2-3 September 2004, Santiago, Chile
I. Introduction
We, the Finance Ministers of the APEC economies, convened our eleventh annual meeting in Santiago, Chile, on 2-3 September 2004. Mr. Nicolás Eyzaguirre, Chile’s Minister of Finance, served as Chairman. The meeting was also attended by the Managing Director of the International Monetary Fund, the President of the Inter-American Development Bank, the Vice Presidents of the World Bank and the Asian Development Bank, and the Deputy Executive Director of the APEC Secretariat, as well as by representatives from the private sector.
We met under the policy themes of “Fiscal policies for growth and stability
in an open APEC region” and "Institution building in a world of free
and volatile capital flows”. In discussing the themes, we emphasized that
to reap the benefits of enhanced openness and integration, member economies
must have in place policies and institutions that lead to sustainable, broad-based
and equitable growth in the region.
I. Global and Regional Economic Developments
We note with satisfaction the strengthening of this year’s global economic growth and the continued favorable outlook for 2005, notwithstanding the risks associated with high oil prices. We stress the important fact that investment and trade are the leading factors behind the global economic recovery. In our view, both factors are crucial for stronger and broader based growth and for spreading the benefits of globalization. We also note that restored confidence in financial markets, revealed in lower spreads, has contributed to the recovery. Despite higher growth and increases in a number of commodity prices including oil, inflation is expected to remain moderate in most economies.
We also observe that the APEC region is growing faster than the world economy. Though the developed APEC economies are driving this recovery, it is the emerging economies within the region that are showing the highest growth rates, reflecting the sound macroeconomic policies instituted, buoyant exports and the recovery of domestic demand.
In pointing out that trade is one of the key factors pushing growth in the region and the world, and in consonance with the Bogor Goals, we reiterate our support for the WTO Doha Round. We welcome the Decision Adopted by the General Council on 1 August 2004 and call for reaching prompt and concrete results in the negotiations.
Ministers note that terrorism remains a threat to growth and stability and support actions to combat terrorism including increased compliance with accepted international standards to counter money laundering and terrorist financing, as well as other measures including fostering closer cooperation among financial intelligence units and customs. In this context, we urge FATF to make progress, as appropriate, in the enlargement of its membership.
III. 11th APEC FM Process Policy Themes
Looking forward to the Bogor Goals, the discussions under the two policy themes underscored the importance of sound policies and robust institutions to successfully meet the challenges of globalization.
Fiscal Policies for growth and stability in an open APEC region
We acknowledge the importance of disciplined and sustainable fiscal policies for their contribution to long-term growth and macroeconomic stability. Sustainable fiscal policies keep public indebtedness within limits that help to ensure continued access to international capital markets and reduce external vulnerability. At the same time, such policies allow social and investment expenditures to be maintained during economic downturns. Fiscal discipline will also help governments to better face the future fiscal challenges associated with population ageing.
Transparency is a key element for fiscal credibility and accountability, and hence for good governance. We underscore the need for strong institutions to ensure fiscal discipline while granting sufficient flexibility to manage economic shocks. We recognize that there is no single way of inducing fiscal discipline and that properly designed fiscal rules can be useful tools to guide fiscal policy.
We are pleased with the significant progress being made in a number of APEC economies in strengthening fiscal institutions. Such progress has improved our economic resilience and helped our region to both weather successfully the economic slowdown of the past years, and be in the forefront of world economic recovery. We agree to continue building on the progress made in order to address current and future challenges to fiscal sustainability.
Institution building in a world of free and volatile capital flows
We stress that financial integration can contribute to growth and economic development through benefits that include reductions in the cost of capital, greater technology transfers, increased investment opportunities, improved competitiveness in domestic financial markets and lower consumption volatility. However we also recognize that freer capital flows can heighten vulnerabilities, especially in emerging market economies, increasing the importance of sound economic policies, strong institutions, and appropriately sequenced liberalization. We note also that additional efforts at the international level can be helpful in this regard.
At the domestic level, economies are encouraged to promote deep and broad financial systems for developing alternative sources of financing and diversification of risks, well-supervised financial institutions, improvements in transparency for authorities and market participants and good governance in general, in combination with a sound macroeconomic policy framework.
At the international level, additional efforts should be made by the IFIs to provide, as appropriate, liquidity to emerging economies with sound economic policies and fundamentals at times of distress originating from external shocks, along with their efforts to help economies achieve sound policies and institutions for growth. We welcome the growing number of economies that include collective action clauses in their international sovereign bonds and the convergence toward collective action clauses as a market standard.
We also note the increasing importance of remittances as a steady source of financial flows that can benefit emerging markets and urge continued work on analyzing and reducing the institutional and regulatory impediments to remittance flows.
Ministers welcome steps being taken at the regional and national levels to develop capital markets and strengthen banking systems, which would over time facilitate freer and more stable capital flows and the choice to move to an exchange rate regime with greater flexibility, in some economies, if they deem appropriate.
We highlight the importance of enhancing the resilience of markets and institutions to growing capital flows. We reaffirm our support for the Bogor Goals as useful tools to promote sustainable and broad-based growth in the APEC region.
IV. Other Matters
We welcome the dialogues with the APEC Business Advisory Council (ABAC), and the Pacific Economic Cooperation Council (PECC) Finance Forum. They have provided valuable insights from the private and academic perspectives, as well as support for the work under the themes of this 11th APEC Finance Ministers’ Process.
We would like to thank the Chilean Government and the Ministry of Finance for the arrangement of this APEC Finance Ministers’ Process and the Chilean people for their hospitality.
