Indonesia’s central bank is facing heightened pressure from the government as finance minister Purbaya Yudhi Sadewa signals he does not support Bank Indonesia’s independence, fueling investor concerns about fiscal dominance and market stability, Bloomberg reports.
People familiar with the matter say Purbaya has long believed the central bank should follow government guidance, aligning with populist leader Prabowo Subianto’s agenda. Since taking office on September 8, Purbaya has injected $12 billion of government funds into banks to boost lending, unveiled nearly $1 billion in welfare programs, and indicated a willingness to relax legal caps on fiscal deficits and national debt.
These policies have coincided with the revival of a Covid-era “burden sharing” arrangement, discussions about legal changes that could make it easier to remove senior central bank officials, and debates over amendments to the bank’s mandate. Investors fear these moves could undermine Bank Indonesia’s ability to control inflation and support the currency.
“The institutional safeguards that have underpinned macro stability in Indonesia appear to be coming off,” said Kaimin Khaw, global macro strategist at Loomis Sayles. “Erosion of central-bank independence has often ended badly in emerging markets.”
The uncertainty has triggered the worst month of outflows from Indonesia’s bond market in more than three years, with foreigners selling a net $234.5 million of stocks in September, according to Bloomberg-compiled data. The rupiah has fallen roughly 1% against the dollar, approaching levels last seen during the Asian financial crisis.
Despite these challenges, the Jakarta Stock Exchange Composite Index rose 3% in September, as domestic investors offset global sell-offs. Analysts caution that while fiscal stimulus and interest rate cuts may boost stocks and corporate revenues in the short term, long-term risks persist.
Bank Indonesia has cut interest rates for three consecutive meetings, pledging to go “all-out” to support growth. Governor Perry Warjiyo emphasized bold action to stabilize the currency, but analysts at Goldman Sachs predict the rupiah may continue to lag peers in Asia ex-Japan due to fiscal concerns and expectations of further rate cuts.
Experts warn that the true test of Indonesia’s central bank will come during times of market stress, when credible and independent policymaking is crucial. “In moments of crisis, the lack of credible central bank action will likely show up,” said Aroop Chatterjee, strategist at Wells Fargo in New York.
The situation highlights broader global trends, with fiscal pressures and political influence increasingly challenging the independence of central banks, a cornerstone of stable financial markets.
