Rupiah tumbles as Indonesian finance minister’s removal unnerves investors
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Global investors viewed ousted Indonesian finance minister Sri Mulyani Indrawati as a voice of fiscal responsibility in an administration pushing for bigger spending.
ST PHOTO: LIM YAOHUI
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SINGAPORE – 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 Dr Sri Mulyani, one of Indonesia’s longest-serving finance ministers in three different stints, as crucial to their bets in South-east Asia’s biggest economy, and her previous departures sent markets tumbling.
The news of her removal sent the rupiah plunging on Sept 9, prompting Bank Indonesia to intervene in a bid to stabilise the currency. The rupiah fell 1.1 per cent to 6,482 per US dollar as at 4.04pm Singapore time. It also slid 0.9 per cent against the Singapore dollar.
“Mulyani was the safeguard of prudent fiscal policy,” said Mr 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 Dr Sri Mulyani with Mr 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 Mr Prabowo faces the biggest challenge of his presidency so far, while his flagship free meals programme that seeks to provide meals to more than 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 Ms Trinh Nguyen, senior economist for emerging Asia at Natixis.
“To afford the lunch programme, she (Mulyani) had to make the difficult decision of cutting expenditure very aggressively to maintain fiscal sustainability.”
Dr Sri Mulyani has won plaudits for reforming the taxation system and is widely considered the linchpin behind improving Indonesia’s fiscal performance and winning investor approval.
Ms Nguyen said: “The issue is how the new finance minister is going to afford the 1.5 per cent of GDP (gross domestic product) lunch programme and raise spending for sectors such as defence without punching a larger hole in the deficit. For investors, that will be a key concern.”
Mr Purbaya told reporters that Mr Prabowo’s target of 8 per cent 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.
Mr Andrey Wijaya, head of research at RHB Sekuritas Indonesia, said: “It may take time for markets to build full confidence in his policies, especially considering Sri Mulyani’s strong reputation after more than two decades of steering Indonesia’s macro-fiscal agenda.”
Indonesia’s international bonds fell, and the focus is on whether Dr Sri Mulyani’s departure could force an exodus of global investors.
A former academic, Dr Sri Mulyani was first appointed as finance minister in 2005 by then President Susilo Bambang Yudhoyono.
After spending several years as the World Bank’s managing director, she returned to the post in 2016 under then President Joko Widodo and was retained in October 2024 by Mr Prabowo.
In total, she has helmed state finances for almost 14 out of the past 20 years.
Meanwhile, the latest social unrest has dampened overseas demand for Indonesian assets, with equity outflows reaching US$254 million (S$326 million) for the first four days of September. Bonds saw bigger withdrawals.
Foreigners hold less than 14 per cent of outstanding Indonesian government securities, down from around a quarter back in December 2020, with the high-yielding bond market notoriously volatile during Indonesia’s previous episodes of skyrocketing inflation.
Indonesia’s foreign exchange reserves were at US$150.7 billion at the end of August, down from the US$152 billion a month earlier, data from the central bank showed on Sept 8.
“IDR (Indonesian rupiah) 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 Mr 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.” REUTERS, BLOOMBERG
