Wednesday, Jul 15, 2020
Post-COVID-19 Crisis: Implications for Financial Stability, Financial Inclusion, Gender Equality, and International Development
Part of the New Normal series. This episode features:
- The Honourable Sri Mulyani, Minister of Finance, Indonesia
- Carmen Reinhart, Vice President and Chief Economist, World Bank Group
- Moderated by Susanna Moorehead, Chair, OECD’s Development Assistance Committee
Full transcript
June 29, 2020
Babak Abbaszadeh:
Hello, everyone. Thanks for joining us. I am Babak Abbaszadeh, CEO of Toronto Centre. On March 11th,
the WHO declared COVID-19 a pandemic, which triggered panic and a sudden shutdown of the world
economy. Praised well by the Economist magazine immediately, public authorities faced stark choices
between life, death, and the economy. Many responded with lockdowns, extraordinary monetary and
fiscal policies, if they could afford it, unprecedented flexibility and supervision, to help the financial
system absorb the shock, remain sound, and keep providing crucial support to the real economy. We're
now witnessing devastation coursing its way through Latin America and other developing countries.
Many of which do not have deep pockets. This crisis will have important implications for financial
stability, financial inclusion, gender equality, and international development. All are important to
Toronto Centre's mission.
Babak Abbaszadeh:
Today, we sit down with senior accomplished leaders to hear their perspectives. The honourable
Supreme Sri Mulyani is Indonesia's finance minister. And Dr. Carmen Reinhart is the World Bank Vice
President and Chief Economist. We're also thrilled to have Dr. Susanna Moorehead, chair of OECD's
development assistance committee, as our senior moderator. You've received their bios. A big welcome
to our panel and moderator. Please use the Q&A tab to submit your questions. A big thanks to our
funders: Global Affairs, Canada, Swedish SIDA, IMF, USA ID, Jersey Overseas Aid, and Comic Relief. Also,
a big thank to our staff, Demet Çanakçı and Diana Bird, who worked so hard to put this panel together. It
is now my pleasure to hand over the session to Susanna. Go ahead, please.
Susanne Moorehead:
Babak, thank you. Thank you very much. And a very warm welcome to all our participants. I see we've
got 150 odd already. And more joining as we speak. And of course, a huge welcome and thanks to my
two panelists. So Sri Mulyani, as Babak said, Finance Minister of Indonesia. And Carmen Reinhart, the
recently appointed Vice President and Chief Economist of The World Bank. There is an invisible thread
that joins us. When I was the UK's executive director at the World Bank, Sri Mulyani was there in
Washington. And now Carmen is. So I think it's, I hope it's a virtual circle of good ideas, too, that we can
talk through this morning, this afternoon, this evening. Depending where you are in the world. Now I
understand from Babak that this is actually the 13th such conversation that the Toronto Centre has had.
Susanne Moorehead:
And all of us, whether we're working domestically or internationally, are having COVID conversations.
Depending where you are in the world, some are still in the eye of the storm, managing the immediate
consequences of the pandemic. And elsewhere, it is the economic building back that people are focused
on. One thing is for sure, is that nothing is ever going to be quite the same. And secondly, that as ever, in
periods of crisis, it is the poorest countries in the world that suffer most. And within those countries,
women and girls who suffer even more. So our topics today, which are wide ranging, which is great.
Because it means we can really get some ideas flowing. What are the implications for financial stability,
financial inclusion, gender inequality, and international development. So I don't know how long we've
got. But I think we could spend several months probably on this one. But let's try and focus in on some
really new ideas.
Susanne Moorehead:
Let's think out of the box. And I would say that to participants as well. I don't think anyone has as an
answer yet. And I think this is a real inflection point, in terms of global finance and international
development, to think differently. And this is now rather cliche building back better. But what do we
mean by that? What might better look like? And I think, critically for this conversation, how on earth are
we going to pay for it?
Susanne Moorehead:
So without further ado, as Babak said, I'm not going to read out your illustrious bios. But I think both of
you are uniquely qualified to be able to talk to these topics. It's great to have all woman, if we're going
to be honest. It doesn't very often happen. We're usually hugely outnumbered. So let's, without further
ado, dive into the questions. Just for the audience, I think I will ask both Carmen and Sri Mulyani a
couple of questions. We'll have a little conversation. And then you need to use the Q&A function for
questions.
Susanne Moorehead:
I'll warn you. I'm much more likely to select questions that are short and sharp and to the point. And
that are interesting. And provocative, if you like. But ones that are really going to stimulate the debate.
Okay. So can I turn first to Carmen? Huge congratulations on your appointment. Something of a baptism
of fire I should think.
Susanne Moorehead:
And I understand you haven't actually managed to get to Washington yet. Which is not surprising. But
we're all learning to work in different ways. And you, I know, have done a huge amount of research and
work on the financial crisis in 2008. Just actually, when I had just arrived at the World Bank, 10 days
before Lehman Brothers went down. So I remember how we dealt with it then. I mean, there are an
awful lot of parallels being drawn. And my question to you is, are there any insights from the financial
crisis? Or indeed from the Great Recession? And where all, where should we stop thinking that we can
learn from history? I think you're on mute, Carmen.
