Jakarta (Antara Bali) - Bank Indonesia said it fully supports the government policy to accelerate structural reform to create a stronger supporting environment for investment.
"Improvement of economic efficiency as a whole will make Indonesia very attractive, not only because of its huge domestic market, but also as a global production base," Agus Martowardojo, the central bank governor said at a bankers dinner here on Thursday night.
Agus said strategic and tactical steps have been accelerated by the cabinet at the knots of urgent structural reforms.
Among the knots being strengthened are physical connectivity mainly maritime connectivity and its integration with land connectivity such as railway, and digital connectivity, he said.
"Improvement in the knots, we believe, will significantly cut logistic cost, that the business sector would be more competitive in the global market, and equitability of cost efficiency would be created all over the archipelago," he said.
He also noted steps of acceleration of structural reform to reduce business micro risk.
He said he was confident that investment climate all over the country would be better ahead as a result of improvement in business facilities, quality of public services and management and improvement of human resources in the bureaucracy.
"No less important is the government attempt to launch fiscal reform. Product based subsidy so far has reduced opportunity to strengthen basic capital for development," he said.
Agus said improvement of human resource quality, and development of infrastructure, capacity of innovation and institutions intended to bring the country to the ranks of advanced nations have been hampered by misappropriation of subsidy.
"Therefore, we fully support the step taken by the government to appropriate BBM subsidy for people baaed subsidy and for infrastructure development," he said.
In the financial sector, Agus said he sees structural challenge that also needs revamping . Indonesia is still short of alternative sources of financing resulting in the country lagging far behind other nations in this region.
"The structure of our financial market is not yet diversified and the stock market as a source of investment finance has not played a significant role," he added.
Agus warned that the economic challenge to be faced by the country ahead is not easy that serious preparation is needed.
One of the most immediate challenges is turbulence in the global financial market, that could be triggered by an increase in the US interest rate - the Fed fund rate, Agus said .
"Sooner or later, as expected by many, normalization of the policy by the The Fed will come to reality," he said.
An increase in the US interest rate, however small, would have its impact on geo-monetary constellation, he added.
"Reevaluation of investment risk and valuation of financial asset in the global market to follow the increase in the Fed fund rate , could trigger shifts in the placement of portfolio investment between countries," he said.
As a result, the liquidity of US dollar could tighten especially in countries having weak economic fundamentals.
"For Indonesia, normalization of monetary policy in the United States could result in a drop in capital inflows, which so far have contributed to fiscal finance and helped cope with current account deficit," he said.
In addition, Bank Indonesia still sees macro vulnerabilities, he said pointing to swelling corporate foreign debts, that are mostly not protected from the risk of exchange rate instability.
"Accumulation of portfolio capital by foreign investors in state bonds has also swelled and this could easily flow out and trigger exchange rate instability when there is external turbulence," he said.
In addition Agus said he also sees structural challenge in the real sector, in the form of weakness in domestic production structure.
"So far our heavy dependence on exports of human resource had low added value that our economic growth is sensitive to price fluctuations," he said, adding "our capacity to export goods with high added value is still low." (WDY)
