Senator Kerry,
Excellencies, Ladies and Gentlemen,
Thank you very much, Senator John Kerry, for that very kind introduction. I still remember our meeting 2 years ago during the climate change conference in Bali. I am honored to have you here with us, and I thank you for your friendship for Indonesia.
I am so impressed because Senator John Kerry knows a lot of things about Indonesia and I have to be thankful that you have a strong commitment to bring our relationship, our friendship…and I could feel in our conversation that Senator Kerry is also committed to making our world safer, better, including his attention in dealing with climate change. Your words inspire me, Senator Kerry and I will do my best or Indonesia and fostering our relations in the future.
Indeed, this is a great year for US-Indonesia relations. Last year, during a speech at USINDO in Washington DC, I proposed that it was time to have a strategic partnership between Indonesia and the United States.
I am pleased that both Governments are now deep into efforts to design the framework and substance of that relationship. That Partnership promises to be a comprehensive partnership that would not just elevate but transform our relations for the 21st century.
It will be a dynamic partnership between the world’s second and third largest democracies. A friendship between the world’s only superpower and the country with the world’s largest muslim population. A friendship between the world’s most industrialized country and a country with one of the largest tracks of tropical rain forests. A friendship between the world’s largest economy and the largest economy in Southeast Asia.
That partnership, indeed, has the word “strategic” written all over it, and I often wonder why for years only few people on both sides realized it. The fact that, for the first time in the history of our relations, we have an American President who spent time and studied in Indonesia and speaks Indonesian, and vice versa, is also a unique asset for the Partnership.
That is why I am delighted to be here today, because it is the Friends of Indonesia and the business community who have been among the most spirited components of our relations.
I thank the Indonesian Chamber of Commerce and Industry, USINDO and the US ASEAN Chamber of Commerce for organizing this event.
Today is Saturday, so firstly I appreciate that all of you came today when you can be with your family. Your presence here today means that you are very serious about Indonesia, or maybe your golf game just happened to be cancelled!
Today, I wish to share with you how Indonesia has been able to weather the global financial crisis, and talk about the imperative and opportunity of the after-shock economy of Indonesia.
The business community, of course, has always been part of our success story. Leaders at all three G20 Summits have all committed to coordinate globally to overcome the crisis. That means many things : but it particularly means that governments must help businesses – big, medium and small businesses – recover in a healthier, more accountable and more transparent economy.
I speak from experience.
The crisis Indonesia experienced in 1998 was made worse and led to a collapse of the economy, financial system and political system, because there was no trust, no synergy and no coordination between the government, business and the people. In contrast, during the global financial crisis of 2008, the quick actions taken by the government, working closely with business, helped us to significantly minimize the impact of the global crisis.
As I have just come from the G-20 Leaders’ Summit in Pittsburgh, let me start by reflecting where the global economy is today, I will then update you on the Indonesian economy.
Let us recall the causes of the global financial crisis. There were many. First, were the global imbalances between demand and supply, and between savings and investment. Second, the bubble economy that emerged in the housing sector, banking and capital markets. The bubble was even more inflated with the so-called “toxic assets”. Third, was the failure of international financial regulations and institutions to detect these weaknesses and provide response mechanisms. Fourth, was differences in the governance of the macro and financial sector between countries.
Even though the epicenter of the crisis was in the US and Europe, the crisis of confidence and panic were global. So obviously what was needed was joint actions to restore confidence in the banking sector and market, and joint counter cyclical policies. This was the priority for the G-20 Leaders’ Summit in Washington DC and in London.
I believe that these joint actions have worked. We no longer talk of a repeat of the Great Depression of the 1930s. We have avoided the world economy falling off a cliff, and this is no small feat.
The current status of the global economy is one where recovery is in sight. In fact, the contraction in 2009 is expected to be lower at 1.3%, compared to the projected 2%. The global coordination of counter cyclical policies by all G20 members amounted to a fiscal stimulus equivalent to 2% of GDP or US $1.4 trillion, and easing of monetary policies. There have also been the recapping of banks up to US$2 to US$2.5 trillion and increased the resources of Multilateral Development Banks.
