July 10, 2018 / 10:21 AM / 4 months ago

Indonesia's "proactive" c.banker juggles a mix of policies to battle outflows

JAKARTA, July 10 (Reuters) - Since taking office seven weeks ago, Bank Indonesia (BI) Governor Perry Warjiyo has raised interest rates more aggressively than any other Asian central banker to help defend a fragile currency and stem destabilising capital outflows.

But after three rate increases in two months, he says BI also has to use other measures to support Southeast Asia’s biggest economy, such as by boosting tourism to bring in foreign exchange and firing up a sluggish property market.

“Bank Indonesia can at the same time be pro-stability through monetary policy, but it can be at the same time pro-growth through other instruments,” Warjiyo told Reuters.

Indonesia is among the emerging markets vulnerable to capital outflows, with the rupiah, which has a history of suffering sharp volatility, losing about 5 percent of its value against the dollar so far this year.

“Central banks in emerging markets, especially in Indonesia, cannot just take care of the exchange rate of its currency,” he told a meeting of senior editors last month.

“We cannot do that when the problem is a current account deficit,” he said, referring to persistent deficits, which have to be funded partly through foreign portfolio flows.

Outflows from Indonesia’s government bond market continued in June for a third consecutive month, though they were less intense and finance ministry data showed some foreign inflows in the first week of July. Foreign ownership of government bonds is around 38 percent.

“Bank Indonesia has been particularly pro-active, both in terms of the rate hikes and the intervention in the bond and currency markets,” said Stuart Ritson, head of Asian rates and FX at Aviva Investors, who remains broadly overweight on Indonesia.

“There are lots of positives about Indonesia. But no amount of rate hikes is going to get us past these elevated trade war concerns and the stronger dollar, realistically,” he added, referring to the growing trade dispute between China and the United States unnerving markets.

BI holdings of government bonds jumped to 210.4 trillion rupiah ($14.7 billion) by the end of June from 93.96 trillion rupiah in March, while foreign exchange reserves declined $12.2 billion in February through June, partly due to currency intervention.

With interest rates rising, Warjiyo has sought to use macroprudential measures including easing downpayment requirements for mortgage loans to stoke up the property market.

To bring in more foreign exchange, BI aims to encourage banks to invest in the tourism sector and will work with the government to contain expensive shipping costs for foreign trade, Warjiyo said.

BI can leverage a network of 46 offices across the archipelago of 17,000 islands with a population of more than 250 million people.

Warjiyo has said BI was working with the industry ministry to support exporters in the automotive, pharmaceutical, food and beverages and electronic sectors.

COMMUNICATION STRATEGY

Warjiyo also believes “intensive communication” should be one of BI’s policy instruments. “If we can communicate, if we form good quality contents of information, I’m sure we can reduce irrational expectations,” Warjiyo said last month.

Since taking the helm in May, he has held at least eight news conferences, given interviews to various media and attended parliamentary hearings.

He has also pledged to announce BI’s policy decisions at 2 pm at its monthly meetings rather than well after Asian markets have closed that has often happened under predecessors.

Holding a doctorate in economics from Iowa State University, Warjiyo co-authored a 2016 book in which he argues that a central bank has to be transparent, but also keep an element of secrecy to have the most impact on an economy.

Warjiyo, 59, a BI insider who had a spell at the International Monetary Fund, said his experience had led to “my belief that a central bank in emerging markets cannot..resort to only one target and one instrument...because our problem is so complex.”

$1 = 14,355.0000 rupiah Additional reporting by Tabita Diela and Vidya Ranganathan Writing by Ed Davies Editing by Jacqueline Wong

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