Jokowi central bank nominee seen as signal of policy continuity

[JAKARTA] President Joko Widodo's choice of a career central banker to head Bank Indonesia signals monetary policy continuity as rising odds of faster US rate increases roil emerging market currencies and bonds.

Perry Warjiyo is expected to become Bank Indonesia governor once he's confirmed by the parliament after a "fit and proper test" as early as next month.

Mr Widodo, also known as Jokowi, sent a letter to parliament last week seeking approval for his choice, a person familiar with the matter said. Warjiyo will replace incumbent Agus Martowardojo, whose five-year term ends in May.

Challenges awaiting Mr Warjiyo include reining in food prices during the upcoming regional and presidential elections and easing currency-market volatility that's made the rupiah the worst performer in Asia this month.

Bank Indonesia has cut interest rates eight times since the beginning of 2016 as it sought to accelerate economic growth that's hovered around 5 per cent since Mr Jokowi took office in 2014.

"Perry has been instrumental in shaping Bank Indonesia's standing today as a more credible and transparent institution, especially in the last few years," said Euben Paracuelles, an economist at Nomura Holdings in Singapore.

"I would expect not just policy continuity in terms of the monetary stance but also a similar if not stronger commitment to pursuing financial reforms."

Mr Warjiyo, 58, has been a deputy governor at Bank Indonesia since April 2013. With expertise in economic research and monetary policy, as well as international issues, he also held a two-year position as an executive director of the International Monetary Fund where he represented Asean nations.

The change of guard at Bank Indonesia comes as central banks elsewhere start withdrawing stimulus. The Federal Reserve is penciling in another three interest-rate hikes, or possibly even more, for 2018, creating fresh risks for emerging markets.

The rupiah fell to a 20-month low last week, while the yield on benchmark 10-year bonds rose to the highest in more than three months.

For Indonesia and Mr Warjiyo, external factors are likely to pose more challenges, according to David Sumual, chief economist at PT Bank Central Asia in Jakarta.

"As we have seen in the early weeks of the year, high asset valuation, rising inflation expectations, and Fed policy normalization can create an explosive mix that triggers periodic upheavals in the global market," Mr Sumual said. "That can lead to capital outflows and rupiah instability."

Mr Warjiyo, who did not respond to a request for comment on his nomination, told analysts after a Feb 15 policy meeting that Bank Indonesia continued to monitor uncertainty in financial markets, as well as the impact of rate moves by the Fed.

"We think that the monetary policy accommodation that we have done so far is sufficient to continue supporting economic growth," Mr Warjiyo said.

South-east Asia's biggest economy expanded at 5.1 per cent in 2017 and the government forecasts it to grow at 5.4 per cent this year.

Annual inflation is expected to remain within the central bank's target range for 2018 of 2.5 per cent to 4.5 per cent. The consumer price index eased to 3.25 per cent in January, its slowest pace of growth in more than a year, allowing the central bank to hold its benchmark interest rate at 4.25 per cent.

"We expect Bank Indonesia to keep its policy neutral and policy rate unchanged for this year," said Aldian Taloputra, an economist at Standard Chartered Plc in Jakarta. "The main challenge in the near term is for the central bank to strike a balance between the need to maintain prudent monetary policy given higher rates globally and, at the same time, support the domestic economy's recovery."

BLOOMBERG