"We must increase alertness especially emerging countries whose banks have loans to Europe which are vulnerable to cuts from European financial institutions," he said.Denpasar, Bali (ANTARA News) - Bank Indonesia (BI) Governor Darmin Nasution said the impact of the European economic crisis on Indonesia was becoming increasingly real and therefore serious attention needed to be given to its mitigation.
"With the crisis deepening, investors will take their money out of Europe to be put in other countries. If market players stop investing, including in assets in emerging markets, the contagion will finally reach Indonesia. Adequate measures will be the only way to protect ourselves," he said when opening an international seminar on "Challenges in Macro-Finance in Developing Markets" here on Thursday.
He said US dollar liquidity in banks in the world continued to decline requiring adequate attention and policies to maintain the stability of the financial sector so that it would not hit the economic development of emerging countries.
"We must increase alertness especially emerging countries whose banks have loans to Europe which are vulnerable to cuts from European financial institutions," he said in the seminar which was also attended by representatives from developing countries.
He said management of capital flows would be a challenge because volatility in the exchange rate could cause a loss especially in economies like Indonesia whose money market is relatively slim and limited to protecting mismatch.
Besides that he said capital market in Indonesia is generally still shallow and vulnerable to price movements that could disrupt the integrity of its financial system as it could move fast upon negative sentiment like what has happened in the past two years.
"In other words the financial system in the emerging markets is very weak to absorb significantly capital flows as a result of a decline in the asset quality and financial vulnerability. This condition makes the region become a fertile area for a crisis if market discipline is not optimal and supervision is very weak," he said.
Darmin said increasing supervision and market discipline would be the two factors which are key to preventing a financial crisis especially transparency improvement and tightened supervision of the implementation of prudential regulations that would strengthen bank and non-bank stability.
He said macro-prudence becomes important as a main requirement to creating a healthier economy.
"When the financial service authority becomes effective good coordination with the central bank that is assigned to monitor macro-prudence would be important to reduce systemic risks in the financial sector," he said.(*)
Editor: Heru Purwanto
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