Interview: Perry Warjiyo

How can the regulatory framework be improved to ensure more sophisticated financial services?

PERRY WARJIYO: BI has responded appropriately to rapid changes in the financial technology (fintech) sphere and its impact on the economy. The Financial Technology Office was established in 2016 to specialise in fintech developments. BI also issued a set of regulations on e-money activities, card-based payments and fund transfers. It also launched the National Payment Gateway in December 2017, aimed at creating an interconnected and interoperable payments system that ensures integrity and efficiency, and enhances consumer protection. We have been facilitating digitalisation that connects various government programmes, including social transfers, to improve the efficiency of financial transactions. We are currently working on social assistance, interoperability and the interconnectedness of e-payment systems on various modes of transportation, as well as the digitisation of government spending and toll road payments. In 2017 BI also issued regulations to complement existing anti-money laundering policies and prevent terrorist financing. We are also open to accommodating technological innovations such as biometric data and electronic signatures.

What incentives are required to prevent capital outflows from further depreciating the currency?

WARJIYO: Capital outflows and pressure on the exchange rate in Indonesia and other emerging markets have been triggered by broad-based rising global financial market uncertainties since February 2018. This was due to rate hikes by the US Federal Reserve, as well as mounting trade tensions and rising geopolitical risks. Our overall macroeconomic and financial conditions remain positive, as reflected in rising economic growth, low inflation, and a manageable current account deficit, as well as a stable and sound banking system.

BI has differentiated Indonesia from other emerging markets by enhancing its policy mix. First, we took a pre-emptive approach by increasing our policy rates to ensure the attractiveness of domestic financial assets and lower the current account deficit. Second, we adopted a market-based exchange rate to allow some adjustments to external shocks. Nonetheless, we reserve the right to intervene in the foreign exchange (forex) market to stabilise the exchange rate. Third, we accelerated the deepening of domestic financial markets to expand portfolio investment, market liquidity and hedging instruments. We have also expanded the swaps market and introduced domestic non-deliverable forwards on the forex market. On a policy level BI strengthened coordination with the government and the Financial Services Authority to boost private financing for infrastructure development, and increase non-bank corporate financing through the issuance of equity, bonds and other securities.

How does Indonesia’s monetary policy compare to other ASEAN economies?

WARJIYO: Most central banks direct their monetary policies towards achieving price stability and supporting economic growth. But under recent heightened global uncertainties, most emerging market central banks have had to seriously take into account global spillover effects in their policy-making. Indonesia has raised policy rates by 150 basis points to 5.75% since April 2018, despite a low estimated inflation of around 3.50% for 2018-19. While this is much higher than the US rate hikes, we have to compensate for higher risk premiums due to trade tensions between the US and other countries, and recurrent geopolitical risks.

With regard to policy responses by central banks in the ASEAN region, Malaysia and Thailand increased their policy rate in 2018 to help mitigate the negative impact of unfavourable economic and financial developments in their respective economies. The Philippines also raised its policy rates in recent months to contain inflation, as well as mitigate global spillover effects.