Transcript of a Teleconference Call on Release of Documents of 2010 Article IV Consultation and Financial System Stability Assessment on Indonesia

September 17, 2010

With Thomas Rumbaugh, Mission Chief to Indonesia, Asia and Pacific Department, and Herve Ferhani, Deputy Director, Monetary and Capital Markets Department
Washington, D.C.
Thursday, September 16, 2010

MS. KAMATA: Thank you for joining us. I’m Yoshiko Kamata of IMF Media Relations. This is a press conference call on Indonesia.

Here with me in Washington are Mr. Thomas Rumbaugh, Division Chief of Asia and Pacific Department and Mission Chief for Indonesia, and Mr. Herve Ferhani, Deputy Director of Monetary and Capital Markets Department. They will give you brief openings and then take your questions. Thank you.

MR. RUMBAUGH: Thank you, Yoshiko. This year the Article IV consultation, the executive board discussion was concluded on August 27th and all of the documents related to that discussion are being published on the external website today.

This year’s Article IV included for the first time Indonesia’s first comprehensive financial sector assessment. I will make a few opening remarks about the Article IV and then my colleague Mr. Ferhani will make some opening remarks about the financial sector assessment.

The Article IV consultation found that Indonesia performed very well during the 2008-2009 financial crisis and the outlook is also very positive. There are several reasons for this, the most important of which is a very strong improvement in macroeconomic management over the last 10 years. Public sector balance sheets improved dramatically, corporate sector balance sheets improved, and this helped the economy weather the storm of the financial crisis.

There were also substantial and sustained improvements in financial stability over the last 10 years, and Mr. Ferhani will say a little bit more about that.

Several other reasons for good macroeconomic performance were a diversified export base, very strong foundation of domestic demand with strong private consumption helping to carry the economy through the financial crisis as well as political stability.

Some of the key messages of the Article IV going forward are to sustain high growth and further reduce poverty Indonesia will need to have more investment, especially in infrastructure. This will help support higher growth including by taking advantage of development opportunities throughout the regions and provinces of Indonesia. To achieve this, there needs to be more and better public investment. There needs to be better execution of government spending including on infrastructure projects, and to finance the spending there needs to be lower spending on subsidies and improvements in tax revenue collections.

There also needs to be improvements in the investment climate for private investment and with respect to monetary policy and inflation, we believe there needs to be a stronger commitment to reducing inflation and keeping it low. In recent months, inflation has started to pick up a little bit and in this context the recent announcement by Bank Indonesia to increase their reserve requirement is a step in the right direction.

And the other key message are -- as I said there were sustained and substantial improvements in financial stability, but there are some things that they need to pay attention in that area as well and I’ll pass it over to my colleague Mr. Ferhani to expand on that.

MR. FERHANI: Thank you, Thomas. As Thomas just mentioned, Indonesia has undergone a financial system assessment in the last year. It’s the program that the IMF carries out every four to five years in all countries. The dedicated team visits a country and comes up with an assessment of the stability, the strengths, and the vulnerabilities of the financial system.

This is the first time that Indonesia undergoes this assessment and from this standpoint it’s an important milestone especially 10 years after the Asian crisis which had significant impact on the Indonesian financial system.

What the team found was that the decisive and successful response to the global crisis allowed Indonesia to recover quickly and that, in part, was due to the framework that a decade of sound policies and structural reform had allowed to develop in Indonesia.

There are some concerns still today over enforcement of the rule of law, transparency and governance issues which weigh on market perceptions, and this is an area where it is felt that some further progress has to be made.

Besides this, the team found the banking system to be generally healthy, in particular thanks to high capital and earnings buffer which provided a cushion against macroeconomic volatility. Banking supervision and regulation have improved dramatically since the Asian crisis. Some progress remains to be made in dealing with problem banks and crisis management, but just as in other areas that I mentioned before, the authorities have a decisive plan of action which will be a follow up to the assessment that has been carried out.

Finally, the team noted that Indonesia was planning a major change in their regulatory architecture by creating an integrated supervisory agency and it has been felt by the team that there was an important caveat to this movement: that was the fact that the central bank had to retain a significant access to information and to some extent a role in all supervisory issues.

Those are the highlights of the conclusions that we came up with and what has to be mentioned is that on the whole, the situation has decidedly improved compared to what it was only a decade ago.

Thank you.

MS. KAMATA: Thank you. Now we can take your questions, please.

QUESTIONER: You mentioned here that you are against any administrative effort to boost commercial banks’ credit here, but as you know that (inaudible) has introduce a policy, which is basically what they’re doing to encourage the bank to increase their credits. What do you think of it? Thank you very much.

MR. RUMBAUGH: Thank you very much for the question. I think this has a macroeconomic dimension as well as a financial sector dimension, so we might both comment on it a little bit.

I think what we see is that credit is starting to recover on its own. It already reached the annual rate of 19.5 percent in July. It’s projected to continue to increase, so from a monetary policy and macroeconomic perspective, we didn’t think there was a need to take any administrative measures to boost credit growth.

Now, having said that, I would say that the way they have done it, and the range that they have announced in applying that, means that effectively it’s not going to make that much of a difference from a macroeconomic perspective. So, I don’t see it as a step backwards from macroeconomic policy, and the fact that they announced an increase in the reserve requirement at the same time means, you know, on a net basis that package is definitely going to withdraw liquidity, which is a step in the right direction.

