Bank Indonesia Change is Driven by Politics Over Policy

Indonesian President Joko Widodo’s choice of a new central bank governor is a clear signal that the campaign for next year’s election has begun in earnest.

It’s hard to find another way to explain the promotion of Bank Indonesia Deputy Governor Perry Warjiyo to the top job. With campaigning for municipal elections in June under way and a tough presidential contest approaching next year, the president — known as Jokowi — must have wanted his own guy. Outgoing governor Agus Martowardojo was selected by Jokowi’s predecessor.

Warjiyo has a reputation as a hawk, someone more inclined to fight inflation than stoke growth in Southeast Asia’s largest economy. Yet at 3.25 percent, inflation is safely within the central bank’s target range of 2.5 percent to 4.5 percent. Martowardojo managed to reduce interest rates eight times since early 2016 and avoid either a spike in prices or a big slide in the rupiah.

Kudos to Martowardojo. Why change horses? Incidentally, keeping him would have been itself a break with tradition, as no governor in four decades has been given a second shot. Jokowi himself was once a change agent, becoming the country’s first leader from outside the military or the political establishment.

That feels like a long time ago.

Perhaps Jokowi and the finance minister, Sri Mulyani Indrawati, a former World Bank managing director, sniffed trouble. Jokowi, switching to candidate mode, must be wary of any repeat of early February’s market tumult and the prospect of faster growth and inflation in the U.S. That may, in turn, lead to additional interest-rate increases from the Federal Reserve, putting downward pressure on the rupiah. The last thing Jokowi wants is a pick-up in inflation.

For now, inflation is under control. That could change, which would spell political trouble. As Peter Mumford of Eurasia Group notes, the price of essential goods is the most important issue for voters right now. And perceptions of economic inequality drive Muslim populism in Indonesia.

That Muslim populism reared its head last year when a one-time Jokowi ally was ousted as Jakarta governor because, his opponents claimed, he was disrespectful of the Koran. (The accuracy of social media portrayals of this purported disrespect has been contested.)

Street demonstrations over piety may seem a long way from the rarified atmosphere of the C-suite at Bank Indonesia. Jokowi, now the establishment and wary of political Islam, is taking no chances.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg View. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.