Surviving the Global Economic Crisis

VIVAnews – 2009 will be a year of challenge. Today, the world is at the height of the worst financial crisis since the 1929 Great Depression. The economical setback will become more apparent, especially during the first semester of this year. The business sector and policymakers are doing everything they can to find solutions to survive in these tumultuous times.

The first signs of a global financial crisis emerged in the second semester of 2007 when several banks and financial institutions in Great Britain and the United States began to publicize financial problems related to sub-prime mortgages.

It turns out that such phenomenon was just the tip of the iceberg. Since then, it escalates at a faster rate and the impact gets wider and deeper. Before we know it, the sub-prime mortgages crisis has rapidly evolved into a global crisis. Cash flow loans eventually stopped since investors prefer to store their money in hard cash or gold rather than lending them out. Financial institutions in many countries came under intense pressure, and even forcing some into bankruptcy.

Governments in many countries are forced to implement a bailout plan and their central banks pump liquidity, in unprecedented amount. Ironically, the financial institutions are still under pressure.

Governments and the central banks of many countries try whatever means they could think of, even some unconventional ways, to save the day. In order to halt the downward spiral process—i.e. the poor performance of financial sector affecting the real sector—the monetary authorities pump huge amounts of liquidity and virtually all governments launch fresh stimulus packages.

In fact, many countries carry out intervention, such as issuing a blanket guarantee to all deposits in banks, taking over troubled assets, injecting bank capital, and even acquiring some of its banks.     

*

If we look at all these negative signs, the situation and the prospect of the global economy are indeed gloomy. However, by looking at the world’s economic trouble more objectively and as it is, we could take the necessary steps to overcome the crisis.

In fact I could see some positive signs at the global level. At the epicenter of the crisis, i.e. the United States, there is a new hope since its new government and its new economy team has promised to take immediate and urgent actions to overcome the crisis. Not to mention the multilateral coordination that has also been improved.  

For Indonesia, the impact of the crisis was unavoidable. When we are at the height the global financial crisis which was marked by Lehman Brothers’ bankruptcy and the domestic market psychology turbulence in November 2008, the government was forced to take over Century Bank. The Indonesian banks also suffered the impact of derivative product problems, even though such impact was relatively smaller compared to other countries, especially the developed ones.

However, in the midst of this trouble situation, our position is faring better than most other nations. In fact, our macro-economic condition is really not bad at all. Our banking industry is just as good as ever. In fact, Indonesia is lucky because its banks have very low exposure to sub-prime mortgages.

Previously, many people have considered us as being incapable of integrating our financial sector to the global financial networks. Today, however, this failure proves to be a blessing in disguise, since it saves us from being affected as seriously as other countries.

Therefore, I tend to agree with this following view: The lesson we learn from the crisis is that we need to understand better the exposure risks and get better acquainted with the rules that govern them before we move forward or wish to be considered “advanced” by everyone.



Today, Indonesia needs to re-position itself to become the first under-developed country that could benefit from the global financial revival. The important key here is how to convince the people that Indonesia is a safe and comfortable place for business and investment. Investors should be assured that our macro-economic is well-managed in a sustainable way, and that our banking sector remains steady and solid.

Experience is the best teacher. Looking back on the crisis, one important lesson we have learned from the crisis is that we need to go back to the basics. The current economic crisis has materialized because the financial sector has forgotten its roots, i.e. the real economy activity. Thanks to the liberalization of the global financial sector and the information technology revolution, the number of financial institutions as well as their products has grown considerably in the last decade.

In many countries, the financial sector attracts many people since it is the fastest way to accumulate wealth. Those who are nimble, innovative, and willing to take risks get bigger rewards. However, such diverse complicated and sophisticated financial products have fatal side effects and it is very difficult to assess their risks.

The financial instrument has become increasingly separated from the underlying transaction which is supposed to support them. In fact, it later turned into a bubble. Due to the internal dynamics, the bubble got increasingly bigger until it finally burst and created a crisis.

Therefore, the call to go back to the basics is applicable to all financial institutions, especially the banking sector. Its main purpose is to bridge the financing of goods and service delivery activities, or the real sector. Indeed, banks could do more than just serve as intermediaries; for instance, they could increase liquidity through the creation of giral money. Of course, this activity has risks, and such risks need to be responsibly managed.      

Banks have a duty to finance activities that are supported by obvious underlying transactions, and their risks need to be carefully measured. It is not appropriate for bankers to play speculative games. Banks should avoid activities that have ‘bubble elements’ in it. They should implement a more effective risk management system.

Please remember that the current crisis is solid proof that the universal banking model is not a crisis-proof model. We need to think more carefully about the concept. The well-advanced industrial policy needs to be accompanied by an arrangement of more steady risk management regulations.

For me, the narrow bank concept more closely resembles the banks’ fundamental basic and has been proven to be a crisis-proof. After all, both the 2009 and the 1998 crises clearly show that the reliability of the banking sector is the country’s key bulwark against financial trouble.

Another important lesson we have learned from the crisis is that the basic principles of conventional macro-economic management has been proven to remain relevant in facing the crisis. Any country that has successfully guarded its basic indicators, such as its budget deficit, underlying transaction, loan ratio, foreign exchange reserves, inflation, loan interest rates, and exchange rates, generally fare better in facing the crisis.

However, another lesson that we have also learned from the crisis is that we need to ask more fundamental questions which would serve as guidance for positioning our country in the globalization era. For instance, what is the best balance in our economy, between domestic and export markets, financial and real sectors, inward and outward orientations, and between domestic and foreign loans?

--

* This analysis is based on the speech of the Governor of the Indonesian Central Bank (BI), Boediono, during the 2009 annual banking meeting on 30 January 2009 at the office of the Indonesian Central Bank, Jakarta.

--

Translated by: Edwin Solahuddin