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Analysis: Rumors of finance minister's departure dampen rupiah value

Jakarta Post - February 7, 2024

Tenggara Strategics, Jakarta – Rumors that Finance Minister Sri Mulyani will resign from President Joko "Jokowi" Widodo's cabinet have emerged just weeks before the 2024 general election. Despite denials from President Joko "Jokowi" Widodo and several ministers, speculation about Sri Mulyani's departure has weakened the rupiah and led to significant divestment by foreign investors from Indonesian government securities.

The first suggestion that the finance minister intended to resign was from Faisal Basri, a senior economist at the University of Indonesia, who said in mid-January that Sri Mulyani, along with Public Works and Housing Minister Basuki Hadimuljono and Energy and Mineral Resources Minister Arifin Tasrif, would tender her resignation. Additionally, a tweet by Finance Ministry special staffer Yustianus Prastowo on social media platform X, reinforced these rumors. In his tweet, Yustinus expressed a desire to follow his superior, Sri Mulyani, in leaving the Finance Ministry.

A dispute with Defense Minister Prabowo Subianto over defense spending is believed to be a catalyst for Sri Mulyani's rumored resignation plan. The problem is that Prabowo, as a presidential candidate, enjoys the full backing of President Jokowi. What makes Sri Mulyani want to leave the cabinet, according to some sources, is her indignation over President Jokowi helping his son Gibran Rakabuming Raka be named Prabowo's vice presidential candidate and his decision to increase the social assistance budget amid the presidential election.

The Finance Ministry reportedly refused to approve the Defense Ministry's plan to purchase 12 used Mirage 2000-5 aircraft, citing the country's fiscal limitations. This contract, worth 733 million Euros (approximately Rp 12.4 trillion), for 12 used jets from the Qatar Air Force was signed in January 2023 by the Defense Ministry and Czechoslovak Group, a Czech Republic-based defense company. The acquisition faced criticism from some politicians because of the planes' age and potential maintenance costs. However, in November 2023, President Jokowi approved a 20 percent increase in the defense budget for 2020-2024, from the originally planned US$20.75 billion to US$25 billion, financed through foreign loans.

Another presumed reason is President Jokowi's decision to provide the El Nino social aid program, which has been accused of being overly burdensome for the state budget. The 2023 social aid budget, initially set at Rp 146.47 trillion, swelled to Rp 159.6 trillion in realization and is pegged at Rp 157.3 trillion for 2024.

Many see such an increase in social spending being misused for political purposes, particularly in boosting Jokowi's popularity and his support for the Prabowo-Gibran ticket.

Sri Mulyani has been reticent when asked about the resignation rumors, stating she is still working as minister. Meanwhile, President Jokowi and Coordinating Economic Affairs Minister Airlangga Hartanto have denied rumors of the planned resignations of several ministers, including Sri Mulyani.

Nevertheless, the circulation of rumors about Sri Mulyani's resignation has already created negative sentiment in financial markets, impacting the rupiah's strength. Over the past week, the rupiah weakened to between 15,600 and 15,845 against the US dollar. The weakening of the rupiah has been the result of foreign investors dumping their holdings of government debt securities (SBN). According to Bank Indonesia, foreign investors booked a net SBN sale of Rp 3.31 trillion in the period of Jan. 22 to 25.

What we've heard

Sources in the government mentioned that Sri Mulyani's desire to resign from the cabinet had actually emerged as far early as December 2023. According to the source, Sri Mulyani fundamentally disagrees with the political dynasty being built by President Jokowi.

Her inclination to resign became stronger after Jokowi requested additional budget for social assistance (bansos) programs. This request from the Jokowi administration included extending several bansos programs until June 2024, and the sudden launch of a new direct cash assistance (BLT) program to mitigate food risk. The disbursement of this program is planned to be conducted this February.

Sri Mulyani is reportedly finding it difficult to reject the additional bansos budget. Essentially, disbursing bansos is reasonable as a stimulus during economic downturns. From a fiscal perspective, the state budget (APBN) until September of last year also experienced a surplus, which would make the programs feasible. The problem lies in the vigorous distribution of bansos ahead of the 2024 elections, making it come off as being heavily driven by the electoral interests of government-supported candidates.

Another trigger is the intensifying differences of opinion between Sri Mulyani and Defense Minister Prabowo Subianto regarding the defense budget. Since the beginning, Sri Mulyani has been one of the most outspoken opponents against the Defense Ministry's plan to purchase 12 Mirage 2000-5 aircraft.

Later, according to another source, Sri Mulyani decided not to resign because she was carefully considering the potential successor to her position. She is reportedly concerned that her replacement may not be capable of managing the budget.

"Sri does not want the budget to become a mess in the remaining time of this administration," said the source. "Even if she resigns, it (balancing the budget) will not be finished in the near future."

Certainly, Sri Mulyani's resignation plan has caused fluctuations in the exchange rate of the rupiah in the financial market, subsequently leading to some panic at Bank Indonesia (BI). Moreover, this news also came right as BI had been aggressively intervening in the government bond market (SUN) throughout the past few weeks. "Interventions will intensify because the news of SMI resigning is shaking the market and the rupiah," the sources stated.

[This content is provided by Tenggara Strategics in collaboration with The Jakarta Post to serve the latest comprehensive and reliable analysis on Indonesia's political and business landscape.]

Source: https://www.thejakartapost.com/opinion/2024/02/07/analysis-rumors-of-finance-ministers-departure-dampen-rupiah-value.htm