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Indonesia passes law to cement Central Bank's bond buying power

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Bloomberg News - December 15, 2022

Grace Sihombing and Claire Jiao – Indonesia's parliament passed a law tasking the central bank to directly finance the budget in times of crisis, just as it had been doing since the pandemic, as part of a broader revamp of financial sector rules.

Lawmakers approved on Thursday the legislation covering hundreds of provisions related to the central bank, the capital markets, pensions and digital money. President Joko Widodo, popularly known as Jokowi, is expected to sign it into law within 30 days.

Once that's done, Bank Indonesia will be expected to buy long-term sovereign bonds in the primary market as and when the government declares a crisis, besides helping ensure liquidity at banks. The revised law will also recognize digital rupiah as a legal tender, put insurance policies under the coverage of the deposit insurer and set a framework for carbon trading in exchanges.

While the expanded mandate raises concerns about the central bank's autonomy, the key to retaining investor confidence, the law provides a basis for BI to reject interference, such as barring political nominees on its board. The reforms, in line with Jokowi's goal to cut red tape and simplify rules, are expected to help deepen local capital markets to finance the needs of Southeast Asia's largest economy and adapt to the rapidly evolving fields of financial technology and cryptocurrency.

"The challenges of the Indonesian financial sector show the urgency of financial sector reform," Finance Minister Sri Mulyani Indrawati said, stressing that the previous regulations were more than 30 years old and have fallen behind recent developments in the market.

Market pushback

The approval came after two years of thwarted attempts by legislators after market pushback on revisions to the Central Bank Act that analysts said pose risks to the monetary authority's independence. An earlier proposal to explicitly include job creation and economic growth in Bank Indonesia's mandate was dropped from the new legislation.

Instead, the central bank is directed "to participate in maintaining financial system stability in order to support sustainable economic growth" as well as maintain payment system stability on top of its existing mandate to ensure rupiah and price stability.

Indrawati argued that the law protects Bank Indonesia's autonomy, as it requires politicians to resign from their parties in order to be nominated to the board of governors. The previous charter only required this once they were elected into the board.

"BI is indeed given an additional mandate, but that does not mean compromising its independence because BI is an entity that, together with other entities, maintains the economy and financial stability," she added.

It remains to be seen how Bank Indonesia will carry out its expanded mandate, especially in the area of economic support. While the market has largely accepted the necessity of bond-buying during the pandemic, the move might face more scrutiny from investors post-Covid.

"How much longer BI can get away with it is anybody's guess but once sentiment sours on it, it might be an issue," said Nicholas Mapa, a senior economist at ING Groep NV. "Adding economic growth also leaves the door open for more dovishness."

– With assistance from Norman Harsono and Chandra Asmara

Source: https://www.bnnbloomberg.ca/indonesia-passes-law-to-cement-central-bank-s-bond-buying-power-1.185956

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