Carmen Reinhart:
So I think that the first question of how similar this is to 2008-2009, is as you might imagine, a very
recurring one, given that that's the crisis most people still have fresh, or relatively fresh, in their minds.
And the first thing I respond to that, because it has enormous bearing on the resolution and what we
can learn or not learn. Is unlike that crisis, this crisis has health origins. Which also means that how
quickly we overcome it, to some degree, is outside this... Or to a large degree, is outside the sphere of
economics. That if the pattern of global disease ends with the first wave, that is a very different scenario
from one in which, like the influence pandemic of 1918, which ended only in 1920. It goes through more
than one way. So an important difference is, if you will, there is no such thing as a run of the mill
financial crisis. But 2008-2009 was a more standard financial crisis.
Carmen Reinhart:
Another important difference is 2008-09. Early on in the fall of 2008, and early 2009, the fall out was
indeed global. Emerging markets got hit, and so on. But the 2008-2009 crisis was a financial crisis in 11
advanced economies. And this is truly global. So indeed, the parallel's more akin to the '30s. In terms of
learning as to how quickly we can overcome it, I think recognizing problems early on. And now I'm
talking about on the economic phase. As I mentioned, unfortunately, until we know the path of the
disease, it's hard to make any kind of prediction about the path of the economy. But I think a takeaway
from 2008-2009 was that you need to deal with early recognition of any kind of debt overhang. I'm
referring now not so much to the government side, but also to the private side.
Carmen Reinhart:
And I think we can, early debt restructuring, a lot of care as to how much the government takes on
private debts from the banks, are maybe important lessons from 2008-2009. Ireland started out with
debt to GDP of 20 some percent, and ended up with debt over a hundred percent. Because it took on all
the bank debt. I hope we don't get to see that. I hope there's lessons learned about how to also manage
the financial stress, and the financial fragilities, that this crisis is creating. I don't think we hear, I'll
conclude by saying that I don't think we hear about that right now because, of course, we have the more
imminent concerns about whether the health crisis is over. We're still dealing with a reeling, and
crashing indicators, of economic activity. So that's not in the forefront. But the financial implications, the
financial crisis-type implications, should not be neglected at this stage.
Susanne Moorehead:
Great. Thank you very much. I think we're all having to add zeros to all our normal indicators. Let me
turn to Minister Sri Mulyani. you must have one of the most difficult jobs in the world at the moment,
haven't you? I think, being a finance minister where there's so much pressure on you from all sides, such
a huge responsibility to try and protect the enormous gains I know that you've made. Particularly in
terms of financial inclusion. But also presumably, your revenues declining. How does it feel? And what
are your early thoughts about how to protect the extraordinary progress, actually, that you've made?
Particularly for women in Indonesia.
Sri Mulyani:
Well, thank you Susanna. This COVID 19 is really different from 2008-2009, as Carmen mentioned.
Because at that time I was Finance Minister also during the 2008-2009 global financial crisis. Or even for
Indonesia, we have '97-'98. That is the Asian financial crisis. And Indonesia was crushed by that crisis
with a very huge bail out of the banking system. What we are experienced now is the crisis, which hit
hard directly to the people. Not through the financial institution, or corporation. But to the people.
Because as you mentioned earlier, this is about life and death. And also, in terms of their social welfare
and the economic, both in terms of job and the security of the people. So it's much more complicated
than the previous two crises in Indonesia. Even though we also have a very, very deep '97-'98 crisis.
Because it then triggered the political social upheaval, and change in the economy, and as well as
government.
Sri Mulyani:
This time, what is at least make us a little bit more safe, because it is hit all the country. So we don't feel
that we are really exclusively hit by a certain situation. That's one thing. But we also know that,
immediately, with this COVID-19 from the public finance view, it's really huge burden. You immediately
can see that the demand for all government spending increase. Because we need to protect from both
the threat of this COVID, so that health spending immediately increased dramatically. The social safety
net needs to be increased dramatically. Because people losing the job. Even the informal sector for
Indonesia, which is usually as a cushion for many people who cannot work on the pharma sector. They
cannot even exist, because we are restricting people movement. So definitely, virtually everything is just
stand still and stop.
Sri Mulyani:
And that's really a shock which has never happened before. Because even during the financial crisis, that
is not really the case. People can still move. So the economic activity, especially on the informal sector,
happening. And in this time, you cannot do that. So everything is stopped and stand still. So on the other
hand, then we have to start thinking two-three steps ahead. That is, the company is going to be nonperforming
in terms of their loan. Banking sector definitely is going to have a hit hard by this nonperforming.
And they have to do the restructuring immediately. So the government play a very critical
role when everything is actually stopped, and they don't want to take any further risk. Right? On the
other hand, the revenue side, as Susanna mentioned earlier, it's dropped. Our May figures on our
government revenue dropped by 10%. So we immediately can see that the deficit is going to increase.
Sri Mulyani:
Indonesia actually have more than 15 years adopting fiscal discipline. We are not allowed to have a
deficit more than 3%. So during this very critical situation, we have to have an emergency law to actually
opening this cap, and allowing us to have a deficit. Which originally, my 2020 budget is actually designed
to have a deficit. Only 1.76% of GDP. Primary balance is almost zero. So it's almost balanced. Now with
this crisis, only less than three months, our deficit it's been ballooning to become 6.4% of GDP. That
mean 46 billion dedicated spending only for COVID. Our total spending is almost 64 billion US dollar, for
the whole COVID related spending. And this increase our debt to GDP ratio, which is starting at 30% of
GDP. Now we will expect that it's going to increase into 37% only within this six months of this 2020. 6%
of GDP increase.
