It's Deja Vu for Indonesia Central Bank Governor as He Exits

(Bloomberg) -- Indonesia’s central bank governor is ending his five-year term the same way it started: financial markets are in turmoil, the rupiah is under attack and he has his finger firmly on the interest rate trigger.

Agus Martowardojo, 62, is set to chair his final policy meeting on Thursday and odds of a rate hike are sharply rising. With his solid record of bringing stability to Southeast Asia’s biggest economy being tested by an emerging-market rout, he is leaving nothing to chance, saying last week he’ll act “pre-emptively” to restore investor confidence.

“Stability is the main issue right now,” said David Sumual, the chief economist at PT Bank Central Asia in Jakarta. “It’s been really blatant, actually, the way they’ve communicated to the market,” he said.

From Argentina to Turkey, central bankers in emerging markets are trying to quell panic selling of bonds and stocks triggered by a stronger dollar and rising U.S. interest rates. Indonesia is among the hardest hit in Asia because of its higher exposure to foreign portfolio investors, with its currency among the worst performers in the region.

It all looks a lot like the “taper tantrum” of 2013, when the Federal Reserve first mooted plans of withdrawing stimulus, fueling a more than 20 percent rout in the rupiah that year. Back then, Martowardojo was just a month into his job as central bank governor when he surprised markets with a rate hike that would kick off an aggressive run of tightening.

The former finance minister has moved steadily since his appointment in May 2013 to bring stability to the economy. Inflation is down to below 4 percent from about 8 percent five years ago, foreign-exchange reserves are up more than 30 percent and a new benchmark interest rate was introduced to make monetary policy more effective.

Rate Bets

“Bank Indonesia has emerged as a modern central bank,” said Febrio Kacaribu, an economist from LPEM, an economic think-tank at the University of Indonesia. The most significant reform was the introduction of a new key rate, which “eliminates room for an ambiguous monetary policy statement on the policy rates.”

While more economists bet on rate hikes in Indonesia this year, they are split on whether it will happen on Thursday. Sixteen of the 29 economists surveyed by Bloomberg predict a 25 basis-point increase to 4.5 percent, while the rest forecast no change.

The rupiah slumped to a new low of 14,096 against the dollar on Wednesday, its weakest level since October 2015, while stocks retreated for a third day in a row with the Jakarta Composite Index down as much as 1 percent.

Decisive Strategy

The central bank under Martowardojo has worked consistently to bring down inflation, sometimes using unorthodox methods. BI staff work with the police to break up chili cartels who manipulate prices, and train people how to grow food to ease bottlenecks.

Chatib Basri, who succeeded Martowardojo as finance minister and worked closely with him during the market fallout in 2013, said greater stability has been the outgoing governor’s biggest achievement, adding that he leaves the central bank in a better position than it was when he took up the post.

“I really admire what he has done,” said Basri. “Back in 2013 when we had to face the problem of the taper tantrum he was very decisive in choosing a strategy of stability over growth.” The central bank is adopting that same plan now as it faces fresh market volatility, he said.

Policy credibility, solid growth and stronger buffers have led to credit rating upgrades, reflecting an economy that’s in a very different place than it was five years ago. The current account deficit has been cut by almost half to 1.7 percent of GDP as of last year, while foreign reserves have climbed to $125 billion, even after the central bank spent about $7 billion since the beginning of February to defend the currency.

Martowardojo passes that legacy on to his successor, Perry Warjiyo, who was one of his deputies for the past five years. The incoming governor has pledged to keep his focus on currency stability and low inflation.

Martowardojo plans a more peaceful retirement after his exit from the central bank on May 23, saying he’ll return to his home in South Jakarta where he’s still deputy of a neighborhood council that deals with local issues, like trash collection and security.

“No post or job is hard for me,” he told reporters in March. “As long as we use our heart when working, no job is hard, but we must love our job and give the best.”

--With assistance from Tassia Sipahutar and Manish Modi

To contact the reporter on this story: Karlis Salna in Jakarta at ksalna@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Thomas Kutty Abraham

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