Prabowo Subianto’s efforts to reshape Indonesia’s economy are reaching their limits. Wary of a renewed run on the rupiah, the country’s president picked an orthodox economist and monetary insider to helm the Indonesian central bank. It would be to the nation’s benefit if he can curb his instinct to interfere and let her do the job—even when painful steps are required.
Last week, Prabowo nominated Destry Damayanti to be governor of Bank Indonesia. Destry was the top deputy to Perry Warjiyo, a respected technocrat who raised interest rates to protect the currency and whom the president ousted last month. The appointment seems like an exercise in damage control. The last thing that markets needed was a fresh reason to sell the country’s assets.
There’s nothing in Destry’s resume or public remarks that suggest she will branch out in a radical direction. She may appreciate the understanding, though, that antagonizing Prabowo is a losing move. Destry needs to at least pay lip service to the president’s agenda.
Prabowo came to office promising to dramatically accelerate the pace of growth—and harness the power of the state to reach the goal. In his view, all government agencies should row in the same direction, which is laid down by him.
Fortunately, there are limits to how much damage the president’s agenda can do to the central bank.
It’s one thing for Destry to tread carefully. Defying economic logic is another. The reality is that the rupiah and the Indonesian bond market have been under siege, and it will be her job to defend both.
Rates can’t come down, no matter how much the president wants to juice growth. A further substantial weakening of the currency, which is Asia’s worst performer against the dollar this year, will likely mean additional hikes. The price for balking at that would be further capital flight.
Investors would have been unnerved by a different pick. Markets sold off after Prabowo installed his nephew Thomas Djiwandono as a deputy governor in January.
Since gaining independence after the Asian financial crisis in the late 1990s, Bank Indonesia has been a reasonably effective guardian of the economy. It targets inflation of 1.5-3.5%, and the country’s clip of price increases has mostly remained within the band, aside from a spike after the pandemic.
Djiwandono was widely seen as a threat to that autonomy, so Prabowo was right not to promote him.
Memories of the rupiah’s collapse during the Asian financial crisis undoubtedly weigh heavily on the president. That era led to the downfall of his former father-in-law and autocrat Suharto, who ruled the archipelago for more than three decades.
Prabowo was unceremoniously booted out of the army for disobeying orders, and for a time was banned from the US and Australia for alleged human rights abuses.
The ex-special forces commander failed to win an election until he refashioned himself as a cuddly and cute grandfather-type and teamed up with the son of popular former President Joko Widodo in 2024.
Since coming into power, Prabowo has shown far stronger shades of his authoritarian past than many had expected, diminishing confidence in his ability to get the economy back on track. He has tried to seize control of mineral exports and, last year, fired the respected long-time finance minister, Sri Mulyani Indrawati.
Destry’s main priority should be winning back the confidence of markets even if it means resisting the president’s approach to governance. The rupiah ended four days of declines after last Monday’s announcement, but is still down more than 6% against the dollar this year.
There is still plenty that can go wrong. Bank Indonesia recently resumed a contentious practice of helping finance government spending. That’s revived worries that the central bank is becoming too close to the administration. After doing something similar during the worst days of covid, officials said then that such an unusual step was a response to an emergency.
There will be lingering worries that officials will tolerate a higher pace of inflation. A forthright reiteration of the bank’s autonomy from Destry is thus desirable. The new governor may also have to hike rates to prove her singularity. If Prabowo can tolerate that, it will go some way toward easing concerns.
By all means greet Destry’s appointment with relief. She is likely to be tested soon enough, if not by Prabowo, then by the markets. Her instincts will be to do what’s necessary to protect the economy and financial system and the president may just have to go along. Like it or not, Indonesia competes for international capital. You can only mess with a monetary authority so many times. ©Bloomberg
The authors are, respectively, a Bloomberg Opinion columnist covering Asian economies, and a Bloomberg Opinion columnist covering Asia politics with a special focus on China.