Indonesia financial minister raises pressure on bank reciprocity

JAKARTA (Reuters) - Indonesia's finance minister pressed his demand on Monday, March 25, for the need for reciprocity over foreign bank licences, adding pressure on Singapore to open up its banking sector if the year-old bid by DBS for a local bank is to go ahead.

Mr Agus Martowardojo's comments, made in a parliamentary hearing on his candidacy to become central bank governor, are likely to be seen as a reference to DBS Group Holdings bid for Bank Danamon. Officials have argued in the past that in return for better access to Southeast Asia's biggest economy, Singapore should in return fully open up its market to Indonesian banks.

"Regarding banking regulations, there's a need to apply reciprocal regulations to foreign banks on ownership and licences, based on the mutual benefit principle," he told MPs.

Mr Martowardojo was a surprise candidate put forward last month by President Susilo Bambang Yudhoyono as new central bank chief when Dr Darmin Nasution's term ends on May 22, raising concerns over the management of one of the world's fastest growing economies.

Dr Yudhoyono has not explained why he did not want to renew the current governor's term nor why he nominated Mr Martowardojo as the new governor, a move that would take him out of the cabinet.

The parliamentary commission, which has the final say on who heads the central bank, is expected to decide late on Tuesday whether Mr Martowardojo has passed its fit and proper test.

Though Mr Martowardojo is a respected figure within the investment community, it is not certain he can muster the necessary votes to get through the selection process.

At Monday's hearing, Mr Martowardojo also urged strong coordination between the ministry and the central bank to keep pressure off the rupiah from a widening current account deficit.

But many of the questions from MPs focused more on other issues, especially corruption scandals that have plagued Dr Yudhoyono's government.

There is speculation that ahead of general and presidential elections next year, Dr Yudhoyono would like someone more pliable atop the finance ministry. If there is a new finance minister, that person would be Dr Yudhoyono's third in three years.

Several names have been rumoured as possibilities, but Dr Yudhoyono has been awaiting the outcome of the parliamentary deliberations before making any announcement.

A change of finance minister would come at a sensitive time for Indonesia. Monetary policy is under pressure with inflation rising, the current account deficit worsening and the rupiah continuing to weaken.

On the fiscal side, the government's unwillingness to unwind massive fuel subsidies is putting an increasingly large hole in the budget and sapping funds that need to be spent on infrastructure if foreign investment is to continue pouring in.

"Removing a good fiscal guardian could disrupt fiscal conservatism, especially as the country approaches a general election in 2014," Standard Chartered Bank senior Indonesia economist Fauzi Ichsan wrote last week.

"If Martowardojo's successor is another conservative fiscal technocrat there may not be an issue. But if he/she is associated with the political elite, the government's fiscal belt could be 'relaxed' for what will surely be Indonesia's most expensive election campaign ever, in 2014," he said.

For all the uncertainties, Indonesian markets have shown scant reaction so far to the proposed changes in the two posts that oversee the economy.

There has been speculation that Mr Martowardojo may have fallen foul of politically powerful businessmen by opposing some of their projects, including one which has been strongly backed by Dr Yudhoyono for a bridge to link the islands of Java and Sumatra.

Born in Amsterdam, the 57-year-old Mr Martowardojo has spent almost his entire career in the banking industry, culminating in his role as head of state-controlled Bank Mandiri, which he is widely credited as having turned around.