MR. FERHANI: From the financial standpoint, typically we do not favor any kind of administrative measures designed to interfere with the market mechanisms. As Tom just mentioned, the range that has been chosen is such that we do not expect significant impact for the time being. The feeling is that some of those measures are really designed to target some specific institutions we feel that a business model that banks choose typically reflects their comparative advantages. So, it’s not obvious that there is a significant advantage in setting up measures of that nature, but again the net effect is in fact in the right direction given the fact that this will be withdrawing liquidity from the market. Thank you.

MS. KAMATA: Thank you. Next question please.

QUESTIONER: I’m just wondering if you could address the issue of employment or unemployment. Have you seen any growth in the labor market? Has it been fast enough? And can you say anything about the distribution of wealth in the last few years here in Indonesia? Has the growing economy actually improved the lives of Indonesia’s poor?

MR. RUMBAUGH: Yes. In fact, over the last several years we have seen poverty rates come down significantly. The labor market statistics come with quite a lag and there are some weaknesses there, and what we saw during the 2008-2009 crisis, unemployment didn’t really increase. I think there was a burden on workers. I think firms were going more to part time workers and that kind of thing, so I think definitely the labor sector was feeling some of the impact of the slower growth in 2009.

That should be recovering now. But as I said, over the last several years there has been significant reductions in the poverty rate. We also see some signs that at least in some regions and provinces this is starting to be shared a little bit more equally. For example, the share of national output accounted for by Java is still, by far, the largest, but it declined from 59 percent to 57 percent in the last couple of years and some of the other regions are growing a little bit faster.

MS. KAMATA: Next question, please?

QUESTIONER: You predict inflation for this year at 5.9 percent. I’m just wondering if you’ve lifted that forecast from your previous report.

MR. RUMBAUGH: I’m sorry, I didn’t get the question.

MR. CHATTERJEE: Yeah. You predict in the report that inflation this year will be 5.9 percent at the end of the year. I’m wondering if you’ve lifted at that forecast from your previous Indonesia reports.

MR. RUMBAUGH: No, I think we’ve largely kept the same forecast. We have increased it slightly in the last month as the July and August inflation numbers came out just a little bit higher than what we expected.

Some of it is related to food price increases and a part of that is related to the Ramadan season, so we should see some of that come off. So, I think the August headline number was 6.2 percent, but the core inflation is still around 4 or 4.5. We’re still comfortable with that -- the latest projection that we have for the year.

MS. KAMATA: Okay, thank you. Any other question?

QUESTIONER: Hi, yes. Could you elaborate at all perhaps a little bit more on the concerns about the rule of law and corruption? Has that improved since the last time the IMF conducted this review -- corruption, rule of law issues? And is can that slow down potentially this growth and (interruption)?

MR. RUMBAUGH: I think this is a big objective the government has set for itself and at least in the areas that affects macroeconomic policy we have seen some progress and I think in this area we look at the investment climate as one indicator and we have seen progress in that area in terms of streamlining the investment procedures, and establishing a one-stop shop for investment projects. This is being extended to the provinces. Just recently we’ve seen some renewed interest in foreign multinationals moving production facilities to Indonesia. Every week there seems to be a new story about that.

So, there’s a lot more to be done and I think this is something that all investors are going to be watching closely and continued success in this area is going to say a lot about the ability to increase investment and increase growth.

MS. KAMATA: Is there any other question?

QUESTIONER: Hello. Yes. On the central bank’s monetary policy, there are a couple of conflicting things in the report. You say that Bank Indonesia current stance is justified given the inflation on the other hand you’re saying that they may need to raise rates this year. Perhaps you could just elaborate on that. There’s only a few months left in the year.

MR. RUMBAUGH: I think this is related to what I said before, the difference right now between headline inflation and core inflation. Core inflation is still within Bank Indonesia’s target range, but it has been slowly increasing as well. So even though we expect food prices might come down a little bit in the next couple of months, we expect that core inflation will be gradually pushing more towards the top of Bank Indonesia’s target range. And it’s difficult to predict the timing of these things with any certainty, but it’s just something that BI needs to watch closely. As I’ve said they’ve already increased the reserve requirement which will help to take some of that liquidity out of the system and they may be able to delay a rate increase a little bit longer because of the step they’ve taken on the reserve requirement.

So we can’t really say anything about the timing, but definitely the direction is clear and they’re going to have to be proactive in terms of watching market developments.

MS. KAMATA: Thank you. Is there any other question on the line?

QUESTIONER: I’m just wondering, given some of the commentary from Bank Indonesia in the last week or so, what’s your judgment of why there is an apparent reluctance to use the benchmark rate? Why are they using other methods instead of that?

MR. RUMBAUGH: I think that they are still a little bit concerned with the sustainability of credit growth. They would like, I think, to see a longer track record of getting credit growth back up to the 20 to 25 percent annual growth range and I think that’s related to their reluctance to raise the policy rate because they don’t want to see lending rates moving up yet.

MS. KAMATA: Thank you. If there’s no other question, we can conclude this conference call.

OPERATOR: There are no additional questions.

MS. KAMATA: Okay, so let us wrap up and thank you so much for joining us early in the morning in Asia.

MR. RUMBAUGH: Thank you.

MR. FERHANI: Thank you.


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