Sri Mulyani:
And also what is really critical, especially during March and May, Carmen knows maybe very well. The
market was so panicked. The global financial market. So basically no one dared to enter the global bonds
market. So when financing is becoming so volatile, market can really react in a more reasonable, rational
way. Then the government really have to think about how you are going to deal with the widening
deficit when the market is not open. If some country have bilateral, multilateral, as Indonesia have this
kind of sources, would Ben provide us with additional resources? ADB provides us AIAB provide us. A
bilateral country like Japan, Australia. France is, even in this case, providing as with
Australia, France is even in this case, providing us with additional finance. So that is something which
at least provide a cushion, especially when market is so jittery. Then we can see that, luckily the market
is becoming more rational again, of course, even with the same situation, same or even worse COVID
but market feel like they now understand the risk, which is I doubt that they really understand the risk.
Sri Mulyani:
But at least now they are digesting this and now they're start at least creating an opening. And for an
emerging country, and I believe even more developing countries, they are much in a tougher situation. I
think that access to finance is going to be very critical, very difficult during this time. For Indonesia, after
the shock in March and April, we were able to enter the global market or even the latest two weeks ago,
we actually issue the so-called global bonds and we have the interest rate on the price, which is the
lowest in our history.
Sri Mulyani:
It is because the global financial situation, the interest rate is a very low level. But the low level interest
rate in the advanced country is not actually immediately accessible for many countries in the world. So
there is really globally, the world is really facing with such as huge challenge. Fragmentation in the
market, disparity in terms of access, as well as price. And of course, disruption in our own economy,
whether this is coming from the half, then come to the social and economic shock because of this
COVID.
Sri Mulyani:
So Indonesia is responding very quickly, luckily, because my own experience in 2008, 2009, at least I
know the textbook about how we are going to adjust the budget. We have the emergency law, we
widen the deficit, we secure the spending, especially for the health and social safety net. We also start
immediately after that, thinking about the restructuring of the debt, especially the companies small,
medium and the prices. This is mainly the debt are woman's, so this is also for the financial inclusion and
equality. I think that is also good.
Sri Mulyani:
Most of them is actually women who own less than even 10 million rupees in Indonesia. And that is
exactly our focus, we've already put restructuring for six months and put them also additional subsidy
for their interest rate. This is really try to provide a relief for informal sector or very micro, we call it ultra
micro size of the company who actually own through the banking system.
Sri Mulyani:
We also have to deal with the non-banks institution, which is actually providing quite a lot of debt for a
specific motorcycle. One of the difference from this crisis combating to 2008, is that luckily, we have
technology Susanna. A lot of transaction is [inaudible 00:21:21] and online digital. So the pandemic here
in Indonesia, the center of the spread is Jakarta, who is more advanced on the technology. So even
though there is no contact, but the transactions still continue happening because many people shift into
digital online transaction, which is actually accelerating the transformation of our economy into a more
digital, also.
Sri Mulyani:
Abruptly, we also have to work from home. That's also changed the way we work very, very
dramatically. And it's happened after almost four months, working from home, the Finance Ministry is
still functioning. So I always make a joke with my team that maybe we don't need those office anymore.
The office building is becoming vacant for almost four months, but we still functioning. So this will
change dramatically a lot of things, Susanna, from health, education, the way we work and transaction
in economy. I think in a way that is going to be one of the silver lining and the blessing of this COVID. But
I must say as of now, it is still very hard, economically and of course from the public finance point of
view.
Susanne Moorehead:
Thank you. Thank you very much. So I think what I'm hearing from both of you is that there are some
lessons from history, but there's no blueprint. And I think there's a parallel on the health side. It's
certainly true that those countries that have been through the saws pandemic were better prepared,
but it's not the same. It didn't have quite the same global reach. People talk a lot about parallels with
the Ebola epidemic, which I worked on in West Africa, but that was a handful of countries with very tiny
populations. So, the donor countries were able to throw everything at it. So my next question to both of
you really is I think because every country is affected and everyone is having to use their fiscal
headroom to borrow.
Susanne Moorehead:
As you say, Sri Mulyani, I mean, levels that were against the law until very recently. I think I've seen a
figure of $90 trillion is basically what has been used to try and stimulate the developed world's
economies. So, my question is this, the demand in emerging markets, and particularly in the poorest
countries for additional resources is going to be very, very significant. Where is that money going to
come from?
Susanne Moorehead:
Certainly in my little piece of it, official development assistance, we are doing everything we can to
strive to protect those budgets, but everybody is under pressure. I know the World Bank has done a
huge amount, president Malpass has pushed very hard on debt suspension. Also front-loading IDA,
seeing how we can get resources into these economies, which Sri Mulyani you mentioned various
sources of finance. But my question to both of you is what can the World Bank in particular do and its
shareholders, but also the international financial system more generally to make sure that countries that
are really going to struggle to access these financial resources are able to? To prevent, I think, a reversal
on progress towards the sustainable development goals.
