Darmin Nasution: (JP/Ricky Yudhistira)

Indonesia remains on alert for developments in the crisis-stricken eurozone following Spain’s recent bailout and the pending formation of a new government in Greece. The Jakarta Post’s Hans David Tampubolon and Rendi A. Witular recently talked to Bank Indonesia (BI) Governor Darmin Nasution on BI’s preparations for surviving potential fallout from the deepening financial crisis in Europe. Below are the excerpts from the interview:

Question: How is the nation preparing for the fallout from the eurozone, particularly after the Spanish bailout?

Answer: What is happening in Europe now is similar to the situation we faced during the [1997-1998] Financial Crisis: The [eurozone] economy has been forced to price in the crisis cost, and the epicenter of the downturn has been the banking sector. The authorities are working to adjust asset prices that have lost their value. The crisis has caused numerous assets, state bonds and credits to lose value. The process to fix this problem starts in the banking sector. All of the processes to overcome the crisis must be completed by the banking sector, and this is what we call “price-in”, in which all asset values are re-adjusted.

The impact of the crisis in Europe has hit us directly and indirectly. The aftermath is still in motion. The final outcome will depend on the willingness of European officials to take drastic action. If they only had more courage to take critical decisions last year, the crisis would not have shifted from the United States to Europe.

Complicating the eurozone crisis is the nature of their own member states. It consists of many states. They have the same monetary system, yet each of them has different fiscal policies. It is hard for governments in the eurozone to see eye to eye because each is tied to their own national interest, which is why handling the crisis there is overly difficult.

A very different approach is needed as compared to dealing with a single-state crisis. Officials at G-20 meetings always argue that if only Europe had more courage to take critical decisions at the very beginning, we would not have been plunged into this severe crisis.

The impact of the eurozone crisis on our economy will depend on the willingness of European officials to take necessary action to resolve the crisis, and how soon they will take it.

We cannot say that the crisis is currently at its peak. The process to resolve it is still in motion.

Uncertainty in the formation of the new government in Greece has also posed concern. If they manage to form a government, what policies will they take? Will Greece finally walk out of the eurozone? And if they do, will they do it peacefully, under specific considerations and calculations, or will they just walk out, leaving further chaos? Any decision taken will provide a completely different outcome.

So we have yet to see the light at the end of the tunnel of the eurozone crisis?

There are many states. Making one critical decision for all of them is difficult. Let us stop thinking that if a policy is taken by officials, the output will be unique. Absolutely not. There could be at least 100 different outcomes from any policy taken.

The outcomes will also depend on each of the member state’s political policies. For example, what will be the deal between Germany and France on the crisis? Can they see eye to eye on which policy should be taken, full-fledged austerity or recovery? It could be Germany that decides to walk out of the eurozone, arguing it is too much trouble to solve matters that are not their problem. If they walk out, then we are going to face major chaos.

Is everything there still too sketchy for us to respond?

Yes. We have yet to see any concrete solution that could be implemented by the eurozone to handle the crisis.

What is the central bank doing to mitigate fallout from the eurozone crisis?

The crisis that originated in the United States has shifted to Europe, and hopefully will not shift to other countries in the next one or two years. Whether we like it or not, there has to be a response to the issue, and this has affected our policies.

For example, when we issued a policy to regulate foreign exchange [forex] proceeds from exports, we made it based on the consideration that our economy had been significantly growing at above 6 percent. The growth would mean more imports because we are not a country that produces its own capital goods and raw materials. Every time the economy grows our imports soar. If imports continue to rise while exports stall, then we would book a deficit in our current accounts. The impact of the crisis on our exports was initially insignificant.

However, in the second round, as the crisis began affecting India and China, our exports began to slow. But as long as FDI [foreign direct investment] is enough to cover the deficit in current accounts we will be safe.

On an annual basis, we have seen that our FDI has sufficiently covered the deficit. On a monthly basis, it will be difficult to depend on FDI to plug the deficit, risking the flow of our capital. This has triggered growing pressure on the rupiah since last September due to the unbalanced situation in the forex market. There is not enough supply to meet forex demands.

We then believed, about two weeks ago, that if this issue could not be addressed immediately, we would have difficulties in managing our rupiah exchange. Therefore, we decided to issue a forex instrument for monetary operation purposes. Using this instrument, banks can put their forex reserves in BI. We will then use those reserves to intervene in the forex market, if we have to.

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