the global economy. 18. On the home front, however, the economy is currently moderating, there is low absorption of infrastructure spending and sluggish credit growth. In addition, there remains the twin deficit (current account deficit and fiscal deficit), spiralling foreign debt as well as the weather phenomenon known as El Nino that could decimate food production. 19. Confronting the challenges, Bank Indonesia instituted a policy mix that prioritises stability to ensure sound economic growth. Furthermore, Bank Indonesia policy is consistently directed towards creating stable macroeconomic conditions, primarily in the form of on-target inflation, while reducing the current account deficit to a more sustainable level. 20. Exchange rate policy, however, aims to maintain rupiah stability in line with the currency s fundamental value, thereby avoiding excessive expectations of depreciation that could undermine economic stability. Complementing the policy mix, we
continuously strive to strengthen coordination with the Government and other relevant authorities concerning macroeconomic policy management. 21. Several weeks ago, on 30 th September 2015, Bank Indonesia released a policy package to stabilise the rupiah as a follow-up to the policies issued on 9 th September 2015. The policy package focused on three pillars, namely: (1) maintaining rupiah exchange rate stability; (2) strengthening rupiah liquidity management; and (3) strengthening foreign exchange supply and demand management. 22. The policies instituted by Bank Indonesia are also in line with the policy packages released by the government in September and October 2015. Similarly, the Financial Services Authority (OJK) also issued a policy package containing a number of initiatives for the financial sector, which now falls under the jurisdiction of OJK. We warmly welcome and appreciate the policy measures introduced by the Government and Financial Services Authority (OJK). 23. Coordination between Bank Indonesia and the Government, specifically the fiscal authorities and other institutions such as the Financial Services Authority (OJK), has remained sound and synergic. Policy synergy is crucial to maintain stability and restore national economic conditions. Ladies and Gentlemen: 24. National economic growth is a reflection of regional economic growth. Therefore, as the central bank, we give full attention to regional economic development, inflation control and policy formulation. Bank Indonesia constantly fosters monetary, fiscal and
real sector coordination in local areas, strengthens the role of regional inflation control teams (TPID) and advises local governments through regional financial and economic reviews as well as local competitiveness analyses. 25. In addition, pursuant to its authority, Bank Indonesia will continue to strengthen financial market deepening as a basis of development financing, including infrastructure financing, while promoting financial inclusion as well as micro, small and medium enterprises (MSMEs). 26. We have seen fruitful coordination between the Bank Indonesia Representative Offices in Banda Aceh and Lhokseumawe and the Provincial Government of Aceh at the provincial as well as city/regency levels facilitated by regional inflation control teams (TPID) along with cooperation and coordination to develop local economies, dissemination of the Regional Financial and Economic Review (KEKR) as well as real/msme sector development and the Bank Indonesia Social Program (PSBI). 27. Concrete evidence of successful collaboration and synergy between Bank Indonesia and the Government at the provincial level, as well as other related parties in the region, comes in the form of low inflation. In September 2015, aggregate inflation for the province of Aceh was recorded at 4.19% (yoy) on an annualised basis, which is below the national average of 6.83%. 28. Similarly, cumulative inflation from January to September 2015 was recorded at just 0.31% (ytd), which is well below the national average of 2.24%. Deflation of 0.15% was recorded at the provincial level in Aceh for the month of September 2015,
compared to 0.05% nationally. Low inflation is one positive consequence of 17 regional inflation control teams operating at the city/regency level and one at the provincial level. 29. In light of the positive accomplishments and fruitful coordination enjoyed so far, allow me to express our heartfelt appreciation to the Governor and Deputy Governor of Aceh as well as all regents and mayors, along with their corresponding staff, who have backed and supported our efforts. 30. The successful accomplishments should not lead to complacency, however. Indonesia s interminable journey remains beset by increasingly complex challenges that demand a more active contribution from us to the problems faced. 31. In terms of economic growth, we believe that the ongoing hard work and existing collaboration between Bank Indonesia, the Provincial Government and other related parties should be enhanced. Bank Indonesia recorded slower economic growth in Aceh during 2014 at just 0.59%, which is even lower than that posted in 2013 at 2.8%. Furthermore, Aceh contracted by -2.12% and -1.72% in the first two quarters of 2015. 32. Therefore, we sincerely hope that the clear communication, intensive coordination and synergic collaboration built up over time will continue and improve, thereby reinforcing the economy of Aceh towards greater prosperity and equality. Ladies and Gentlemen:
33. I would like to take this opportunity to graciously thank Mr Zulfan Nukman, who has served the mandate of Bank Indonesia emphatically. As Chief Representative of Bank Indonesia in Aceh, Mr Zulfan Nukman built a solid foundation through harmonious coordination and collaboration with all stakeholders, in particular the Provincial Government of Aceh. 34. Armed with vast experience and insight, Mr Zulfan Nukman will fill his new role as Deputy Chief Representative of Bank Indonesia in Bali with enthusiasm. 35. To Mr Ahmad Farid, the new Chief Representative of Bank Indonesia in Aceh, we extend great expectations to maintain existing performance, while optimising Bank Indonesia s monetary and macroprudential role and that of the payment system amongst all stakeholders in Aceh. 36. We also hope that Mr Ahmad Farid, Chief Representative of Bank Indonesia in Aceh, will more actively accelerate structural reforms, while seeking solutions to the challenges faced by the economy of Aceh. Consequently, the presence of Bank Indonesia in the province will be felt by all social strata. 37. In closing, on behalf of the Governor of Bank Indonesia, we would like to thank everyone in attendance for sparing your valuable time this morning. May all our undertakings to advance the country, state and people be blessed by the Lord God Almighty and let Him give us the strength to carry on. Thank you.
Deputy Governor of Bank Indonesia Ronald Waas