Indonesian lawmakers yesterday approved Finance Minister Agus Martowardojo to become the next central bank governor after he said his priorities would be a stable exchange rate and keeping inflation low.
Commission XI, a parliamentary panel for financial affairs, voted in favor by 46 to 7, with one abstention, after questioning Martowardojo for about eight hours March 25 on bank ownership, market reciprocity, inflation management and monetary policy. President Susilo Bambang Yudhoyono had nominated Martowardojo, 57, to succeed Governor Darmin Nasution, whose term ends May 23.
The approval is set to be endorsed by Parliament on April 2, allowing the president to reshuffle his top economic team as Southeast Asia’s biggest economy grapples with a weakening currency, a current-account deficit and elevated inflation. Focus now turns to whom Yudhoyono will name finance minister as the government prepares to adjust its fuel-subsidy policy to curb oil imports and free up funds for infrastructure.
“Agus’s style in monetary policymaking remains to be seen but generally we do not expect to see any drastic change in Bank Indonesia’s policy mix,” Helmi Arman, an economist at Citigroup Inc. in Jakarta, said in a note today. With eyes now on the selection of the new finance minister, and “given that the cabinet’s service period is less than two years, the new finance minister ideally needs to be able to hit the ground running.”
The rupiah was the worst performer last year among Asia’s 10 most-traded currencies excluding the yen, and forecasts for the currency are being cut by the most among Southeast Asia’s emerging-market currencies as Indonesia’s sliding foreign reserves prompt investors to sell the nation’s assets. Rupiah forwards reached the weakest level since January yesterday.
The central bank will “guard rupiah stability in line with its fundamentals,” Martowardojo said in response to lawmakers’ questions March 25. Bank Indonesia won’t defend the rupiah beyond a certain level, he said.
Emir Moeis, Commission XI chairman and a member of the opposition Indonesian Democratic Party of Struggle led by former President Megawati Soekarnoputri, called on Yudhoyono to appoint a new finance minister quickly.
“President SBY needs to appoint the new finance minister soon to give confidence to the market,” he said after yesterday’s vote. “If the president takes a long time, it will have a negative impact on Indonesia’s market.”
He also urged the president to promote someone from within the Finance Ministry, so he or she would have the experience necessary to quickly master the job.
“The interesting question is who will be the next finance minister,” Agost Benard, an associate director at Standard & Poor’s in Singapore, said before the decision. The central bank “will continue to be inflation targeting with an eye on economic growth. And that will happen in strong cooperation with the finance ministry.”
Inflation accelerated in February to a 20-month high of 5.31 percent. Consumer-price gains are targeted at 3.5 percent to 5.5 percent this year and next, Martowardojo said, adding that the aim is to keep inflation low with a policy mix of interest rates and the exchange rate.
The country’s lending rates are “quite high” because some banks are paying a higher deposit rate, making their cost of funds expensive, he said. The central bank kept its benchmark rate at a record-low 5.75 percent in March.
“To keep inflation low is the main job of Bank Indonesia,” Martowardojo said. “We need to be cautious, as when investors see there’s inflation pressure, it can trigger capital outflows.” A weakening rupiah can add to inflation pressure and hurt economic growth, he said.
Indonesia’s foreign-exchange reserves fell $7.6 billion in the first two months of 2013 to a two-year low of $105.2 billion and a further drop of at least $2 billion is forecast for this month, according to Barclays Plc and two local lenders. That will put downward pressure on the rupiah, according to Barclays, BNP Paribas SA and Aberdeen Asset Management Plc.
The trade deficit widened to a record in October. Reserves are also under pressure from fuel subsidies. Indonesia limited the use of partially government-funded diesel in January, after protests derailed plans to raise prices in 2012. Fuel subsidies rose to 211.9 trillion rupiah ($22 billion) last year as the country imported about $29 billion of oil products, based on official data.
Yudhoyono said on March 13 the government is formulating a more targeted fuel-subsidy policy because the current one benefits middle to upper-income groups more than the poor. The plan may be fleshed out in one to two weeks, he said.
“We need to be cautious, as we have problems with the trade deficit and the current account due to higher oil imports,” Martowardojo said March 25, adding that failure to introduce concrete measures to cut fuel subsidies will hurt the budget in the third quarter. “If Indonesia can’t manage fuel subsidies, it can add pressure on the rupiah and reduce foreign-exchange reserves.”
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.
Yudhoyono hasn’t said who he would appoint to replace Martowardojo at the finance ministry should he win Parliament approval to move to the central bank. Julian Aldrin Pasha, a presidential spokesman, has denied rumors that Martowardojo and Bank Indonesia Governor Nasution will switch jobs.
The president wants Martowardojo to maintain monetary and fiscal stability, Pasha said in Jakarta today.