Investors are nervous as Indonesia considers letting ministers vote on monetary policy

Bank Indonesia building in Jakarta.
Dimas Ardian | Bloomberg | Getty Images

Indonesia’s parliament will be deliberating on a suite of proposals to bring the central bank and government closer — a move that could hurt investor confidence and add pressure on the currency if it materializes, said analysts.   

On Monday, an expert panel presented to parliament the potential changes to the central bank law, reported Reuters. The recommendations include giving government ministers voting rights at monetary policy meetings, as well as expanding Bank Indonesia’s mandate to support economic growth and employment, said the report.

Currently, the central bank’s mandate is to maintain the stability of the Indonesian rupiah through inflation and exchange rate.

The Indonesian rupiah weakened following news of those recommendations, suggesting investors may be concerned over a potential deterioration of central bank independence. The currency depreciated even more against the greenback on Wednesday, changing hands at 14,725 rupiah per dollar in afternoon trade compared with the previous day’s close of 14,565 rupiah per dollar.

Euben Paracuelles, chief Asean economist at Nomura, said the proposal to set up a monetary board headed by the finance minister was “unusual” and not aligned with best practices of how monetary policy should be set.  

“Investors might see that as a big concern, it could lead to capital flow issues and therefore, it could lead to more pressure on the (rupiah),” he told CNBC’s “Squawk Box Asia” on Wednesday.

It is probable that central bank independence will come out of this saga in a weakened position.
Helmi Arman
Citi Research

Asked about the proposals, Indonesian President Joko Widodo pledged that the central bank would remain independent, reported Reuters.

Before the recommendations were made, the rupiah was already one of the weakest Asian currency this year, partly due to concerns among investors about the central bank helping to finance a larger government deficit as a result of increased spending to fight the coronavirus.  

Under the “debt burden sharing” arrangement, Bank Indonesia will buy 397.6 trillion Indonesian rupiah ($27.1 billion) worth of government bonds and be ready to purchase another 177 trillion rupiah ($12.2 billion) of debt.

Indonesian authorities have said that such a program is a one off in response to the coronavirus pandemic. But the expert panel recommended to parliament that the central bank be allowed to buy government bonds in the primary market as a way to manage money supply, and to help with emergency fiscal financing, reported Reuters.

While the parliament may not pass all the recommendations into law, “it is probable that central bank independence will come out of this saga in a weakened position,” said Helmi Arman, an economist at Citi Research.

“Altogether, we think these proposed changes will allow monetary policy to be closely synchronized with the objectives of political leaders,” he wrote in a Tuesday note.

“While this may be justified in certain extraordinary circumstances, our concern is that at some point in the future, these permanent revisions could lead to a period unsustainable risk accumulation.”