Susanne Moorehead:
I mean, we are looking at tens of millions of people falling back into poverty. We're looking at famine on
a scale that I think we have not seen in the world since the 1980s. We know this needs resource, where
might it come from if you were thinking out of the box, how would you think we could do that? Let me
turn to Carmen first.
Carmen Reinhart:
Well, I think I'm sort of going down the list of what the options are, the first line of defense as you know,
it's been headline after headline in terms of the volume of lending by the IMF, the World Bank and the
multilaterals. The official community has tried to respond with the existing tools and with new facilities
as well to facilitate as rapid and as uncomplicated a disbursement to deal with the emergency. So the
first line is of course a variety of fast disbursement emergency financing. Adding to that, being promoted
by the IMF and the World Bank, the G20 went ahead on the DSSI, the temporary suspension from May
1st to the end of the year of debt servicing for the poorest economies. These are the IDA countries, 76
countries that are eligible. More than half of them are participating to date, not all of them have
engaged.
Carmen Reinhart:
I will get to that. That is another temporary form of liquidity provision or resource provision. The DSSI
initiative is paired with also debt transparency conditionality, if you would, that's really about the only
kind of conditionality debt. This is to assure that the savings from debt servicing actually do go to their
intended uses in helping countries deal with a COVID emergency, be it in health, be it in provision of
services for the unemployed, providing a broader range of sustenance for the informal sector.
Carmen Reinhart:
Whatever, that is in the domain of the countries. But the important thing is that it doesn't go to debt
servicing for another creditor that is not participating. And on your broad question of where is the
financing coming from. So far, there are two concerns on the suspension initiative, and one is how broad
will China define it? So that if it's narrowly defined a lot of the loans, which is the lion's share of the
loans that were made by the Export-Import Bank, by the Development Bank to state owned enterprises
in many of the low income countries, if those are not covered, then the saving from not servicing the
debt to that country is much more limited.
Carmen Reinhart:
That's one concern. The other major concern is that as you know, our president has been very vocal
from get-go trying to encourage the private sector to participate in the stand still. And there's been
what I'd characterize as backpedaling. Initially there were statements made that were somewhat
encouraging about the prospects of having the private sector also in involved in the standstill, but that
has receded into the background and nothing has happened on that front. Now, on the street on the
bigger question of what to expect, where do you get the financing when your financing needs are so
large? I would note that beyond the emergency measures that I've alluded to in terms of IMF lending
and the multilateral lending, I think a real challenge as one who looks over the longer haul is neither the
IMF nor the World Bank, nor any development bank is the Central Bank.
Carmen Reinhart:
And so the capacity to do Federal Reserve style or an ECB style, let's create a facility to buy debt or to
provide support. These institutions are resource constrained, they are capital constrained. So what
makes those capital constraints have a higher weight in the radar screen is that this shock is
synchronous. That it's not a couple of countries, the minister already referred to the Asian crisis of '97,
'98, and that was indeed, Korea, Thailand, Indonesia, and the Philippines all were engaged with a fund at
that time, but it wasn't a global one. Even the more widespread crisis of the 1980s, which had its focal
point that Latin America, wasn't asynchronous. And the crises in Africa, Asia and the Middle East were
not asynchronous.
Carmen Reinhart:
So capital constraints are looking forward in terms of challenges for emerging market finance. One
challenge is the limitations of the official capacity. Another challenge, and this one worries me a great
deal that the minister rightly alluded to it, during March, we saw what can be best described as a really
scary shut down. Emerging market finance, if you look at the Institute for International Finance capital
flows, they collapsed. They did in a matter of four weeks, what it had taken 56 weeks to do in 2008,
2009. You saw the volatility, the VIX in the United States, plummet markets froze. And the point that I'm
making is a lot of market participants have taken heart and saying, "Look, things have changed
dramatically in the last few weeks. There's, not a lot, but a nontrivial amount of countries have been
able to access capital markets again, and capital has really flown in. And so the panic phase seems to
have subsided."
Carmen Reinhart:
There are two things that really worry me. How would you, there is a disconnect between the finance
side and what's happening in the real economy. I think the finance side is importantly driven by the fact
that the Federal Reserve lowered interest rates to zero. There is a search for yield, financial market
participants are searching for yields in part of that yield comes importantly from emerging markets. And
even as the fundamentals worsen, there's a willingness to lend. It is difficult to reconcile the fact that
credit rating agency downgrades are at an all time high, and that applies to downgrades and that it
applies to downgrades in outlooks, they're on an all time high. And it is hard to reconcile the fact that
the economic fundamentals seem to be doing worse, and yet the financing terms have improved
significantly.
Carmen Reinhart:
I'll conclude by saying that, I think the challenge in terms of financing ahead is not to be lured too much
by the temporary mood of capital markets. Because capital markets, as we had recent proof of are
extremely volatile, can turn on a dime. The vulnerability to a sudden stop in an environment in which
fiscal finances and economic conditions are as weak as they are because of the global situation. We
haven't even brought up the issue that this isn't just, as if COVID wasn't enough, this isn't just a COVID
crisis. It's also been a commodity, an oil crisis as well. We had the Russian-Saudi war, which impacted
commodities. And so in that kind of environment, I think a real challenge is how to limit or manage the
exposure so that the vulnerability to a sudden reversal to a sudden stop is less than -
Susanne Moorehead:
I'll bring Sri Mulyani in if I can.