All these steps have been able to restore confidence, as evident from the recovery of stock markets, exchange rates and other indicators. For 2010, a stronger recovery of 3% is expected compared with previously 1.9%. All global economic indicators point to an improvement in the second half of 2009, which is expected to continue into 2010. What is of interest is that the recovery will happen in Asia first, followed by the US and Europe.
However, the critical issue remains in how to sustain the recovery. Presently. recovery is still fragile, market confidence remains jittery, and unemployment rates remain high.
So what should be done next?
Given the seriousness of the unemployment situation and fragile recovery, the exit strategy from expansionary fiscal and monetary policies must be done in a coordinated way, so as not to affect market confidence. Job creation, through private investment driven growth, needs to be sustained by structural reforms and improvement of the investment climate.
We also need to address medium term issues, such as reforms of the financial sector and international regulations. We also need factor in global challenges such as climate change, and food and energy security.
Now let me complete the update with the good news coming from Indonesia. Fortunately, we have been able to weather the global financial crisis better than most countries. Despite a decline in growth in the second half of 2008, we still managed a growth rate for 2008 of 6.1%. Quarterly growth rates show the economy has been recovering through the first half of 2009, with growth in the first semester of 2009 reaching 4.2% compared with first semester of 2008. We are projecting growth to be around 4.5% this year.
In line with the global trend due to the financial crisis, Indonesia also experienced sharp declines in the exchange rate, foreign exchange reserves, the stock market index, and the yield on government bonds. However, we have seen recovery in all these indicators. The stock market, for instance, experienced one of the sharpest declines, but is also the star performer in the rebound to date.
Most importantly, we have been able to limit the social impact of the crisis. In fact, comparing 2009 to 2008, the national poverty rate declined to 14.2% of the population compared with 15.4%. Open unemployment was 8.1% compared to 8.5%. A key reason in our poverty reduction rate is that the increase in agriculture growth was very high, 4.8%, while rice prices remained stable, and cash transfers were lifting the expenditure of the poor directly.
Furthermore, we have also managed to have what we call a “quiet revolution” in the past 5 years. All of Indonesia’s Governors, regents and mayors are now directly elected, with the consequence the political landscape has dramatically changed. This has also made Indonesian politics much more grass-rooted and more accountable.
On the security front, we have dealt serious blows – one after another - against terrorist groups. It is an unfortunate fact of life that no place on earth is completely safe from terrorism – not New York, Washington DC, Madrid, London, Mumbay, Istanbul or Jakarta. But Alhamdulillah, we have now been able to hunt and find and kill Southeast Asia’s two top terrorists – Malaysian Dr. Azahari and Nurdin Muhamad Top, who were responsible for the recent major attacks in Indonesia. Indeed, their extremist and violent ideology have been met by an emboldened and resolute moderates who are even more determined as the mainstream force of our nation.
I would like to pay special tribute here to Mr. James Castle who is in the audience today, that despite the bombings he has remained positive and confident on Indonesia. And my heart goes out to Mr. Max Boon, the Dutch man who survived the bombings, and passed a message to me in a letter he remained about Indonesia, a country which he deeply fell in love with. These are the true friends of Indonesia, and they are not just exemplary representatives of the business community, they are remarkable human beings !
Excellencies, Ladies and Gentlemen,
Of course, I would like to share with you not just the good news – but more importantly why we have been able to have such good news. Its not just luck, but it is really the result of hard work, cooperation and togetherness of the Indonesian people that we have been able to achieve this. It also cannot just be measured by the way we have responded to the crisis but also all the ground work and sound fundamentals that we have laid out since 2004.
There are several reasons for this good performance.
First, while exports and investment declined sharply, domestic demand remained robust, supported by the government’s stimulus spending. The numbers speak for themselves. Consumer confidence remained high during the whole period, and we are already seeing the sharp pick up of demand for cars, motorcycles and industrial activity.
Second, Indonesia has been able to manage and limit the impact of the global financial crisis, because of the initial responses we undertook as well as the fundamentals that existed prior to the onset of the crisis.
Fortunately, partly due to the experience of the financial crisis a decade ago and the policies and institutions that have been set up since, our financial sector was relatively sound, with little exposure to the so-called “toxic assets”. Our corporations were also not over-leveraged in debt and we had a strong fiscal position with low public debt.
