(The Insider Stories) - Main story: Indonesia’s new economic chiefs face economy, banking challenges

Former finance minister Agus Martowardojo has been inaugurated as central bank governor, and faces a slew of challenges including inflation, a weak rupiah and a delayed fuel price increase.

Investors were cheered this week by the announcement of technocrat Chatib Basri as Martowardojo’s permanent replacement, however the new finance minister faces many of the same challenges

Vox: Banking challenges await Martowardojo Martowardojo securing a greater foothold for Indonesian banks overseas, overseeing a banking M&A deal that could become Indonesia’s biggest ever, and securing a smooth transition of Bank Indonesia’s focus away from banking sector oversight and towards the economy

Executive data – profile of Martowardojo and mini-bio of Basri  

Indonesia’s new economic chiefs face economy, banking challenges

The inauguration of former finance minister Agus Martowardojo as Bank Indonesia (BI) governor was held Friday in Jakarta. Martowardojo was highly regarded by investors during his time as finance minister, although he lacks prior experience as a central banker (see profile in Executive data section and Main story in this weekly report).

He replaces the outgoing Darmin Nasution, who has served in the post since 2009, at a time when the rupiah has lost some of its sheen as a regional star performer, and inflation and weak exports have begun to crimp economic growth.

A widening current account deficit has also bloated the deficit in the balance of payments, contributing to the rupiah’s weakness, while a stalled policy decision on raising subsidized fuel prices is hurting investor sentiment as the subsidy load threatens the state budget.

Martowardojo also will be tasked with overseeing the transfer of banking sector supervision from BI to Indonesia’s new regulatory superbody, the Financial Services Authority or OJK.

He assumes the post ahead of the formation of the ASEAN Economic Community, a trade bloc the 10 members of the Association of Southeast Asian Nations are seeking to establish by 2015, and which is expected to drive strong regional competition, including in the banking sector.

Martowardojo also faces the challenge of securing a foothold in Singapore for major state-owned lenders PT Bank Mandiri (IDX:BMRI), PT Bank Negara Indonesia (IDX:BBNI) and PT Bank Rakyat Indonesia (IDX:BBRI), who are seeking to establish full commercial banking operations in Singapore as a form of reciprocity from the Monetary Authority of Singapore (MAS) in return for Singapore’s biggest bank being allowed to exceed an ownership limit in its purchase of a major Indonesian lender.

BI has given permission for DBS Group Holdings Ltd. (SGX:D05) to buy 40% of PT Bank Danamon (IDX:BDMN), and is considering whether to allow it to increase this to 67.4%  in an acquisition that could be the largest ever to take place in Indonesia.

Mandiri, BRI and BNI are hoping that Singapore will ease a requirement that foreign banks incorporate their Singaporean units in order to attain the Qualifying Full Bank (QFB) status that allows full commercial operations, which requires providing S$1.5 billion capital.

Among foreign lenders, Malaysia’s Malayan Banking Bhd. (MK:MAY), India’s State Bank of India Ltd. (IN:SBIN) and ICICI Bank (IN:532174), and Hong Kong-based HSBC Holdings PLC (HK:5) have QFB status, but so far haven’t been incorporated their local units.

Investors were cheered by the announcement this week that Chatib Basri has been selected as finance minister to replace Martowardojo, who was briefly succeeded as acting finance minister by coordinating minister for the economy Hatta Rajasa, a political figure (see TIS analysis here and report here).

Previously chairman of the Investment Coordinating Board (BKPM), Basri is seen as a clean, capable figure who is economically savvy, although he has little hands-on leadership experience in government and it remains to be seen how effective he will be in pushing through the much-needed fuel price hike and other policy reforms. (See mini-bio in Executive data section.)  

Vox: Martowardojo must push for reciprocity, oversee transition in BI’s role

The following are some insights from Martowardojo and other economic experts at the inauguration ceremony.

