Mulyani on Indonesia’s financial crisis

Euromoney: The rupiah has been the hardest-hit currency in the region over the last month or so, and the central bank has announced further capital controls as a way to try and support it. What role do you see for the ministry of finance in these efforts?

Mulyani: We’re all aware that the global situation is difficult; we’re not dealing with a normal situation here. We have to protect the interests of the economy and Indonesia in general, but I don’t support the idea that countries should fend for themselves. As a country we’re quite susceptible to the exposure on the currency that you’re talking about – we are looking at all possible policies. At the moment capital is tending to flow from developing countries back to the US, and in this situation any country can face difficulty.

So we’re trying to regularize and normalize flows and control the movement of currency by both residents and non-residents. If a transaction is supported by appropriate documents and a balancing underlying transaction, then we know that it should be supported. We don’t want people to not trust our efforts to safeguard the currency and the economy.

Euromoney: How is the mood at the G20 meeting? What progress has been made?

Mulyani: We’re still debating at a very technical level what the right format for the statement is. The level of expectations is very high, but we still need to come up with specifics. We’re focusing on three areas:
1) take immediate action to restore confidence to financial markets;
2) consider the strong aspirations signalled by some European countries about changing and increasing regulation so that no institutions or instruments are outside appropriate control and monitoring, without hindering market dynamics too much; and
3) continue the discussion among international financial institutions such as the IMF and G20 as to how these mechanisms can serve better. Now that the global economy is so closely knit, improving it will require action beyond sovereign-level statements.

Euromoney: Presumably there’s a sense of urgency behind the negotiations because the market is waiting for what G20 comes up with?

Mulyani: Well, we don’t want to disappoint. We’re debating how specific the statement should get because we need to ensure that this is not the last G20 meeting.

Euromoney: And you must be feeling some pressure in that Indonesia is the sole representative of Asean (Association of Southeast Asian Nations) at the meeting?

Mulyani: Yes, we try to strike a balance between our needs and those of Asean. We’re the biggest country in the region and are a middle ground between the very advanced economies such as Singapore and the less developed ones such as Laos or Myanmar. The region’s exposure to the crisis is very diverse: as the most open economy Singapore is very quickly exposed, whereas the developing economies are more fragile overall. Our role is to reflect the situation faced by these developing economies, and we’re lucky in a way in that we can afford to have a slightly expansionist policy. We need to restore confidence to the bond markets first, but we will be visiting the international credit markets as long as we can secure financing that’s reasonable.

Euromoney: Indonesia had some very successful bond issues this year. But at what spread does debt funding from the international market start to look unattractive for Indonesia?

Mulyani: Well, you need to look at this in terms of our ability to fund fiscal policy. The size of the deficit at the moment is equal to around 1% of nominal GDP, in other words around $5.5 billion. Traditionally we’ve funded half of that from bilaterals and multilaterals, and half from the bond markets. So we need around $2 billion to $2.5 billion in a normal, non-disrupted year. We’ve been enjoying some of the best spreads recently, in 2006 and 2007 paying less than 200bp over treasuries. Currently the market is very distorted, so that price looks unrealistic now. We’re going to have to be realistic and look for windows of opportunity. 

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