Central Banks

Indonesia Central Bank Shuffle Plan Raises Concerns

Pedestrians cross a street in Jakarta's modern business district.
Romeo Gacad | AFP | Getty Images

Moves by Indonesia's President Susilo Bambang Yudhoyono to put his finance minister in charge of the central bank is leading to concerns that he may be seeking someone more malleable to run the state coffers in the run up to next year's elections.

Yudhoyono made the surprise announcement on Feb. 22 that he wanted Agus Martowardojo to take over the central bank when the current governor's term expires in May. He has given no explanation for not seeking to extend Governor Darmin Nasution's term.

Nor has there been any explanation why the president wants to move Martowardojo out of the cabinet, and take charge of monetary policy for Southeast Asia's biggest economy.

On Tuesday night, parliament is due to take the first step by deciding whether Yudhoyono's sole candidate for the five-year term is eligible to face the fit and proper test that he must pass to take over the governorship of Bank Indonesia from late May.

The president had proposed Martowardojo for the central bank job before, in 2008, but parliament ruled him ineligible for consideration at the time, in a decision that was seen as a more related to politics than specific objections to Martowardojo.

(Read More: Indonesia's President Reassures Investors Economy Is Top Priority)

Some MPs have grumbled that Martowardojo lacks monetary policy skills and question his links to graft cases that have been ripping apart Yudhoyono's ruling Democrat Party. The finance minister has been questioned as a witness over one major scandal, but there has been no suggestion he was involved.

Martowardojo was also in the ministry when Indonesia introduced laws, including a controversial tax on mineral exports, which have attracted warnings that the government may be pushing away foreign investors.

So far, foreign direct investment has been at record highs and a major factor in rapid economic growth.

"We do not expect any immediate changes to the current monetary policy stance. In our view, BI will remain reluctant to tighten its policy stance," Nomura wrote in a research note, in reference to the benchmark rate which has been at a record low of 5.75 percent for a year.

Born in Amsterdam 57 years ago, Martowardojo has spent almost his entire career in the banking industry culminating in his role as head of Bank Mandiri, when he is widely credited as having turned around the fortune of the top state bank.

Who Next?

If Martowardojo does switch to the central bank, attention will turn to whether his successor at the finance ministry allows political considerations to outweigh fiscal prudence.

"Will his successor be a person of equal credibility as Martowardojo? Or would the replacement be accommodative to the political pressures prior to 2014 (elections)?" said Fauzi Ichsan, senior economist at Standard Chartered in Jakarta.

One of the biggest challenges the next finance minister will face is how to cut back on fuel subsidies which gobble up around 15 percent of the annual budget and went 54 percent over budget last year, an issue Martowardojo was able to only partially tackle.

(Read More: Indonesia Will Hike Fuel Prices, No Inflation Risk: Official)

"The worry is a more fiscally lax replacement may compromise the perception of Indonesia's fiscal soundness, more so ahead of the elections," said one Indonesia economist who asked not to be named because of bank policy over talking to the media.

Speculation over who will head the finance ministry range from the outgoing BI chief, representing a straight job swap, to the current chief economics minister Hatta Rajasa.

Rajasa, more career politician than technocrat, is close to Yudhoyono and often seen as the president's choice to be the next leader of the world's fourth largest country.

Taking Stands

Martowardojo took over in May 2010 from Sri Mulyani Indrawati, effectively driven from office by a political and business elite upset with her tough stand against graft, frequently cited as the biggest drag on one of the world's fastest growing economies.

For all the speculation that Martowardojo is being sidelined, he denies he is being pushed out of his current job.

His only comments about his proposed move to the central bank have been to say he will watch inflation and also expects reciprocity with other countries in banking.

That appears to be a direct threat to the already long-delayed bid by Singapore's DBS Group Holdings $7.2 billion for Bank Danamon, unless the island neighbour changes policy and lets Indonesian banks operate there.

In his ministerial role, Martowardojo has been prepared to take on both foreign and politically influential domestic investors. Analysts point to his willingness to confront the Bakrie Group, whose head is also in charge of the powerful Golkar party, over the purchase of a stake in a major gold mine.

He opposed a project to build a bridge to join the islands of Sumatra and Java and which is thought to be something Yudhoyono had hoped would be a legacy of his 10 years in office.