It's A Good Move for Sri Mulyani but NOT for Indonesia

JAKARTA/WASHINGTON, KOMPAS.com - Indonesian Finance Minister Sri Mulyani Indrawati, a key reformer in Southeast Asia’s biggest economy, is leaving office in what could be a major blow to a crackdown on graft and tax evasion. Indrawati, 47, was named managing director of the World Bank Group, a sign of the growing clout of emerging economies but also reflecting increasing pressure on her at home from politicians opposed to her clean-up campaign.

“It’s a good move for her, but not good for Indonesia,” said Nick Cashmore, head of CLSA in Indonesia. “She’s leaving earlier than expected, not doing the full five years. It shows that all these undercurrents are gathering pace.”

President Susilo Bambang Yudhoyono has congratulated Indrawati on the move, indicating he is willing to let her go, but investors will be watching who he appoints as her replacement for a signal on where the reform programme is headed.

Investors have been big buyers of Indonesian assets in the past 18 months, largely attracted by its pace of reform and liberalisation and the prospect of a surge in demand for its vast natural resources, including timber, palm oil and coal, as the global economy recovers.

Local financial markets fell after the announcement of Indrawati’s move, but analysts said the weakening in the rupiah to 9,090 per dollar from 9,030 and a 3 percent drop in the stock market reflected broader investors concerns about emerging markets and risk related to the euro zone.

“The market will definitely react negatively to her departure,” said Destry Damayanti, an economist at Mandiri Sekuritas in Jakarta. “Hopefully it is a short-lived one, but it all depends on who replaces her. That is the main concern for now, her replacement. What is needed is someone who is a professional, someone who is not politically biased.”

Strong growth

Indonesia’s economic growth is expected to be 5.7 percent this year and as much as 6.3 percent in 2011, Indrawati said last month. Inflation, long the bane of Indonesia’s policymakers, remains tame, and interest rates are at a record low of 6.5 percent.

“I don’t think that this will hurt investment climate (in Indonesia) in the long term as I believe foreign investors see this as a democratisation process,” said Purbaya Yudhi Sadewa, an economist at Danareksa Research Institute in Jakarta. “However, in the short term, it will create a temporary shock in the market as well as for the rupiah.”

Indrawati and Vice President Boediono were regarded as Yudhoyono’s top reformers, taking a tough public stance against corrupt politicians, officials and businessmen in a country that ranks among the most corrupt in the world. Their reforms, for example in the tax and customs offices, have led to improvements in revenue collection but much more remains to be done to clean up the civil service, including the police and judiciary.

“A lot of the macroeconomic gains are secure but the question is reform. This may leave Boediono more exposed, depending on who her successor is,” said Cashmore at CLSA. World Bank President Robert Zoellick said Indrawati has been an “outstanding finance minister”, adding that she would play a key role in helping to lead the Bank as it moves to strengthen client support and implement reforms.

Indrawati, who takes up her new job on June 1, has been Indonesia’s Minister of Finance since 2005, helping to put Indonesia firmly on the world map. In her new role, Indrawati will supervise three World Bank regions: Latin America and Caribbean, Middle East and North Africa, and East Asia and Pacific, a World Bank statement said.

“It is a great honour for me and also for my country to have this opportunity to contribute to the very important mission of the Bank in changing the world,” Indrawati was quoted as saying in the statement.