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NEWS UPDATES 16 May 2009

Indonesia’s central bank governor resigns to run as vice president

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Indonesia's central bank governor has submitted his resignation so he can run in elections as the president's vice presidential candidate, two senior central bank sources said on Friday, prompting a stock market sell off.

President Susilo Bambang Yudhoyono, tipped in polls to win re-election on July 8, is expected to confirm the central banker, Boediono, as his running mate later on Friday in Bandung, West Java, Reuters reported.

However, the election outcome may not be decided until October if the vote goes to a second round, raising some uncertainty in financial markets over the course of monetary policy and when a replacement for Boediono might be found.

"We see that at least Boediono has been in the team for a while and we could predict what path he would take. For market players there is a level of certainty. That is more favourable compared to having a new person," said Muhammad Al Fatih, an analyst at BNI Securities in Jakarta.

The benchmark Jakarta stock exchange index ended down almost 2 percent, after briefly falling around 4 percent earlier in the day on the news, as other equity markets around the world rallied on hopes that the worst of the global downturn is over.

The rupiah, the strongest performing currency in Asia this year partly because the country's economy is expected to maintain growth despite the global downturn, was largely steady around 10,400 per dollar.

"We are now discussing the resignation offer," a senior central bank official, who declined to be identified, said of Boediono.

"He has submitted his resignation letter to other members of the board of governors. The letter will later be forwarded to the state secretariat," said another central bank official, who also asking not to be identified.

Indonesia's laws do not clearly stipulate whether a central bank governor has to resign if he decides to run for vice president, or whether he can continue in his post until officially elected vice president.

But some analysts have said Boediono should step down from his post in order to avoid any appearance of a conflict of interest since the central bank is by law independent from the government.

"He must resign from his post or else monetary policy could be biased," said Purbaya Yudhi Sadewa, an economist at Danareksa Research Institute.

However, the central bank played down such concerns.

"That's clearly not an issue as policies are taken collectively by the board of governors," spokeswoman Dyah Nastiti Makhijani said. The board of governors comprises the governor, a senior deputy governor and five deputy governors.

The spokesman declined to comment on the resignation offer, while Boediono told a local television station aboard a train heading to Bandung that he would make an official comment later.

The Javanese academic only recently emerged as a vice-presidential contender. He started his five-year tenure as central bank governor in May last year.

The outcome of the presidential vote could affect the pace of Indonesian reforms which are critical for attracting foreign investment, creating jobs and driving economic growth which slowed in the first quarter of 2009 to its weakest in five years.

The registration of candidates runs May 10-16, with Vice President Jusuf Kalla of the Golkar Party, former President Suharto's political machine, and former President Megawati Sukarnoputri of PDI-P both potentially set to run against Yudhoyono, backed by coalitions.

Yudhoyono's approval rating of 67 percent, against 12 percent for Megawati and 2 percent for Kalla, makes it almost certain he will win a second term, bar some unexpected blow.



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