Bank Mandiri (IDX:BMRI) CEO Budi Gunadi Sadikin, speaking to Insider Stories:

On regional banks operating in Singapore: “Malaysian, Chinese and Indian banks were allowed licenses without that amount of capital, S$1.5 billion. With that much capital, and only being able to open a few branches, we won’t make any money. We’d have to operate at a loss. In the negotiations with the Monetary Authority of Singapore [MAS] the three [state-owned banks] are working together. We have talked with [CEO Gatot  Suwondo] of BNI and [BRI CEO Sofyan Basir], among the three of us we are allowed to set up 15 branches and 50 ATMs. So that it’s reciprocal, as here, [DBS] will open many branches. We hope that the capital requirement will be the same as when the Malaysian and Chinese banks entered [Singapore].”

On Martowardojo as BI governor: “He will continue [to push for] reciprocity. His mindset is nationalistic, similar to Darmin. Indonesia is a big country with a big population and should be considered equal to other countries in Asia. The economy improved in 2012 but has weakened a bit since then, Agus needs to safeguard monetary conditions, the economy and stability, so that in five to 10 years the GDP can be among the world’s 10 largest.” New Bank Indonesia (BI) governor Agus Martowardojo:

On the term of outgoing governor Darmin Nasution: “Bank Indonesia in the preceding term proceeded well. Generally, inflation has been well managed.”

On reciprocity, with the DBS-Danamon deal and stronger regional competition expected as the ASEAN region works towards setting up an economic community by 2015: “We will hold discussions with the monetary authorities in other countries to develop reciprocity. We will seek input from discussions at BI on foreign banks that have offices and branches in Indonesia and will announce our policy going forward regarding this matter. We will continue to coordinate with the Financial Services Authority (OJK) so that banks in Indonesia continue to perform their functions well, and can expand regionally or globally. We will prepare them and let them know what their preparations should be for regional competition.

On Martowardojo’s focus after assuming the BI governorship: I will urge [BI] to study global and regional economic conditions and implement policy based on this. In the policy mixture will be monetary policy such as rates, macroprudential [policies], and coordination among fiscal authorities with the real economy in the [economic] centres and also in regional [parts of Indonesia]. At BI we will increase the stability of the financial system, including Financial System Safety Net (JPSK) regulations [that are currently being discussed in parliament], in order to anticipate changes in the global economy. We will also ensure that the transfer of supervision of Indonesian banks [from BI] to the OJK is done carefully and in line with fundamental [requirements of the banking sector]. We will seek good cooperation with the finance ministry, OJK and the Deposit Insurance Corp. (LPS) so that the transition is unproblematic. We will strengthen our function as a central bank. BI will focus on encouraging beneficial economic activity and stimulating micro, small and medium enterprizes (UMKM) and investment.”

Atmajaya University economist A. Prasetyantoko On challenges that Martowardojo will face in the role:

“There is a search for a new focus at BI. The transition of [the functions of] BI must be well-ordered, it should no longer have a micro-focus on banking. Hopefully there will be some fine tuning. [Martowardojo] has a lot of macroeconomic and fiscal experience. Fiscal is important – Darmin also has fiscal experience.

For Agus the biggest challenge is the [weakness of the] rupiah, and its implications for other factors such as inflation and the balance of payments. In [the transfer of] banking oversight, I don’t think there will be [challenges] as the process is already underway.

But in macroprudential [policy], industry, loan-to-value [policy], and system-of-payment [regulations], like branchless banking, there is still scope for changes.”

Indonesian Banks Association (Perbanas) chairman Sigit Pramono:

“For Agus, what I think is most important is the legal side, a BI governor’s task is the transformation  of BI regulations. With the formation and activation of the OJK, control and oversight of the banking sector is affected, so the legal framework must be altered.” “The second task is safeguarding monetary stability.

"The challenges caused by the European crisis are not yet completely over, and there is no clear conclusion, which has an effect [on the domestic economy.]”

“Thirdly, the fuel price issue, the president has been urged that [prices must be raised] like it or not, but there is no decision yet and the pressure is building on the balance-of-payments deficit. This is not only Agus’s task, but also that of [new finance minister] Chatib Basri.”

“Fourthly, the mandate of OJK must be completed, by simplifying the regulations on JPSK. With crisis, the cycles become shorter, so JPSK is still very important. BI is the driving force, along with the government and parliament."

