Time for Indonesian President Joko Widodo to smash precedent.
Central bank Governor Agus Martowardojo’s term is up next month, and it’s been a successful five years for Southeast Asia’s largest economy. Growth is humming along at about 5 percent, the inflation rate is low, and Martowardojo has cut interest rates without much impact on the currency. The last point is critical, given that the Federal Reserve is raising them.
Jokowi, as the Indonesian leader is known, hasn’t tipped his hand on who he wants to run Bank Indonesia. No incumbent has gotten a second term in four decades. Granted, the nature of Indonesia’s economy — not to mention its political system — has changed dramatically in that time. If anyone has earned a second chance, it’s Martowardojo. Jokowi himself made history in 2014, becoming the first president from outside the military and political elite. This is no time for him to fall back on convention.
Political leaders typically like their own people in key roles, and Martowardojo was appointed by Jokowi’s predecessor. But why risk a rookie when Jokowi is gearing up to run for reelection next year? He offered some insight into his thinking about the post last week. “It should be someone who can gain the market’s confidence on economic issues, including monetary policy and inflation,” the president said. “I believe the trust of the public and the market is very necessary for a governor of the central bank.”
Those qualities would seem to count in favor of Martowardojo. And for reasons neither man can control, they might be more important than the governor’s record to date. That’s because for all the talk about the rise of Asia and decline of the West, the reality is that most emerging markets’ fate is tied to developments in the U.S. — specifically, what the Fed does with interest rates under its incoming chairman, Jerome Powell, and how transparently it signals the direction of policy.
Let’s back up a bit. Outgoing Fed Chair Janet Yellen executed three steps that had potential to upend economics and financial markets around the globe: ending quantitative easing, raising interest rates, and beginning to reduce the massive bond holdings the Fed had accumulated during the crisis era. She was aided by a steady expansion, low inflation, and the Fed’s relatively recent innovation of releasing dollops of information about its intentions — known in the trade as forward guidance — which sucked a lot of volatility out of markets.
That steady, predictable, utterly transparent approach enabled officials around the world to predict what the Fed was going to do almost before the Fed did. That meant they could respond to soft inflation and juice growth — that is, cut rates — without worrying that they would fall behind the Fed and, as a result, suffer from dramatically weakening currencies. That’s a huge and welcome shift from historical practice. It has surely contributed to the synchronized global upswing.
Martowardojo didn’t just trim Indonesian rates; he slashed them. Eight reductions since 2016, including surprises in August and September. Inflation hasn’t surged; it’s at a one-year low. And Martowardojo has been able to do this without any significant capital outflows: After falling 11.3 percent against the dollar in 2015, the rupiah rose 2.3 percent in 2016 and was little changed last year.
What’s critical is not just how much higher U.S. rates will go, but whether Powell can be as clear about his intentions as Yellen was. His first meeting atop the Federal Open Market Committee is six weeks away. Given the angst uncorked by last week’s jobs report, he’ll likely look for some way to convey the Fed’s intentions well beforehand.
Martowardojo and Jokowi have a huge stake in Powell’s success, as do emerging markets generally. For his part, Jokowi should deploy that trust he spoke about. Bank Indonesia’s governor has earned it.