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Indonesia Tests Central Bankers as Rupiah Drops: Southeast Asia

Indonesia Tests Central Bankers as Rupiah Drops
The Bank Indonesia logo is displayed at the central bank's headquarters in Jakarta. Indonesia’s political system can pose challenges for a speedy succession at Bank Indonesia. Photographer: Dimas Ardian/Bloomberg

Indonesian lawmakers will assess candidates to become the central bank’s deputy governor for monetary operations today, seeking to fill a post that has been vacant since 2011 as the nation grapples with a falling currency.

Commission XI, a parliamentary panel for financial affairs, is due to vet Perry Warjiyo and Hendar, who goes by one name. Both are Bank Indonesia executive directors for monetary policy, while Warjiyo also oversees economic research. If the panel rejects both of President Susilo Bambang Yudhoyono’s nominees, he would need to submit new names.

The same committee will also examine the credentials of Finance Minister Agus Martowardojo for the position of governor in less than two weeks. At stake is safeguarding the central bank’s leadership and curbing prolonged vacancies in an institution wrestling with elevated inflation, a trade deficit that widened to a record in October and one of the worst performing currencies in Asia in the past year.

“For decision making, ideally the positions that need to be filled ought to be filled as this concerns checks and balances,” said Eric Alexander Sugandi, a Jakarta-based economist at Standard Chartered Plc. “The most immediate challenge now is the current account because this deals with the rupiah. So these two are the focus.”

The rupiah weakened by the most in almost two weeks today, falling 0.2 percent to 9,708 per dollar as of 11:45 a.m. in Jakarta, prices from local banks compiled by Bloomberg show. The Jakarta Composite Index fell 1.3 percent, heading for its biggest one-day drop since Aug. 30.

Improve Effectiveness

Indonesia’s political system can pose challenges for speedy central bank succession. Current Governor Darmin Nasution, 64, assumed the top post in September 2010 after more than a year as acting leader. It took the president about a year to nominate him after the previous head, Boediono, resigned in May 2009 to become Yudhoyono’s running mate in the presidential election.

The president last month named Martowardojo as his sole candidate to succeed Nasution, whose term ends May 23. The parliamentary committee has agreed to assess the finance minister for the governor’s job on March 25.

Appointing a new deputy governor will improve the central bank’s effectiveness in managing monetary operations, said Destry Damayanti, chief economist at PT Bank Mandiri in Jakarta. Warjiyo or Hendar must know how to balance policies that affect inflation, the rupiah and economic growth while addressing the external imbalance, she said.

“Both names are credible,” Damayanti said. “Perry is more experienced with the monetary policy side, while Hendar is more experienced in monetary management, such as when to intervene. Whoever is selected can get along with Agus.”

Trade Shortfalls

The government is targeting economic expansion of 6.5 percent to 6.8 percent this year after gross domestic product rose 6.1 percent last quarter from a year earlier, the slowest pace in more than two years.

Indonesia’s inflation accelerated to a 20-month high in February and Southeast Asia’s biggest economy has expanded above 6 percent for the past nine quarters, limiting the central bank’s scope to cut interest rates. Bank Indonesia held its benchmark at a record-low 5.75 percent for a 13th straight month in March. Widening trade shortfalls are a constraint to an investment grade rating, Standard & Poor’s said last year.

Yudhoyono’s administration has sought to cut fuel subsidies and allocate more spending to infrastructure to spur growth. It limited the use of partially government-funded diesel in January, after protests derailed plans to raise fuel prices in 2012.

Fourth Attempt

“The challenge for the deputy governor is quite daunting,” said Anton Gunawan, chief economist at PT Bank Danamon Indonesia in Jakarta. “Especially when it comes to the current account deficit and a shallow foreign exchange market.”

Bank Indonesia has stepped up intervention to support the rupiah and narrow the gap between local and overseas prices, Hendar said in a Jan. 28 interview. The central bank may take action on its key rate if the currency’s depreciation causes inflation to quicken, Deputy Governor Hartadi Sarwono has said.

Today’s so-called fit-and-proper test marks Warjiyo’s fourth attempt at becoming deputy governor. Warjiyo, 54, has a Ph.D. in monetary and international economics from Iowa State University, and was an executive director for the Southeast Asia voting group at the International Monetary Fund from 2007 through 2009. He lost out to Sarwono in 2008, while in 2010 and 2011 Halim Alamsyah and Ronald Waas were picked.

Hendar, 55, has a Master’s degree in development economics from Williams College in the U.S., and has never been tested for the role. Lawmakers will likely choose Warjiyo, as he is considered more senior and more qualified, Gunawan said.

Supervisory Role

Bank Indonesia is due to hand over its banking supervisory role to the newly established Financial Services Authority, which will oversee lenders starting next year. The central bank currently has three deputy governors and one governor. The law states the board consists of at least four deputy governors and a senior deputy governor, besides a governor.

Deputy Governor Halim Alamsyah, who oversees banking supervision, took charge of monetary operations when Budi Mulya took on a non-active position in October 2011. Mulya was removed from the monetary role after he was investigated by the state auditor over a 1 billion-rupiah ($103,000) loan he obtained from the owner of PT Bank Century, which he said was personal. The lender was bailed out during the 2008 global financial crisis.

As Yudhoyono adjusts his top policy making team, Indonesia may be at risk from unpredictable policy making ahead of the next presidential election due mid-2014, according to Capital Economics Ltd.

“Policy making in Indonesia has become increasingly haphazard,” said Gareth Leather, a London-based Asia economist at Capital Economics. Martowardojo has clashed with the cabinet over fuel-subsidy reform and the need for fiscal discipline, so Yudhoyono’s move may be an attempt to sideline him from government decisions and “open the door for a more profligate approach to fiscal policy ahead of the election,” he said.

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