Yudhoyono’s Bid for Outsiders at Bank Indonesia Faces Test

Indonesian President Susilo Bambang Yudhoyono’s bid to bring more outsiders into the central bank’s top management team is being tested as lawmakers assess the two candidates he proposed for senior deputy governor.

The president’s two nominees for the No. 2 job at Bank Indonesia are Mirza Adityaswara, chairman of the agency that guarantees bank deposits in Indonesia, and Anton Gunawan, PT Bank Danamon Indonesia’s chief economist. Both gave presentations to lawmakers today. Parliament’s Commission XI, which oversees financial affairs, will decide on their eligibility tomorrow, Harry Azhar Azis, the panel’s deputy chairman, said in an interview yesterday.

Yudhoyono moved his finance minister Agus Martowardojo to head the central bank this year as the Southeast Asian nation grapples with accelerating inflation, slowing growth and a sliding currency. The former president director of PT Bank Mandiri, the nation’s largest lender by assets, has overseen a combined 1.25 percentage-point increase in the benchmark interest rate since early June.

“To reduce imports and the current-account deficit, the central bank needs to raise the interest rate, but we can’t raise the key rate too high,” Adityaswara said at parliament today. “Bank Indonesia needs to focus on managing inflation, the currency, without hurting the economy.”

The rupiah touched the weakest level since April 2009 today on concern that the government will struggle to rein in a record current-account deficit. The currency fell 0.8 percent to 11,065 per dollar at 5:47 p.m. in Jakarta, prices from local banks compiled by Bloomberg show.

Under Pressure

The rupiah will remain under pressure as long as the current-account gap and higher inflation persist, Adityaswara said. Indonesia is depending on foreign capital to finance its state budget and economy, and investors want to see stability, he said.

Consumer prices rose 8.8 percent in August from a year earlier, the fastest pace since January 2009, data showed yesterday. Inflationary pressures are coming from the supply side and a fuel price increase, Gunawan told parliament.

Bank Indonesia’s combined 75 basis points of rate rises in June and July were a sufficient response to inflation, said Gunawan, who predicted the central bank would leave the rate on hold in August. The monetary authority paused at its scheduled meeting on Aug. 15 and then raised rates by 50 basis points at an extraordinary meeting on Aug. 29.

“I think the latest rate increase by 50 basis points, it’s not to guard inflation but to answer a perception of a gap between the central bank and market,” said Gunawan. “I don’t think the central bank needs to raise the rate again this month.”

Policy Coordination

The central bank will need to anticipate the U.S. Federal Reserve’s tapering of stimulus that has spurred capital outflows from emerging markets and help coordinate for crisis management, he said. The monetary authority needs to deepen the money market and guard against currency volatility, he said.

Credit Suisse Group AG predicts Bank Indonesia will raise the benchmark rate by at least another 0.5 percentage point this year. Data yesterday showed the trade deficit widened to a record in July. The government said on Aug. 23 it will allow more mineral exports this year and increase a luxury-goods tax to try to narrow the trade gap.

“Bank Indonesia can’t solve these problems by itself; they need to coordinate their policies,” Agustinus Prasetyantoko, a Jakarta-based economist from Atma Jaya Catholic University of Indonesia, said by phone today. “The two candidates have good experience and expertise about the economy. I don’t doubt their ability, but the senior deputy governor must have the ability to coordinate, give advice and build up trust.”

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