Impressive figure: It’s great that Sri Mulyani says she’ll stay. Her public service, however, isn’t a Band-Aid for flawed policies. — Reuters
INDONESIA’S hard-won reputation for stability is under great strain. In the decades after a financial collapse re-ordered the way the country was run, economic decision-making has been fairly predictable and financial managers considered credible.
This has been a big plus for an emerging market that’s often buoyed by bullish projections about its future role in the global economy, but sometimes struggles to get out of its own way.
This durability is being tested. While Finance Minister Sri Mulyani Indrawati’s insistence on Tuesday that she wasn’t leaving was greeted with relief, not everything should rest on her shoulders. Quality ministers matter, but the underlying approach to budgets and interest rates, and the messages received by investors, matter more.
If calibrated correctly, policies ought to survive the personnel cycles that are a natural feature of governments everywhere.
Will Indonesia be that fortunate?
That Jakarta’s stock-market plunge – the main index was down 7% at one point on Tuesday – was attributed to speculation Sri Mulyani would depart wasn’t a promising sign.
It suggests weaknesses that require not just a steady hand, but a particularly adept sales executive who can help Indonesia raise funds in international markets.
She has performed that role ably for much of the past decade, but problems have piled up that would test any cabinet pick: a surprising revenue shortfall, a weakening currency, questions about the central bank’s independence, and a decline in consumer prices.
Wrapped around these challenges is the troubling perception that President Prabowo Subianto is meddling in decisions once left safely to technocrats.
Sound fiscal policy has been a redeeming quality of recent Indonesian administrations; deficits are restricted by law to 3% of gross domestic product, and officials have taken care to stress prudence. There have, however, been some shocks.
Last week, the government revealed a rare deficit for the first two months of the year. Hardly a disaster, but context matters.
A long-planned hike in the value-added tax was recently gutted, a decision closely followed by a sudden drive to reduce spending.
Some belt-tightening is laudable, though the haphazard nature of decrees is worrying. The rupiah is Asia’s worst-performing currency this quarter.
Spending that hasn’t been chopped is for Prabowo’s pet projects, including free school lunches.
He wants the economy to grow much faster than the 5% logged over the past decade, and thinks fiscal policy has been too cautious.
But this is a global environment less benign than when the former general turned populist took office in October. World growth prospects appear weaker than even two months ago.
Once dismissed as unlikely, the prospect of a recession in the United States is now being taken seriously.
President Donald Trump’s threats of wide-ranging tariffs, and the on-again-off-again nature of their implementation is eroding confidence.
The disruptive shifts are also on display at Bank Indonesia (BI). After pledging to buttress the rupiah when setting rates, the central bank unexpectedly changed direction early this year and began cutting borrowing costs.
Surprises are rarely good in the monetary realm.
Indonesia’s dash for growth was odd, given the emphasis placed on currency stability and the need to intervene frequently to steady it.
The central bank kept its key rate unchanged on Wednesday, reflecting the expectations of most economists. To have made a reduction after this week’s tumult would have been truly astonishing.
Also distressing is BI’s apparent preparedness to entertain so-called debt monetisation, the use of the central bank’s resources to finance state spending.
This has usually been frowned upon because it blurs the distinction between fiscal and monetary settings – and exposes the bank to criticism that it’s subject to political pressure.
BI, remade in orthodox fashion under the guidance of the International Monetary Fund (IMF) after the Asian financial crisis, was wary of going down that route.
That began to shift during the pandemic, when the bank purchased bonds directly from the government.
The practice has again resurfaced, but in a modified manner.
And late last month, BI said it would buy bonds issued by the government to fund Prabowo’s ambitious public housing programme.
That’s not all that’s weighing on markets.
In a sweeping overhaul of how powerful state companies are run, Prabowo has created a multibillion-dollar state fund that will steer investment toward his preferred projects – and report to him.
This is “an instrument, a development tool that must be able to change the way we manage wealth for the welfare of the people,” Prabowo said in February. The message is that he will determine that welfare.
With so many moving pieces, who can blame markets for panicking that Sri Mulyani might let someone else have a turn?
The former World Bank managing director has held the portfolio since 2016 (her first stint as finance minister was from 2005 to 2010 under Susilo Bambang Yudhoyono). She is indeed impressive.
I recall the first time I met her, almost a decade ago, at a meeting of the IMF and World Bank. She could speak persuasively about returns on investment and put current stances in the context of Asian, and domestic history.
I was reminded of Malaysian Prime Minister Datuk Seri Anwar Ibrahim, when he was finance minister in the 1990s, or Paul Keating at height of his power as Australian treasurer a decade earlier.
As much as these people can dazzle, too much can be expected of them. Prabowo faces pressures beyond who presides over departments.
Much of the stress in Indonesian markets is self-inflicted. A bit more deliberation and consistency would go a long way. It’s great that the minister says she’ll stay. Her public service, however, isn’t a Band-Aid for flawed policies. — Bloomberg
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. The views expressed here are the writer’s own.