We will meet again for the 12th APEC Finance Ministers’ Meeting in Jeju, Korea, on 8-9 September 2005.
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Intervention by
Dorodjatun Kuntjoro-jakti
Coordinating Minister for Economic Affairs
Republic of Indonesia
in the Plenary Session on
Fiscal Policies for Growth and Stability in an Open APEC Region
Excellencies, Distinguished Delegates, Ladies and Gentlemen:
It is a pleasure to join you here in Santiago for the 11th APEC Finance Minister Meeting.
Given the pressure of time I will keep my remarks brief and to the point. The Indonesian economy is on the mend and the fiscal situation in particular is very much improved. The economy continues to gradually pick up speed and 1st half growth in GDP was 4.7%, with inflation in the 7% range and administered interest rates at below 7.5%.
Post-crisis: the focus of Indonesia’s fiscal policy continues to be restoring macroeconomic balance. This task is very much on track. The ratio of government debt to GDP is now below 60%, a substantial improvement from over 100% just five years ago. Budget deficit for this year is expected to reach 1.2% of GDP, down significantly from around 3.5% just 3 years ago. On the commitment to implement the fiscal discipline, I would like to emphasize that the success in reducing the deficit to a historical low this year happens at the same time Indonesia conducts national, provincial, and local elections; and for the first time in our history, a direct presidential and vice-presidential elections.
I am also honored to inform you that the year 2004 is the first year that Indonesia conducts her economic program after a successful completion of the Extended Fund Facility Program with the IMF last December.
As for next year, it is the new government and parliament that will be responsible to continue the fiscal sustainability policy. However, the present government and parliament are expected shortly to approve a baseline budget of 2005 with a targeted deficit of 0.8%, another record low in our history.
Lack of fiscal stimulus has meant growth and particularly government investment remained low, but the payoff is starting to be felt. As I mentioned earlier, interest rates and inflation are now at all time lows and investment growth in the 2nd quarter was moving to over 9% and still rising.
The government has not only been concentrating on restoring fiscal balances but since 2001 also on completely revamping the organization of government, in particular by transferring the responsibility for the provision of government services and approximately 30% of the national budget to regional governments. Indonesia is a large archipelagic country with approximately 218 million population, which makes this process difficult, but again decentralization with improvements continue to be undertaken.
Finally, we have now been able to turn to some of the fiscal institutional and organizational issues that contributed to the severity of the 1997-98 crisis. We have passed new State Finance Law, Treasury Law and Auditing Law which will form the underpinnings of a new fiscal management. Following from these we are reorganizing treasury and budget processes and the Ministry of Finance itself to increase transparency and accountability. I refer you to the accompanying paper for more on these wide ranging reforms. There are also almost equally dramatic changes at the Tax department as it is being reoriented from a focus on taxes to taxpayers in line with modern tax departments elsewhere.
Let me close by saying that we are proud of the many reforms that have been undertaken, especially in our fiscal management. These will serve us well as we build a stronger and more resilient economy.
Thank you.
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Intervention by
Dorodjatun Kuntjoro-jakti
Coordinating Minister for Economic Affairs
Republic of Indonesia
in the Plenary Session on
Institution Building with Free and Volatile Capital Flows
Excellencies, Distinguished Delegates, Ladies and Gentlemen:
It is again a pleasure to share with you Indonesia’s experience with managing capital flows.
Perhaps surprisingly, Indonesia has had an open capital account since the early 1970s and this policy was considered to have served us well until the crisis of 1997-98. And now, while we recognized that there were serious problems, we see the chance to find opportunity in crisis and we remain committed to maintaining an open capital account. However, we realize the paramount importance of better monitoring and stronger institutions, especially the institutions that underpin macroeconomic stability.
More specifically, we have been able to identify several lessons:
· First, although free capital movement improves living standards by increasing the access to foreign private capital, like some developing countries, Indonesia has not been able to fully realize the benefit of capital flows due to weak financial infrastructure.
· Second, flexibility is needed for exchange rate management, but this does not mean sticking to freely floating exchange rates. Exchange rate policy should consider the development of the financial system and the capacity of domestic policy and institutions to adjust. The exchange rate has to be the safety valve, when political or other factors are difficult or impossible to adjust in the face of capital flow reversals.
· Third, to improve capital account management, the government has redefined the role of the central bank. It is now fully independent and responsible for monetary stability, sound regulations and effective supervision of financial institutions. However, we accepted that the Central Bank can better play this role if we split the central bank’s monetary and banking supervision role. Thus we will set up a Financial Sector Administrator (FSA) with the task to create a consolidated independent banking, capital market, insurance and pension supervisor over the next five years.
· Fourth, we are pressing ahead with plans for enhanced banking supervision under the Basel 25 core standards and especially the use of risk-based methods.
· Fifth, related to the important lesson of the over reliance on bank financing and the need to diversify sources of financing for the private sector. The mismatch in maturities and currencies in the banking system contributed greatly to the depth of the crisis. Since then we have been working hard to improve the efficiency and depth of capital (equity and bond) markets.
It is gratifying to be able to report that these measures have begun to work more effectively. Inflation and interest rates continue to go down and the exchange rate more stable. Bank lending is picking up with lower levels of non-performing loans and higher capital standards, while capital and bond markets are growing rapidly.
Finally, please refer to the accompanying paper for details on our strategy to reduce capital reversals, enhance prudential regulations, maintain the non-internationalization of the Rupiah, improve foreign exchange monitoring, and increase transparency not only for the authorities but also for market participants through international standard for the disclosures of financial and economic information.
Thank you.
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Source: Co-ordinating Ministry for Economic Affairs, Republic of Indonesia