There's a huge amount there, I mean and I'm not sure where to start. I mean I think this point that
what's happening in the financial markets as opposed to what's happening in the real economy is
something we're only just beginning to think about, and what the implications are going to be for people
losing their jobs in huge numbers, for people modifying their behavior. I mean as Sri Mulyani said, a lot
of people may not want to go to the office anymore. What about global travel for business or indeed for
pleasure? So it's how this will change the way that we are as economic actors.
Susanne Moorehead:
And then going back down to how do we finance it, one question that I hope will come up in the Q&A is,
"Should we, as shareholders of the development banks, be thinking about another recapitalization, but
doing it on the understanding that the balance sheet has to be worked far, far harder than it has been
and actually recalibrate our risk appetite a little bit?" I'm going to ask Sri Mulyani for a few comments,
and then I'm going to open it up to the audience, so please send your questions in. If your question is
specifically for one of the panelists, please indicate that. But Sri Mulyani, let me hand over to you.
Sri Mulyani:
Well Susanna. Okay. Can I start? Okay. When we talk about the source of financing, where we are going
to get the finance, I mean it really depends from country to country to country who got the financing
access. We just much more established whether your bonds market that domestically also deep enough,
then I think at least you still have this source of financing. Money [inaudible 00:00:38:02]. They are still
in the very early stage of actually this experiencing access of global bonds, as well as their own domestic
bonds market is still not well developed, not to mention for many low income countries that just still not
thing have the ability and capacity to issue the global market. So they, for those who really depend on
bilateral multilateral support, then they go to the private sector, usually the consortium of the
commercial bank, and they can have a very, very high price, high interest rate. We just disconnect with
what is actually happening globally.
Sri Mulyani:
For those who already have the access, then they are facing what Carmen mentioned and I mentioned
earlier, that is the unpredictability of the market during the most important time, then they really need
those financing. So you really have to find the right balance for a country. For Indonesia, even in this
case, we really have to deepen our domestic market, but even on a domestic market that is local
currency, the participation of foreign buyer is still quite significant. And when you are having this sudden
stop or capital outflow immediately, just like what happened last March. Within only one week, we have
104, 24 trillion. This is almost like 0.9% of our GDP, which is I think huge for a company to have that
shock. That's scary, as Carmen mentioned, it's really scary because we don't know how long this is going
to happen, right?
Sri Mulyani:
So really deepening your own market and relying on your own local currency is very critical. For
Indonesia, when we designed this deficit increased very dramatically to above 6%, we look the first
financing source is our own. That is we have some what we call it sovereign fund for education. So we
use all those longterm financing sources which just existed in Indonesia to become our first lender of
last resort. Second, we use our own domestic bond market, local currency, and we also relaxing very
critically at this moment, the ability of the central bank to buy to participate in the primary market.
Which has never happened in Indonesia and Indonesia is actually very entitled those kind of practice
because we have the central bank totally independent. They only taking care of inflation and stability on
the exchange rate. Now they really have to carry the same burden with the government by allowing
them to participate in the bonds market and the primary market as a spend by buyer.
Sri Mulyani:
So that at least give the certainty that this deficit can be financed. Of course, we have to be very careful
with the inflation and make sense of it, but as of now, this is not really the focus because we really focus
on the contraction or depression or recession that we are now seeing as the real threat for the
economy. Then, as I said, the role of the multilateral bilateral is very critical. As Carmen mentioned, I
really appreciate that all the lateral institution, World Bank, ADB, AIIB, even Islamic Development Bank,
they are all overing me. What can I do with the fosters disperse loan related to the coffee handling that
is on our half. So we really designed very quickly and then they then first disbursing and that really
create two benefit for us. Not only financing, but also to calm down the market, especially as sensitive
because they see that the reserve of the central bank is increased with our disbursement from this
multilateral.
Sri Mulyani:
So they see that, oh, it's not depleted. And it's okay because there is nothing wrong with our economy
to begin with, right? It is just a shock and then suddenly you really have to restart, what do you call it?
The trust and the confidence again. And that's why you mentioned, Susanna, whether it is time for this
Multilateral Institution to increase the capital again. I think what banks already have the capital increase
just recently. For Indonesia, we haven't used all the space that is allowed for us to access the World
Bank which is good, but we also know that maybe that's not the case for other. The capacity of the
Multilateral Institution as I mentioned is always very important when we are facing with the market,
which is so volatile and not rational in terms of their behavior. This has happened in 2008, when many
countries like Indonesia is actually we are okay.
Sri Mulyani:
Our [inaudible 00:07:07]. Is good and then suddenly there is a Lehman brothers case, and then the
behavior is totally irrational or erratic in this case. At that very moment, you need to have a stop gap
who rationalizing again the market through this kind of mechanism of Multilateral Institution who's
there to provide us with a spend by financing during this very critical time. So this complimenting,
especially when market is not reliable in terms of their behavior. And we know that in many episodes of
the crisis is always the case. And then of course in the long run, as Carmen mentioned, I mean we really
don't know what is going to happen in the work. First in terms of the trajectory of the recovery of this
economy, because this is not just one shock, you just putting the balance sheet into a better shape
again, and then you are going to recover, even if you restructure and you're balancing this okay now,
under this restructuring, you are facing with the situation of the economy in which people don't want to
travel.