At the onset of the global financial crisis, we quickly restored confidence by taking the necessary decisions on financial market safety net, such as increasing the level of guarantee for deposits in the banking system, and fiscal stimulus. The focus of the fiscal stimulus has been two-pronged.
First, and foremost, we wanted to ensure that the impact on the poor income groups and Small and Medium Enterprises would be limited, and maintaining consumer purchasing power was priority. This includes sustaining or expanding, the cash transfer for the poor, subsidy for rice consumption, community development grants to all districts, micro finance program for Small and Medium Enterprises, and health and education programs.
Second, we focused on spending and tax policies that would have the most direct impact on growth, such as building infrastructure and reducing tax rates. Corporate tax rates have been reduced to 28% this year compared with 30% in 2008 and will come down to 25% in 2010.
I would like to stress again that from the beginning of the crisis, the government and the business sector were in very close coordination. I appreciate our Chamber of Commerce – Kadin - who from the beginning of the crisis worked the government in many late night meetings. They certainly played their role in maintaining business confidence and striving very hard under challenging circumstances to minimize layoffs.
The final set of factors that has contributed to Indonesia’s good performance is also a reflection of the reform programs we have had introduced since 2004. In the last few years, we have worked hard to improve the investment climate and costs of doing business, and reforms of tax and customs as well as the bureaucracy. We have also intensified our efforts to build the necessary physical infrastructure, and invested in human resources through comprehensive health and education programs.
Because of this hard work, Indonesia’s ranking in the World Competitive-ness Inde-x and IFC Costs of Doing Business is rising. Of course, we know full well that there is still work to be done to continue improving the investment climate.
We have also started to address the constraints to growth and competitiveness, such as the infrastructure bottlenecks. Which brings me to the next question – how do we ensure a favorable global environment and the opportunities that come out of the crisis.
There are several measures we can do to have a more resilient world economy :
First, reforming financial regulation and supervision to ensure that financial institutions and banks are prudent, sound and accountable to prevent future financial crisis. We need to avoid the bubble economy that emerged in the years prior to the global financial crisis, and with it there should also be no excessive bubble bonuses to the bankers and financial managers. Furthermore, we have to do better to design the early warning system that will provide the “orange light” that should then lead to the right responses, actions and sanctions that will prevent excesses from getting out of control.
Second, promoting a more balanced global economy, which is fair, inclusive and sustainable with clear role and benefits for developing economies.
Third, a fair and open global economy where trade and investment flows are key to the sustaining the recovery process. International trade and investment flows have been severely impacted with the global economic downturn, and the impact has been more felt by developing economies. Yet, they have less capacity and financial resources to deal with the downturn. So, protectionist measures need to be minimized.
Furthermore, completing the WTO Doha Development Agenda negotiations by 2010 will, I believe, create a more fair and open trading system that will benefit developing economies most. The political will of leaders need to be translated into action and especially by the major economies so that the outcome can really be realized.
Fourth, prior to the onset of the financial crisis as commodity prices dramatically doubled and tripled, we were all aware of the need to address energy and food security. These threats remain real, especially to the hundreds of millions of people who remain hungry, and we need to have a global response. In fact, in undertaking fiscal expansion and restructuring of our economies, there is a great opportunity to rebuild based on a green economy path. That is : we can provide incentives, allocate resources and prioritize investments in addressing climate change objectives which could include development of clean and renewable energy, as well as technologies and innovation that will help us mitigate and adapt to climate change. We also need financing mechanisms for ensuring that the climate change and growth objectives are not in conflict.
Excellencies, Ladies and Gentlemen,
Finally let me turn to the imperative and opportunity to ensure that in the after shock situation, the Indonesian economy remains robust and can get back to the 6% or higher growth path.
The story so far as noted by many analysis and news stories can be summarized as that “so far so good” and that “Indonesia is on the rise”. Furthermore, Indonesia does have a “golden chance” to rise and become the next I in BRIC (Brazil, Russia, India and China), as the special report on Indonesia in the recent Economist Magazine puts it. However, we all know that the golden chance can only be realized if we continue our reform program and address the challenges of maintaining sustainable growth.
