New Indonesia Market Watchdog Risky, Unnecessary: Economists

By webadmin on 02:36 pm Jun 22, 2012
Category Archive

Rachel Armstrong and Adriana Nina Kusuma

Indonesia’s new financial watchdog is due to open its doors at the start of 2013, but concerns are growing that it may actually undermine the country’s progress in bringing its fast growing financial sector under control.

The Otoritas Jasa Keuangan (OJK) was first proposed in the aftermath of the Asian financial crisis 14 years ago.

Indonesia’s House of Representatives announced late Tuesday the board of commissioners who will oversee the new body, a group of seasoned government and central bank officials led by deputy Bank Indonesia governor Muliaman D. Hadad.

They have six months to get the body into shape so it can take full responsibility for regulating the country’s capital markets at the start of next year. The OJK will assume full control of bank regulation from the central bank at the start of 2014.

However worries about a lack of preparation and uncertainty about the transition of supervision from the current regulators has left bankers and economists questioning the wisdom of pressing ahead with the new body at all.   

“I would prefer the OJK wasn’t created. It’s come about by political and legal default, rather than for practical reasons,” said Fauzi Ichsan, senior Indonesia economist at Standard Chartered in Jakarta.  

“If the euro situation deteriorates, then the OJK will face in its infancy a renewed global crisis which would be very challenging given that it’s a new institution,” he said.  

Added to that are concerns that the commissioners brought in to run the new body are too close to the establishment to bring about any meaningful reforms in the country’s financial sector.  

“The OJK will take a friendly position with the financial industry instead of being a strong regulator,” said Danang Widoyoko, coordinator of local NGO Indonesia Corruption Watch.
 
Wider worries

The watchdog is being launched at a time when Indonesia’s regulatory environment is already sparking uncertainty among investors. Recent moves to limit foreign shareholdings in the mining sector and confusion over new regulation on bank ownership have led to accusations of protectionism.

Economists say bringing in a new regulator could add to foreign investors’ skittishness.

“Fortunately the Indonesian banking system is relatively solid right now,” said Standard Chartered’s Ichsan.

“But the OJK’s challenges are enormous — logistics, staffing, harmonizing salaries between the various groups that are being merged, and co-ordination between all the major stakeholders.”     

Central bank upped its game
  

The law to mandate the OJK’s establishment was passed in 2004 due to concerns that the central bank, Bank Indonesia, didn’t have a strong enough grip on the country’s disparate financial sector.
 
Since then, many industry watchers feel Bank Indonesia (BI) has upped its game, and siphoning its regulatory responsibilities to a new institution will create unnecessary disruption.  

“The way BI supervises banks is totally different to how it was done in 1999, in fact it’s now very good,” said Rimawan Pradiptyo, a lecturer at Gadjah Mada University who has published a paper on the new regulator.
 
“Not all of the BI staff would like to join the OJK – so they will need to find new people to replace them, and what happens to the quality of supervision during the period they’re being trained? It could be chaos,” he added.   

Politicians and the newly appointed commissioners, however, believe that the new body can help drive meaningful reform in the country’s banking sector, where bank penetration is low and annual loan growth runs at 20 percent.  

“We expect in the next 10 years Indonesia can be a financial hub regionally,” said Arif Budimanta, lawmaker of the opposition Indonesian Democratic Party of Struggle, who was on the panel to select the new commissioners.    

For others though doubts still linger. The new OJK is partly modeled on the UK’s Financial Services Authority, which is being broken up amid accusations that it failed to properly monitor British banks in the build-up to the 2008 financial crisis.  

“I don’t think something which failed in the UK can be successful in Indonesia,” said Pradiptyo at Gadjah Mada University.    

Reuters