"Currently [the regulation] is still in parliament. Fortunately, the Financial System Stability Committee (KSSK) has as members the finance minister, BI governor and OJK."  

Agus Martowardojo profile – Executive data

Born in 1956 in Amsterdam, Agus Dermawan Wintarto Martowardojo has a long history in banking and economics. Graduating from the University of Indonesia’s economics faculty, he also holds qualifications from the State University of New York, Harvard Business School, Stanford and Wharton.

In 1984, Martowardojo became a loan officer with Bank of America, before moving to PT Bank Niaga in 1986 and eventually rising to the rank of Vice President in Niaga’s Corporate Banking Group.

In 1995 he became CEO of PT Bank Ekspor Impor Indonesia, before serving as a managing director at PT Bank Mandiri, Indonesia’s biggest bank, between 1999 and 2002, overseeing risk management and credit restructuring, retail banking and operations, and finally human resources and support services.

In 2002, after becoming a special advisor to the head of the Indonesian Bank Restructuring Agency, he was selected as the CEO of PT Bank Permata.

Between 2005 and 2010, Martowardojo served as CEO of Bank Mandiri, a role that won him acclaim among investors as he raised the bank’s profile among investors, cut non-performing loans and increased profits.

Martowardojo also assisted in the recovery of more than $100 million from graft suspect Tommy Suharto, the son of the late dictator Suharto. Martowardojo was voted Indonesia’s best executive in 2009 by Asiamoney, and in 2010 received The Asian Banker’s annual Indonesian Banker Leadership award.

In 2012, he was chosen as global and Asia Pacific Finance Minister of The Year by The Banker.

Beginning his career as Finance Minister of the Republic of Indonesia on May 20, 2010, highlights included easing value-added tax regulations on house sales, eliminating taxes on cooking oil for the poor and supplying funds in advance to state logistics agency Bulog to supply rice to the poor.

He was known for opposing powerful business lobbies in parliament, and won respect among investors for clashing with two of the country’s most powerful political figures, neither of whom are well liked by markets: Hatta Rajasa, Pres. Susilo Bambang Yudhoyono’s most trusted lieutenant and the coordinating minister for economy, who briefly succeeded Martowardojo as acting Finance Minister until his permanent replacement was announced this week, and Aburizal Bakrie, the chairman of the Golkar political party and one of Indonesia’s richest people. He also improved efficiency at the ministry, which is considered one of Indonesia’s most effective and reformed institutions.

Still, Martowardojo was unable to push through a proposed increase in subsidized fuel prices last year, which has allowed fuel subsidies to become a major economic issue, and there are persistent suspicions that politics were behind the decision to move him from the finance ministry to BI.  

Executive data – Chatib Basri mini-bio Basri is an established technocrat who has previously held advisory roles at the finance ministry, before being tapped to head BKPM in 2012.

Basri has robust private-sector and academic experience as a co-founder of the research firm CReco Consulting, a senior lecturer in the economics faculty of the University of Indonesia and an adjunct fellow at the Australian National University, among other roles.

He holds a PhD in economics and has held a variety of advisory posts for renowned Indonesian and international economic bodies, and has acted as an independent commissioner for major Indonesian companies including PT Astra International, PT Semen Gresik and PT Indika Energy.

Of West Sumatran descent, he is a cousin of the poet and writer Asrul Sani and was interested in culture, the arts and politics at a young age, participating in theater events.

Experience:

2006-2010 – deputy for Indonesia’s finance minister at the Group of 20 leading economies

2006-2010 – special advisor the the Republic of Indonesia finance minister

2010-2011 – member of the High Level Trade Experts group consisting of experts from Indonesia, the UK, Germany and Turkey 2010-2012 – member of the International Monetary Fund’s Independent Regional Advisory Group for Asia Pacific

2010-2012 – deputy chair of Indonesia’s National Economic Committee

June 2012-May 2013 – chairman of BKPM Education:

1992 – economics degree from University of Indonesia

1996 – Masters in economic development from Australian National University (ANU)

2001 – PhD in economics from ANU

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