×

Indonesia's cabinet reshuffle may speed up reforms as Sri Mulyani Indrawati returns

A celebrated economist has returned for her second stint as Indonesia's finance minister, bolstering hopes of accelerated reforms in Southeast Asia's largest economy.

The appointment of World Bank Managing Director Sri Mulyani Indrawati as finance minister, a post she previously held from 2005 to 2010, was the key highlight of the twelve ministerial changes announced Wednesday as part of President Joko Widodo's latest cabinet reshuffle—the second in two years.

Finance Minister Sri Mulyani (L) and Seurity Minister Wiranto (R) pose together at the presidential palace in Jakarta on July 27, 2016.
ADEK BERRY | AFP | Getty Images
Finance Minister Sri Mulyani (L) and Seurity Minister Wiranto (R) pose together at the presidential palace in Jakarta on July 27, 2016.

Overall, the new cabinet was broadly welcomed by markets; local stocks and the rupiah gained on Wednesday, with the currency extending its rally to Thursday.

Sri Mulyani's World Bank experience could see the fiscal agenda prioritize infrastructure development and multilateral or foreign participation in infrastructure financing, according to J.P. Morgan. Progress on both those fronts would reduce the need for domestic bank financing and the impact on balance of payments, the bank said.

"The balance of payments surplus is expected to benefit from renewed inflows given the reformist credentials of the key economic appointments," J.P. Morgan said in a note on Thursday.

That's good news for a country whose current account has stubbornly been stuck in a deficit since 2011. The deficit stood at 2.1 percent of gross domestic product (GDP) during the first quarter of this year and the central bank expects it to widen 2.6 or 2.7 percent of GDP next year.

With Sri Mulyani overseeing the economy, it's also hoped she will spearhead long-awaited reforms, particularly regarding tax intake.

Tax revenues were running at 26 percent of the full-year target as of May this year, DBS flagged in a Thursday report, noting that annual tax revenue growth has stayed below its long-term historical average for 4 years running now. To change that, the government needs to boost revenues through measures such as increasing taxes on products such as alcohol and cigarettes, DBS said.

However, the appointment of ex- army general Wiranto as Minister of security, political and legal affairs raised eyebrows among international commentators.

The 69-year old was among officials indicted for crimes against humanity in 2003 by a U.N. tribunal for the military's reported violence in East Timor. But experts say his inclusion into the President's administration was a strategic political maneuver.

Wiranto still likely holds close ties with the military and police, flagged OCBC economist Wellian Wiranto. "Given the country's high terror alert, Jokowi [the President's nickname] likely wanted somebody who knows how to handle things on that front."

Political considerations were also a factor behind other cabinet appointments.

Officials from a range of political groups, including Golkar, the National Awakening Party, the People's Conscience Party and the National Mandate Party, were given ministerial titles-a move that facilitates political inclusion in a country known for tensions among parties.

"Ideally, a real dream team would be fully staffed with professionals. But in Indonesia, you still need political support from various parties and the best way to secure that is by dishing out cabinet posts," said Wiranto.

Malaysian bank CIMB noted that the ratio of politicians to technocrats was maintained at 17:17.

"In less than 20 months since he came to power, Jokowi has replaced 17 ministers and introduced 13 new faces. He seems firmly in control now, a departure from the perception when he was inaugurated ... The government is now supported by 69 percent in parliament versus 37 percent when the new term started," CIMB said in a report.

Still, it remains to be seen how well the cabinet will gel, Wiranto added.

"Like basketball, you can have all the NBA players in one dream team, but it takes time for everyone to work together."

—Follow CNBC International on Twitter and Facebook.