Sri Mulyani:
They are not going to the shopping mall. They're not going to the movie. They're not going to the
restaurant. So we really don't know how people are going to feel safe that they are going to then behave
in a normal way that then can generate the economic activity. This is what is the most uncertain is
actually that kind of changed behavior. And until the vaccine is invented or it's going to be easily
accessed, then we are going to face with the situation. So we don't know how long, and that is creating
the very difficult part of restarting the economy. It's really like you really start opening up, but people
are still very cautious in this kind of situation. So with that, then the question is then, then you really
have to have... You are playing a long game.
Sri Mulyani:
This is not like one short shock and then we're going to be recovered. This is going to be like shock with
you and stay with you until quite some time. So if we learn from 1918 Spanish flu, that is two years, as
Carmen mentioned. That means are you going to be able to withstand these two years. In Indonesia
case when we designed the emergency law that is putting this limit, eliminating the limit of our deficit.
When I presented in the cabinet, I said, "We give three years for Indonesia to allow to have deficits
above 3%. And then after three years, we are going to the fiscal discipline again. Going back to the 3%
cap again." But this is really when people ask me, how do you know it's going to be three years? I don't
know, but maybe we're thinking that at that time this may be adequate.
Sri Mulyani:
And within this three years, we didn't have to make sure that you are going to be able to build the right
foundation for this recovery to happen. Bear in mind when now the deficit in Indonesia is 6.3, that
means next year, we have to be able to have a deficit which is lower than that so that the tapering of
this deficit is not going to create additional shock to the recovery of the economy. So it's really like
balancing between the fiscal design monitoring now policy, which is central bank allowing to finance this
deficit, to some extent, without jeopardizing the market discipline and reputation of our macro policy
credibility. These are all the set of policy that we tried to do in which you are responding to the
immediate situation without jeopardizing the heard earned reputation of macro stability and reputation,
and the markets continue functioning.
Sri Mulyani:
And that is exactly what I see as the most important. During this very difficult time, the role of the IMF
World Bank and Multilateral Institution is going to be very critical because they can support us when we
really need it. When there is no else source of financing that we feel that it is justified that kind of
financing. If we go to the market with such a very high price, it will not justify in terms of should you
really spend the money for this kind of urgency or emergency. So this kind of situation that I think the
design of the Multilateral Institution with all the instrument and the policy to be really, really put in the
context of global public goods or global public bad like this kind of coffee or climate change, that will
definitely require a certain mechanism, instrument and institution, global institution, who's allowing us
to compliment first the market discipline instrument, but they're not always reliable with this kind of
continuity because managing economy and country, you cannot say like, "Okay, we are going to take six
month holiday."
Sri Mulyani:
That is not the case. The country should go on. So continue no matter what, no matter how the volatile
of the economy of the market, but we try to avoid those permissing behavior of the market as much as
possible. And I think within that context, some policy warranted to be adopted. Sometime you really
have the market when market is not reliable, the government intervention and control justify, but it's
not going to be and not supposed to be substituting the market in the long run. So it's supposed to be a
temporary credible intervention, but then you have to then step back when the situation is getting back
to the normal. I think that kind of flexibility by the market by the government is really needed, but that's
required a legislation and institutional arrangement within each country to be able to do and conduct
those kinds of on and off and temporary as well as then you are withdrawing in a such a way that is
allowing this development process to continue in one country without the disruption coming from this
kind of shock.
Susanne Moorehead:
Thank you. Thank you. So I do want to open it up to our audience now. There's a huge amount there and
I come back to what I said at the beginning. Sri Mulyani, you have got one of the most difficult jobs in
the world because all of that is without being able to factor in how this is going to change the way
people behave and I think what it's going to do to the labor markets. I mean I think there are huge
numbers of jobs that will disappear and we're going to have to invent new ones. So Carmen, in that
spirit, there is a question that wants to know what shape the recovery is going to be on the basis of the
information we have so far. Now I know there's been a lot of talk, is it a V? Is it an L? Is it a W? Is it a U?
Susanne Moorehead:
If you could answer that, but also to talk a little bit about opportunities, particularly for women. And I
was very struck by what Sri Mulyani was saying is the digitalization revolution has been accelerated.
Because I think when we're looking at the recovery, whatever shape it is, we do need to make sure that
we are taking as much advantage of this crisis as possible. What do you think? I think you're on mute.
Yes.
Carmen Reinhart:
The shape of the recovery. I think there is a general tendency to confuse rebound with recovery, and I'll
be specific on what I mean. Rebound after you have growth collapses like what we're registering in the
first half of this year. You're going to have something, a rebound on growth that looks, oh, that looks
great. It looks like a V, but that is actually misleading because if you were to look at the level of per
capita income, it will take some years to get back to the pre crisis level in most cases. It varies across
countries, obviously, but if you look at the level of per capita income, you don't get this superficial
looking V-shape recovery. So answer, I think abstracting, and again, I highlighted that one of the things
that makes this situation particularly worrisome from the economic standpoint, it's encompassing
uncertainty because you don't know how long it's going to last.
