President Susilo Bambang Yudhoyono’s decision to opt for an acting finance minister to replace Agus Martowardojo threatens to cloud the policy outlook as Indonesia struggles to revamp its fuel-subsidy program, step up infrastructure investment and damp price pressures.
Hatta Rajasa will replace Martowardojo, who is set to become the next Bank Indonesia chief, the government said April 19. Rajasa is chairman of the National Mandate Party, a member of Yudhoyono’s Democrat Party coalition, and will also remain coordinating minister for the economy.
The Jakarta Composite index, which has gained about 16 percent this year and reached a record last week, fell after the announcement that came an hour before the close of trade on April 19. Rajasa assumes the role as a government plan to curb fuel subsidies threatens to boost inflation that reached a 22- month high in March, adding to the burdens of an economy facing falling prices for its commodity exports including palm oil.
“The decision is quite strange — it will have a negative impact on the stock market and the rupiah,” said David Sumual, an economist at PT Bank Central Asia in Jakarta. “Indonesia needs a finance minister with a background in macroeconomic and fiscal policy, as there are so many problems in the economy.”
Indonesia’s benchmark index, which was little changed at the time of the announcement, closed 0.3 percent lower, posting its first drop in four days. The measure fell as much as 0.5 percent today before ending little changed. The yield on 10-year government bonds was steady at 5.45 percent, according to prices from the Inter Dealer Market Association. The rupiah weakened 0.1 percent to 9,719 per dollar, prices from local banks compiled by Bloomberg show. The currency has slipped more than 5 percent in the past 12 months, the biggest drop after the yen among 11 Asian currencies tracked by Bloomberg.
Rajasa’s tenure will end before Yudhoyono completes his five-year term in 2014, Julian Aldrin Pasha, a presidential spokesman, said by phone on April 19. Pasha said he doesn’t know when a new finance minister will be named.
Yudhoyono’s choice of Martowardojo earlier to replace Governor Darmin Nasution when his term ends May 23, also received mixed reactions from analysts. Rajasa, whose daughter is married to the president’s son, has been chief economic minister since October 2009 and was previously state secretary.
“The dual position can lead to the perception that the government is not serious about the finance ministry,” said Lana Soelistianingsih, an economist at PT Samuel Sekuritas in Jakarta. The limited term “adds to the uncertainty.”
Yudhoyono has sought to cut fuel subsidies and allocate more funds to infrastructure to spur economic growth. The government limited the use of partially subsidized diesel in January, after protests derailed plans to raise prices in 2012.
A move to raise gasoline and diesel prices or restrict the use of subsidized fuel would add to inflation, increasing pressure on the central bank to raise interest rates. Price gains quickened to 5.9 percent last month from a year earlier.
Bank Indonesia has held borrowing costs for 14 meetings and lowered its 2013 economic growth forecast to between 6.2 percent and 6.6 percent from a previous estimate of 6.3 percent to 6.8 percent. While gross domestic product has risen above 6 percent for the past nine quarters, the economy expanded in the three months through December at the slowest pace in more than two years as exports fell amid a decline in commodity prices.
Palm oil posted a fourth weekly decline last week, the longest losing streak since the four weeks ended Dec. 14. Prices of metals including copper and tin, which the Southeast Asian nation also exports, have fallen as the International Monetary Fund lowered estimates for Chinese and world growth this year.
Indonesia spent 211.9 trillion rupiah ($22 billion) on fuel subsidies last year, spurring demand for energy products that contributed to a record trade deficit in October. Containing the subsidy bill will be a key challenge for the finance minister. The challenge of Indonesia’s trade deficit caused by oil imports requires sound and fast response, Rajasa said after the handover ceremony today.
Delay of structural reforms, especially rationalization of the energy subsidy regime, is a constraint in Indonesia’s sovereign-credit quality, Standard & Poor’s said in a report this month.
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The prices of oil is projected to raise in the long term, therefore Indonesia should concentrate on exporting it’s oil by investing in oil exploration, and slowly reducing it’s fuel subsidy in stages, and educating it’s citizens to move to hybrid models of cars and electric motorcycles to save petrol, and indirectly creating a local industry boom for motorcycles and automotives, forcing your manufacturers to upgrade over let’s say a 5 year period, by providing them incentives. The next industries are in the non oil of textiles, apparel, footwear, mining, cement, chemical fertilizers, plywood, rubber, food, tourism which can take a boost by producing for demand to increase ROI instead of the traditional manufacture to supply then sell, which will net a lower profit.
– Contributed by Oogle.