00:00What happened?
00:03Yeah, good morning. It was a surprise.
00:05Details are thin, but we all woke up in a scramble when Bank Indonesia called a press conference for 7
00:12.30 a.m.
00:13No one quite knew what it was about.
00:15But that's what was announced.
00:18Perry Wargio has submitted his resignation for stated health or personal reasons.
00:23Submitted the resignation to the president over the weekend, and it was accepted.
00:29And the city is trying to make sense of it right now.
00:33He was, like you said, had two years left on his term, and he's been widely regarded as a capable
00:41hand of the bank.
00:42And this was a surprise, yes.
00:48Yeah, question for both of you, but Otto, let me just put the question to you first.
00:51How is this being viewed locally in markets right now?
00:57So, markets are trying to make sense of it and trying to determine whether it fits into a narrative of
01:05Bank Indonesia developing less independence under the Prabowo Subianto administration.
01:12We haven't heard from Wargio, but generally we know that Bank Indonesia has been under pressure since Prabowo started up
01:21in October 2024 to help boost economic growth.
01:25He has a very ambitious growth goal to, by the end of his term, raise economic growth to closer to
01:328%, something that Indonesia hasn't seen in decades, from 5% right now.
01:37And we know that Wargio was more or less on board with that.
01:42He promised last year, he promised monetary policy would be all out pro-growth.
01:48That said, we've seen increasing pressure on Bank Indonesia, and the market has been watching that very closely.
01:56Parliament passed a law recently that expands the central bank's mandate to include real sector growth and job creation.
02:04It also subjected the bank to performance evaluation.
02:09So, there's a sense that the independence wasn't perhaps not being eroded exactly, but changed.
02:19This morning, interestingly enough, an economic affairs expert published a lengthy column in local media that made the case for
02:27a central bank that was more aligned with the bank.
02:30And he pointed to closer coordination between central banks and governments in countries like Singapore, China, Japan, China.
02:38So, the market is trying to evaluate right now.
02:42The rupiah is a little bit weaker, still hovering near that all-time low.
02:47And the stock market is just a little bit down, but not as phased by it as you might have
02:54imagined a couple hours ago.
02:57Andre, when you saw the headline this morning, what came through your mind?
03:00And how much pressure could this have on the rupiah?
03:02Well, the first thing, what the actual comments were going to be, because they're not scheduled clearly.
03:08First of all, I'd take a step back.
03:09I'd say I wish Pat Perry very well.
03:11I've met him on many occasions over the past.
03:14But going to the markets, I think that, as already stated earlier, it's that continuity that matters.
03:20It's not just that his term has expired early prematurely, but, what, just under two years?
03:26He's been there for over eight years.
03:27So, this is a second term of office.
03:30And at a time when a lot of EM central banks and FX are under pressure, and there's been a
03:35little bit of inroads in the rupiah in terms of policy.
03:38We've had inflows in the foreign bond market.
03:40We've had 100 basis points tightening by the central bank governor.
03:43So, the question is, who takes the next stages on and whether that credibility gets maintained?
03:48We know that the deputy governor, Destry, is there.
03:51But we get the appointment of the permanent one, and that's the question mark.
03:55So, it's not great time-wise, considering where we are in terms of the Middle East and the world prices.
04:01And, Andre, the fact that we're trading slightly weaker in spot, and I think, as you point out, in the
04:07forward market,
04:08do you think that will continue to remain the case until we get clarity on who will eventually succeed?
04:14I believe so.
04:15And you're absolutely right.
04:16So, you look at the one-month NDFs.
04:18They've already tested the 18,000, those key levels.
04:21Again, it's not that dramatic, but it's that direction that matters more.
04:25And, again, it's unfortunate because it was outperforming the Philippine peso, outperforming the rupee.
04:30So, it was making inroads.
04:31But I think that the market will wait to not only just about continuity in terms of the deputy governor,
04:35but ultimately who's going to take over.
04:37And that procedure, as already mentioned earlier, will be up to the president,
04:41and then appointed by the oil nominated in terms of approval of the government.
04:45And that will take some time.
04:47So, there will be additional premium as a consequence of that.
04:51We don't look at it as a positive development.
04:53It increases our concerns around Indonesia, which already were around governance.
04:59So, we've had a negative outlook on Indonesia.
05:02We have not allocated to that market.
05:04It will have bigger implications in terms of come November when the decision with regards
05:11to whether it remains emerging market or gets downgraded to frontier category.
05:16And that could not just have an implication in terms of market valuation,
05:22but a lot of money from fund managers who are supposed to allocate to emerging markets
05:27may move out of the country.
05:30So, it remains to be seen who replaces the governor, but definitely not a positive development.
05:37He was looked at, as you were talking about it, as a steady hand.
05:41And the increased rates had kept the rupiah stable.
05:46So, it's a very big question mark at this point.
05:50Yeah, you say you haven't allocated to Indonesia.
05:53I'm just wondering the reasons for that.
05:55Do you share MSCI's concerns about governance, transparency, the free float requirements,
06:00and then, of course, incidents like this and the resignation of the finance minister as well?
06:05Are those the reasons, or is it something else that causes you to steer clear?
06:10Yes, I mean, along with a few others, there are a few fundamental positives in Indonesia.
06:16The growth rate has been stable.
06:18It's a big domestic market, but again, it's also an importer of energy.
06:23So, that's one reason to be concerned.
06:25The currency does tend to whipsaw.
06:27The weakness of currency affects foreign investors when you convert your investments into U.S. dollar.
06:33But, yes, a big concern is around governance.
06:35We are wary of GOM.
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