By Ankur Banerjee
SINGAPORE (Reuters) -The abrupt removal of Indonesia’s influential finance minister Sri Mulyani Indrawati has stunned markets, as investors fear the hard-fought fiscal credibility could be eroded by the populist spending plans under President Prabowo Subianto.
Global investors have viewed Sri Mulyani, one of Indonesia’s longest-serving finance ministers in three different stints, as crucial to their bets in Southeast Asia’s biggest economy and her previous departures sent markets tumbling.
The late news of Sri Mulyani’s removal on Monday sent Indonesia stocks down 1% while Indonesia’s international bonds fell. The rupiah was set for a lower open on Tuesday.
“Mulyani was the safeguard of prudent fiscal policy,” said Hasnain Malik, EM equity and geopolitics strategist at Tellimer. “Her departure will stir up fears of widening deficits under an unconstrained and, after the protests, under-pressure Prabowo.”
The move to replace Sri Mulyani with Purbaya Yudhi Sadewa, an economist who has promised accelerated growth, comes at a delicate time for Indonesia as it grapples with widespread protests and unrest that have raged for two weeks.
Calls for a fairer taxation system have erupted as Prabowo faces the biggest challenge of his presidency so far while his flagship free meals programme that seeks to provide meals to over 80 million Indonesians has struggled in its first year.
“The key question for markets is whether Prabowo can have his cake and eat it too,” said Trinh Nguyen, senior economist for emerging Asia at Natixis.
“To afford the lunch program, she (Mulyani) had to make the difficult decision of cutting expenditure very aggressively to maintain fiscal sustainability.”
Sri Mulyani has won plaudits for reforming the taxation system and is widely considered the lynchpin behind improving Indonesia’s fiscal performance and winning investor approval.
“The issue is how is the new FM going to afford the 1.5% of GDP lunch program and raise spending for sectors such as defense without punching a larger hole in the deficit. For investors, that will be a key concern,” Nguyen said.
Purbaya told reporters the president’s target of 8% economic growth was “not impossible” and that he would find ways to quickly boost the economy and push for more involvement of both the private sector and the government.
The immediate market reaction is likely to be in the rupiah, which could lead Bank Indonesia to aggressively defend the currency. The rupiah closed at 16,300 per U.S. dollar on Monday but could be set for a much weaker open.
Indonesia’s foreign exchange reserves were at $150.7 billion at the end of August, down from the $152 billion a month earlier, data from the central bank showed on Monday.
“IDR may have to bear the brunt … until greater confidence about what the cabinet reshuffle entails for any prospective shifts in budgetary outlays and funding sources,” said Aninda Mitra, head of Asia macro strategy at BNY Investment Institute.
“Market participants will want certainty about policy settings and a steady hand at the fiscal till.”
(Reporting by Ankur Banerjee and Rae Wee in SingaporeEditing by Shri Navaratnam)
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