Sara Webb – In what could be a setback to a crackdown on graft and tax evasion, it was announced on Wednesday that key reformer Sri Mulyani Indrawati was quitting her job as finance minister to work at the World Bank.
Sri Mulyani's move raises several concerns, the first of which is that prospects for reform are probably weaker. Sri Mulyani was arguably the country's top reformer, pushing for the overhaul of the bloated and corrupt civil service, and taking a tough line on corruption.
She made many enemies as a result and for months has come under attack from powerful politicians, officials and businessmen who have much to lose from her reform drive. Her leaving office could be seen as a short-term victory for this group.
It remains unclear whether she willingly left her cabinet post or whether the move was engineered as part of a deal to placate powerful coalition politicians, such as Golkar Party leader Aburizal Bakrie, who made no secret of his disdain for her.
A close friend of Sri Mulyani's, who spoke on condition of anonymity, said she had not been pushed out but was "fed up with the political pressures." While still a setback for reform, this would not cause major market jitters.
But if her departure turns out to have been a concession to opponents of reform in the coalition, this would rattle markets and hurt prospects for a credit rating upgrade with the country now rated just one notch below the coveted investment grade by Fitch.
A second concern is the market's reaction. Financial markets fell, but analysts said the weakening in the rupiah to 9,065 per dollar from 9,030 before the news was announced, and a 3 percent drop in the stock market, reflected broader investor concerns about emerging markets and risk related to the euro zone.
Investors have been big buyers of Indonesian assets in the past 18 months, driving a surge in local stocks, bonds and the rupiah.
They have been largely attracted by the pace of reform and liberalization in the region's largest economy, and the prospect of a surge in demand for its resources including timber, palm oil and coal.
Foreign investors have bought a net Rp 40 trillion ($4.4 billion) in government bonds this year, double the purchases all of last year. That took their net holdings to a record Rp 148 trillion, representing 24.6 percent of all outstanding government debt.
Another concern is policy continuity, which will depend on a successor. President Susilo Bambang Yudhoyono has lost one of his most trusted reformers and will need to find a suitable replacement if he is to retain the confidence of investors.
In the past, Anggito Abimanyu – head of the Fiscal Policy Agency, which comes under the Ministry of Finance – was widely regarded as a strong contender for the post of finance minister. He is known to foreign investors and policymakers, and while he has a lower profile internationally, he is considered likely to continue with many of the same policies as Sri Mulyani.
Coordinating Minister for the Economy Hatta Rajasa – who is not a technocrat but a politician with a reputation for following a more nationalist agenda – is the acting finance minister before the president appoints a permanent replacement.
The appointment will be watched carefully by foreign investors for a signal on whether Yudhoyono remains committed to reform and liberalization. Macroeconomic policy will likely be unaffected by Sri Mulyani's move.
Indonesia took years to recover from the 1997-98 Asian financial crisis and shake off its reputation as an economic basket case. But its resilience throughout the 2008-2009 global financial crisis has shown that macroeconomic and fiscal policy is on a firm footing thanks to the sound policies of technocrats including Sri Mulyani and Vice President Boediono, the former central bank governor.
Inflation remains tame and interest rates are at a record low of 6.5 percent. Economic growth was also expected to be 5.7 percent this year and as much as 6.3 percent in 2011, Sri Mulyani said last month.
Prospects for an investment grade rating are probably unchanged. Indonesia is expected to achieve an investment grade credit rating within the next three years, top policymakers say. That would leave it rubbing shoulders with the so-called BRIC nations – the top emerging market investment destinations of Brazil, Russia, India and China. Prospects for that upgrade should not be affected by Sri Mulyani's move, although there may be concerns about prospects for civil service and other reforms.
Finally, with Sri Mulyani in such a high-profile position, Indonesia could benefit further from rising international recognition of its potential, particularly as a G-20 member and a country that is widely expected to join the emerging market elite.
[Sara Webb is bureau chief for Reuters in Indonesia.]