Carmen Reinhart:
You don't know if the second wave is worse than the first, which was the case in the 1918 pandemic.
You just don't... In some sense, the disease is just in the driver's seat until there is a vaccine. And so the
best case scenario in my view still involves a U. You are going to see things that snap back and you say,
"Aha, that's a V." No. In most cases, the unemployment will take a while to settle back to pre crisis. The
per capita GDP will take a while. What is very troubling about the gender issue like the poverty issue is
that this crisis is very, very regressive. It's having its greatest impact on the low income. Many women in
many societies are clustered in that low income. So that's one dimension that I think the fact that it's a
very unequal... At the end of this, we're going to have a major setback to the gains inequality
distribution that we had seen over the... Gradually, very gradually over the last couple of decades.
Carmen Reinhart:
... You know where the ... gradually, very gradually over the last couple of decades. Another dimension
where I am concerned about the setback for women and girls is ... and you hear this narrative from
Subsaharan Africa, certainly. We saw a glimpse of it, you alluded to the Ebola epidemic, children are
being pulled out of school because of the pandemic. Not all those children return to school, and the
incidents of returning appears to be much lower for girls than for boys. We saw this during the Ebola
pandemic.
Carmen Reinhart:
Yet another factor that is a source of concern is a lot of the gains in financial inclusion for women also
came from very micro driven initiatives in terms of micro finance. I think for a while we're going to be
seeing a credit crunch. Look, I think governments and central banks are doing very much what they can,
but, and the minister was alluding to this, there is also risk aversion, the aversion to making some of
those riskier loans is something that we see again and again during crisis times, so that those are real
source of setbacks and concerns for women in the post COVID era.
Susanne Moorehead:
Thank you. That is a perfect segue. So, I've got loads and loads of questions, which is, I mean what is the
policy response to this regressive crisis? Sri Mulyani, with all your experience of financial inclusion and
reaching particularly the poorest within ... what can government do? Because, I think Carmen's right. I
mean, all the progress that we've made on girl's education, on later marriage, one thing and another,
risks being reversed.
Susanne Moorehead:
Again, the overlain on all of this is a domestic violence spike as well, which is really going through the
roof. So we know this, we see it happening. We know women and girls are going to be hardest hit. We
have an enormous array of policies and programs. What do we do to push this to the top of the agenda?
And my guess is that the answer will have as much to do with politics as economics.
Sri Mulyani:
Yeah, well, as I said, but for many politicians, they also realize that this COVID hit directly to the people.
So in terms of their asking for the government or support for the government, for the political party to
support government, to do an extra ordinary intervention, I think more or we're relatively there. So we
are not having a constraint in terms of the urgency and the demand for us to actually intervene or
designing a policy. The challenge is more how in this very shock and emergency situation, you are going
to be able to design the good policy that is always like the trade off between the speed and the fast
response with your ability. And especially when the country doesn't have, what you call it, the necessary
condition of, for example, like the system in place for the health, for the education, for the social safety
net.
Sri Mulyani:
For example, like in Indonesia, do you have the by name and address of the poor people in Indonesia?
We have the 40% bottom by name, by address. This is 29 million households, but they are not updated
after the recent situation, especially when they are hit by the COVID. There will be new poor, which is
not going to be included in this database. So when you are expanding your social safety net, I mean,
when I said earlier, the technology helping a lot, because you can easily digitize and you are actually
transferring through the bank.
Sri Mulyani:
Indonesia is an archipelago country. We still have a remote area. Luckily, the COVID is actually, maybe
it's not the word, luckily is not appropriate, but the COVID hit mostly in a city, big city, like capital city of
Jakarta. So in this case, the social safety net can be done through our transfernality through the
payment system digital, and the role of fintechs in Indonesia has been increased very dramatically. So
that is all the case in which you have this technology and the system that is allowing you to respond.
Sri Mulyani:
But when you talk about targeting, you maybe still have the inclusion/exclusion error because of, first,
updating of the data and where. Then also the COVID creating a new poor, which just not capture in the
existing database. So, that is one thing that is the challenge.
Sri Mulyani:
And the second one is of course, for us to actually try to find, even if you're not an ideal case, what else
you can do in order for you to lead, especially the poor and the most vulnerable? For Indonesia, we find
that providing subsidy or even electricity bill for the lowest household is the most effective one.
Sri Mulyani:
This is the one, more than seven 24 million households who actually register on the electricity bill at the
lowest level. They actually only have 450 V per month, the capacity. This, we put them totally free
electricity for six months. That's helped them a lot. So we try to find how, and what is the best way to
reach the bottom 20% or bottom 40%, knowing that maybe it's not what you got perfect, but at least we
tried to cover from many different form.
Sri Mulyani:
In addition to that, we also converted some of the existing policy. For example, we have what we call it,
village, fund transfer to each village in Indonesia. We have 75,000 villages in Indonesia. So we said that
one third of this village fund should be comforted to become social safety net. So, that subsidy to the
poorest hard hit. This because for Indonesia, those who are employed usually go back to their village.
Sri Mulyani:
They work temporarily in a city, and when the city close, locked down, then they go back to their village.
