Indonesia Central Bank Choice Elicits Mixed View: Southeast Asia

Indonesia's Minister of Finance Agus Martowardojo
Agus Martowardojo, Indonesia's minister of finance, replaced former Finance Minister Sri Mulyani Indrawati in May 2010, when Mulyani joined the World Bank as a managing director. Photographer: Dimas Ardian/Bloomberg

President Susilo Bambang Yudhoyono’s surprise choice of Agus Martowardojo to run Indonesia’s central bank met with mixed reactions, with some questioning his record as finance minister and others praising his banking experience.

Yudhoyono nominated Martowardojo as his only candidate to succeed Bank Indonesia Governor Darmin Nasution, whose term ends May 23. Martowardojo, 57, former president director of PT Bank Mandiri, was rejected for the top central bank post by the parliament’s finance committee when Yudhoyono picked him in 2008.

“He is a very experienced senior banker,” Eugene Galbraith, deputy president director of Bank Central Asia, the country’s biggest bank by market value, said in a mobile-phone text message. “He has done well as finance minister and now combines top-level knowledge of both the government regulators and the banking community.”

At stake is Martowardojo’s ability to shepherd Southeast Asia’s biggest economy as it faces a weakening currency, a widening current-account deficit and inflation stemming from power tariff increases and higher wages. While PT Samuel Sekuritas economist Lana Soelistianingsih says he failed to provide fiscal support for the economy last year, Bank of America Corp.’s Chua Hak Bin says the minister has helped keep the budget deficit in check.

The benchmark Jakarta Composite index rose 1 percent today. The rupiah was little changed at 9,705 a dollar, having fallen about 2 percent in the past six months, the biggest decliner after the yen among 11 Asian currencies tracked by Bloomberg.

Fuel Subsidies

Martowardojo said today he will continue Bank Indonesia’s “good policies” if selected to lead the authority. The central bank’s focus should be managing inflation and it must continue preparations to transfer its supervisory role of commercial banks to the Financial Services Authority, he told reporters in Jakarta. The next challenge is to persist with reforms, the finance minister said.

Since Martowardojo became finance minister in 2010, Indonesia’s government has sought to reduce fuel subsidies and allocate more spending to infrastructure. The country limited the use of partially government-funded diesel last month, after protests derailed plans to raise fuel prices in 2012.

“The ministry of finance has been the one that has been more advocating that fuel prices should be hiked and highlighting the financial cost of such subsidies,” said Chua. “The fiscal deficit has been kept in check, public finances are in order, it’s hard to find fault with any track record.”

Still, the president’s decision to tap Martowardojo for the central bank surprised analysts including Fauzi Ichsan, Jakarta-based economist at Standard Chartered Plc, who said the move would mean a second change in the Finance Ministry’s leadership during Yudhoyono’s second term.

Experience Issue

“We know that Martowardojo has no experience to maintain monetary policy,” Ichsan said. “The challenge for the next governor is not easy as he needs the ability to maintain the rupiah and manage the reference rate. Looking at the experience of Martowardojo, I’m afraid the finance committee may reject him as it’s happened before.”

The parliament’s finance committee will conduct a so-called fit-and-proper test on Martowardojo before he can be approved by lawmakers in a plenary meeting. Martowardojo replaced former Finance Minister Sri Mulyani Indrawati in May 2010, when Mulyani joined the World Bank as a managing director.

“Parliament will decide whether we will receive Martowardojo’s nomination for the next governor,” Harry Azhar Azis, vice chairman of the finance committee, said Feb. 22. “We realize that the previous finance committee rejected Martowardojo’s candidacy for Bank Indonesia governor. This time it will depend on the fit-and-proper test.”

Career Banker

Martowardojo started his career at Bank of America Corp., according to the Finance Ministry’s website. He was president director of PT Bank Mandiri, the country’s largest lender by assets, before becoming finance minister. The Amsterdam-born banker holds a bachelor’s degree in economics from the University of Indonesia, according to Bank Mandiri’s website at the time of his appointment to the finance role.

Martowardojo worked at the Jakarta branch of then-Bank of America and several local banks before joining Bank Mandiri in 1999. Asiamoney magazine named him Indonesia’s best executive in 2009, crediting him with turning around the lender and reducing its bad debts.

Nasution, 64, assumed the central bank governor post in September 2010 after more than a year as acting governor. He has a doctorate in economics from University of Paris, Sorbonne, France, and is the 14th governor in the central bank’s six-decade history. He became acting governor after Vice President Boediono resigned in May 2009 to become Yudhoyono’s running mate in the last presidential election.

Banking Knowledge

No one expected the president to nominate Martowardojo for the Bank Indonesia job, according to Soelistianingsih at PT Samuel Sekuritas.

“This is like, we need a cardiologist but the president gives us a dentist,” Jakarta-based Soelistianingsih said in a phone interview. “He failed to reach 2012 budget assumptions such as GDP growth target, budget deficit, rupiah level, oil lifting, slow government spending. This shows he has no knowledge of macroeconomics even though he was a good banker.”

Martowardojo has knowledge of the banking system and Indonesia’s new Financial Services Authority, Coordinating Minister for the Economy Hatta Rajasa told reporters today. There are many reasons Indonesia couldn’t reach its 2012 budget and macroeconomic targets, including external and internal ones, he said.

“Slow government spending is because other ministries can’t disburse their budget in line with their target, so it’s not because of the finance minister,” Rajasa said.

Growth Slowing

The economy expanded 6.11 percent last quarter, the slowest pace in more than two years. The central bank this month kept its reference rate unchanged for a 12th meeting at a record-low 5.75 percent.

Bank Indonesia has stepped up intervention to support the rupiah and narrow the gap between local and overseas prices, Hendar, executive director for monetary policy at the central bank, said in a Jan. 28 interview. Bank Indonesia may take action on its benchmark rate if the currency’s depreciation causes inflation to accelerate, Deputy Governor Hartadi Sarwono said last month.

Foreign Debt

Indonesia must watch its private foreign debt, Martowardojo said in December. “There’s a phenomenon of rising private foreign debt that needs to be watched out for” because of currency and tenor mismatch concerns, and banks need to urge clients to bring their foreign-exchange export revenue back into the domestic market, he said then.

“Most impressions would have come across more of him as a banker rather than a central banker per se so I think it’s still a big question mark on his views on monetary policy,” said Chua at Bank of America. “I think the Ministry of Finance has been fairly silent on currency issues or interest rates.”

The central bank is hoping for a “good result” as it faces new challenges with the Financial Services Authority taking over bank supervision next year, spokesman Difi Johansyah said today.

The central bank is an independent institution that is ready to work in harmony with the government, Martowardojo said today. The next finance minister should be a professional, a technocrat or someone from within the bureaucracy so that reforms and coordination between fiscal and monetary authorities will continue, he said.

Martowardojo said he will discuss with the central bank and Financial Services Authority officials regarding the activities of foreign banks in Indonesia. It’s important that a reciprocal principle regarding foreign banks becomes the “first guideline,” he said, declining to comment on a plan by Singapore’s DBS Group Holdings Ltd. bid to buy Bank Danamon Indonesia.

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