Arya News - Indonesia’s mounting institutional risks could make assets more volatile after Perry Warjiyo’s sudden resignation from Bank Indonesia, and since the government brought in state asset fund Danantara into the decision-making process of the Financial System Stability Committee (KSSK).
JAKARTA – Rating agencies have warned that Indonesia’s mounting institutional risks could make assets more volatile after Perry Warjiyo’s sudden resignation from Bank Indonesia (BI) and since the government brought in state asset fund Danantara into the decision-making process of the Financial System Stability Committee (KSSK).
Martin Petch, vice president of ratings at Moody’s, told The Jakarta Post on Tuesday that BI’s change of leadership has a bearing on credit implications depending on the “credibility of monetary policy going forward”.
“In the near-term, we may see a response of further volatility in capital flows and the exchange rate while financial market participants assess the future overall direction of macroeconomic and monetary policy,” said Petch.
Moody’s in February reaffirmed Indonesia’s sovereign bond ratings at Baa2 but shaved its outlook from stable to negative over concerns on policy effectiveness and signs of weakening governance.
Petch said the central bank’s “long-standing track record of effective monetary policy” was a key factor behind the rating affirmation, suggesting that the rating view may change if the policy did.
George Xu, Asia Pacific sovereign ratings director at Fitch Ratings, which likewise maintained Indonesia’s ratings but downgraded the outlook to negative in March, also said the rupiah might receive extra pressures originating from the latest developments.
“We see risks of further external pressures stemming from fragile investor sentiment amid uncertainty over the future trajectory of monetary policy and perceptions of central bank independence,” Xu told the Post on Tuesday.
Xu said Indonesia’s “increasing policy uncertainty and erosion of Indonesia’s policy mix consistency and credibility amid growing centralization of policymaking authority” was the main driver behind the outlook downgrade, suggesting that failure in addressing those concerns may entail consequences in assessment.
Rain Yin, a sovereign analyst at S&P Global Ratings told the Post on Tuesday that despite not having direct impact on the agency’s ratings, Perry’s resignation may contribute to greater uncertainty regarding the future direction of monetary policy and the authorities’ policy response to evolving economic conditions. S&P has recently affirmed the same rating and outlook for Indonesia.
Fragile position
A law on the central bank limits BI Governor post to two five-year terms for every individual and Perry was right in the middle of his second term which was supposed to expire in 2028, making the sudden resignation a surprise given that he had about two years left before he was set to go out permanently.
To maintain independence, the law regulated that a BI Governor could only be uprooted when a criminal conduct was involved but it also allowed voluntary resignation and replacement when the individual was permanently unable to serve, such as in the event of death or dire health conditions.
Nevertheless, Perry, the second-longest-serving governor in Bank Indonesia’s history, was rumored to have been politically pushed to the sidelines in recent months.
The same day Perry’s resignation was announced President Prabowo Subianto summoned KSSK members to the State Palace for a meeting where he instructed that Danantara be involved in every future decision from the committee, said Danantara CEO Rosan Roeslani on Monday.
“KSSK was asked to involve Danantara in every decision for the sake of direct impact to the economy and business, not just from fiscal and monetary side. So it’s more about the whole ecosystem. So the instruction is KSSK plus, that is plus Danantara,” Rosan was quoted as saying by CNN Indonesia.
Interim Bank Indonesia (BI) governor Destry Damayanti confirmed the news and said Prabowo instructed KSSK to “enhance coordination and cooperation”, particularly regarding policies relevant to the government.
Read also: BREAKING: BI Governor Perry Warjiyo resigns
The committee was established with the main task of coordinating their policies to prevent financial system crises from materializing and handle it when one arises, as well as maintaining stability.
The committee itself is composed of the Finance Minister as the coordinator and member, alongside BI Governor, Financial Services Authority (OJK) chair and Indonesian Deposit Insurance Corporation (LPS) chair as members.
The committee has convened every quarter since it was first established in 2008 following a crisis triggered by Bank Century insolvency. It was then only built up of BI Governor and Finance Minister.
In 2016 the law on financial system crisis prevention came into force and as a result the latest form of KSSK, which included LPS and OJK, was established. BI, OJK and LPS are independent auxiliary state institutions that move within their respective fields, equipped with the authority to put policies in place.
All KSSK members have the right to vote in the meeting and it remained unclear whether Danantara would be given the right to vote and whether an amendment of the law was required to fit Danantara into the body.
Some economists have voiced concerns that this arrangement would increase the risks of political intervention toward the auxiliary institutions.
Permata Bank chief economist Josua Pardede told the Post on Tuesday that the distinction between Danantara getting involved to provide support in streamlining policies and having the authority to decide policies has to be clarified.
He argued so because on one hand Danantara could provide useful insights and data for policymaking but, on the other hand, the action itself “may be interpreted as an attempt to expand government control toward the independent bodies”.
Rahma Gafmi, an economics professor at Airlangga University, told the Post on Tuesday that involving Danantara in KSSK could “blur the lines between the regulator and investment operator”, spelling potential conflict of interests in policymaking.