That's where we provide safety net on a village level. So what I'm saying is that we try to use all the
policy and instrument available that is allowing us to respond in a very short time. And that is very, very
critical to do that. So I think that that's what the country needed, ideally. And that's why, as I said
earlier, this crisis trigger the need for reform. That's why we said that we should not waste this crisis.
We use this to trigger the reform in a health sector, in education, social safety net, including the
accuracy of the data and how we are going to prepare.
Sri Mulyani:
In terms of the recovery, as Cameron mentioned, and I also had mentioned earlier, because of this
uncertainty what we should do is just preparing for a longer period of uncertainty. Carmen mentioned
about the risk of reverse, and that's exactly what is happening. This time to jumpstart again how the
bank, after they restructure the loan and the company, or the corporation, or even small to medium
enterprises after they restructure, they both don't want to restart the working capital again. They just
want to wait under all the restructuring process finish. And that maybe can be six months, eight, nine
months, one year. So you can imagine, Susanna, that if you wait for 6 to 12 months, meaning that the
economy is just going down, there is no credit. Now, if I ask, "What is going to be the credit growth?"
Sri Mulyani:
We used to have like 12% for years, down to 9%. Now what I have is only 3% or 4%. That's lucky enough
that you still have the positive growth of a credit. That is maybe on the area we disaggregated to the
health activity and food and beverages, which is still actually moving, but other, I think they just
stopped. So now the government is trying to do, introducing what you call it, risk management or
incidents for the new working capital loan, so that the bank feels safe to lend again, and the company,
they are going to feel protected because the government will pay them the incidents of the first loss of
their working capital.
Sri Mulyani:
So we put budget dedicated for this kind of incidents for the new working capital, because we don't
want them to like, just stop only on the restructuring. On the woman, I think this is very important for
us, because as Carmen also mentioned, the COVID really hit hard, especially the poorest and the
woman. And you mentioned about domestic violence. We also heard from the Ministry of Woman
Affairs, this case is actually escalating. When people are only at home and as specific for many poor area
that they are in poor housing, then the domestic violence is going to be one of the biggest challenge that
we have to face.
Sri Mulyani:
At least from the economic point of view, what we try to do is try to help, as I said earlier, the
government immediately during this situation dedicate the restructuring and support for the ultra
microcredit, which is 80% the borrower are woman. We have more than 8.2 million woman borrowing.
And they actually, the one who do the very basic activity, economic activity we said to them that you
don't have to pay your principal, or even in this case, all the interest rates will be like paid by the
government. We still thinking at this moment, should we have more by providing additional capital to
them? Because they are the one who actually still maintaining maybe basic transaction among people,
whether this is in the village, rural area, or a among the informal sector, we just now start moving again.
Sri Mulyani:
So we are continue improving our policy. We will look at where the area that we actually can do more to
help, especially the most vulnerable that is the poor people, as well as the woman.
Susanne Moorehead:
Thank you very much. I mean, what I take away from this is there are so many systems that were put in
place for other things. I mean, social safety net, so digitization, and actually the key is to use those
existing systems in innovative, flexible ways in order to get a quick response out there. And that there's
a huge amount of being tried, tested, probably some things going wrong. We need to make sure that
we're sharing these lessons in real time, because everybody I think is struggling with this in a very
complex and challenging time.
Susanne Moorehead:
So I'm going to have to draw this to a close very soon, because I know everybody has a day or an
evening. I one last quick question for both of you, let me start with Carmen. I mean, what's the single
most important lesson you've learned from this crisis in two minutes or one minute. You're on mute,
Carmen.
Carmen Reinhart:
I think that neglected problems always come back to haunt you. And I think one
area where the world at large advanced emerging the idea of preparation for a global pandemic was
something that had gone out. So I think a legacy of this is going to be a focus on resilience, and resilience
on the really core health and food that perhaps I think got waylaid along the way.
Susanne Moorehead:
Thank you. Thank you. What about you, Sri Mulyani?
Sri Mulyani:
I think when the sunshine you have to fix your roof. So basically you really do the counter cyclical when
situation is actually happy, everybody partying. This is the real work for you to strengthen your
fundamentals so that you are always sure that when the next crisis happened, you have the buffer, you
have the space, and you have the capacity to deal with. I mean, that's happened in a fiscal side,
monetary side, on a social safety net, and in many other area. So basically don't waste when situation's
good. That mean you have to work harder so then when situation is not good, then you also have to
work harder, but at least you are starting in a much better situation.
Susanne Moorehead:
Thank you. Thank you both very much. So if I may take your two lessons and combine them, I think it is
put solar panels on your roof and don't think that climate change is not coming down the track very,
very fast. We haven't talked about that at all. Maybe another time. This has been a hugely stimulating
conversation, such rich experience on both sides, and I think seeing Sri Mulyani with your to do list on
the one hand, then Carmen trying to get the bank to be as helpful as possible has given our 200 plus
participants a lot of insights into, I mean, how difficult this is, but also just how hard people like you are
working to try and come up with innovative, creative solutions, especially for women and girls.
Susanne Moorehead:
Great to see you both. Thank you very much, indeed. Thank you to our participants. Let's let's close it
there. Enjoy the evening or morning, depending where you are. Goodbye everybody.
Sri Mulyani:
Thank you, Carmen. Thank you, Susanna. Bye.