Given that the world economic situation will not be favorable in the next one or two years, a big push for investment driven growth will be much needed to sustain our growth rates.
We need to, first of all, maintain the stable course to date – sound macroeconomic management, political stability with the continuation of the process of democracy and strong anti corruption drive.
The objectives of energy security, including development of renewable sources of energy; agriculture revitalization; raising the competitive-ness of our economy; and ensuring that the 230 million Indonesian population can have access to effective and appropriate health and education services, are imperative.
How can we achieve those objectives? Let me share with you the main priority programs in the next five years, and what we also hope from all of you to contribute and participate since they also offer opportunity.
First, is physical infrastructure to ensure that we can reduce logistic costs and make Indonesia truly competitive. We need to ensure that the national economy is nationally integrated if we are to be competitive and be part of the global economy. Thus, Indonesia is ready for, and will ensure, that the necessary breakthroughs on power generation, and easing the transport bottlenecks by building of roads, ports and developing the maritime based transport.
There also needs to be a big push at the local level by investing in urban infrastructure to develop key cities and regions that will be the main drivers of Indonesian competitiveness. The opportunities for economic development, investment and business, and the markets, are not just in the big cities in Java – but are across Indonesia. This is why getting our national logistics right – to ensure connectivity and sharing in growth by all regions, needs to become a reality.
Apart from continuing to improve the effectiveness and implementation of the current framework for infrastructure and public private partnerships, and finalizing the blueprint for a national logistics strategy, a number of new laws will be helpful to this end.
This include the Power Sector Bill, which will open up for private sector investment not just in power generation, but also in transmission and distribution. The Parliament just passed the Special Economic Zone law which will allow the government to develop zones and clusters of economic activity which will be supported by the right policy and incentives, best practices in terms of government services and infrastructure.
Second, there are new opportunities in various sectors, which will be prioritized. The potential sectors include the agro-industry sector. We will also focus on raising the competitiveness of our industrial sector, accelerating the development of the tourism and other services sector.
Another priority is the continuous improvement of the supporting soft infrastructure.
This includes ensuring that the investment climate will improve. We will need to continue efforts to lower entry barriers, including the time and cost to start a business; continued improvements of the investment regulations and one stop service; and lower costs of doing business with a focus on short term actions that will have immediate impact such as improving logistics.
Under the current administration, we have started our program for bureaucratic reforms in a number of Ministries, including the Finance Ministry and National Land Agency. The process for bureaucratic reforms is targeted to be completed by 2011. The key will be to develop a modern regulatory framework and centralized set up for civil service policy making, regulation and management, and improve compensation, recruiting and promotion but link it to accountability.
Another key component of the soft infrastructure is our human resources. Indonesia has a young and productive labor force, with close to 50 percent of our population being under 29 years of age. This bodes well for the future of Indonesia, and we will be investing in education and productivity programs that will raise the quality of our labor force and human resources.
Finally, is to nurture Creativity -- with a big Capital C. We realize full well that the future of Indonesia lies in nurturing development in innovation, technology, productivity and creative industries.
Creative industries which build on our rich cultural heritage and creative human resources, offer another very promising area of development in the future. Currently we estimate that around 6.3% of our GDP is accounted for by these creative industries such as film, animation, music, handicrafts, fashion, architecture, design, advertising and publication. These industries have grown in a dynamic way serving the very large domestic market, and some are already exporting creative goods and services abroad.
Excellencies, Ladies and Gentlemen,
In closing, let me say that the past five years have been the most remarkable years for Indonesia. We have seen a nation transformed beyond what I expected. Through a series of difficult decisions, we have established a better foundation for future generations. There is now a renewed confidence in the country, we have a stronger and healthier democracy, and Indonesia is better connected – and better understood – by the world.
I have been very humbled and honored to have the opportunity to lead this country. But I do passionately believe that the next five years could be even better. With the fresh political mandate from the 2009 elections, which changed the Indonesia political landscape, I am convinced that Indonesia is on the verge of a tipping point from good to great.
I am asking and praying to Allah SWT that it will be a great journey. And I look forward to your partnership in that journey.