Life in Indonesia after Sri Mulyani Moves to WB

By Sunanda Creagh and Olivia Rondonuwu

JAKARTA, KOMPAS.com - To gauge reform prospects after the departure of Indonesia’s finance minister, here’s what to watch: who gets her job, how the balance of power in the cabinet changes, and what happens with probes into tax evasion and graft. Sri Mulyani Indrawati’s move to a prestigious World Bank position means President Susilo Bambang Yudhoyono has lost his top reformer, a woman who by her own admission was “obsessed" with shaking up Indonesia’s bloated and corrupt bureaucracy.

Yudhoyono now has to convince Indonesians and foreign investors that he remains committed to driving reform and fighting corruption despite the opposition of powerful figures who fear their privileged economic position is under threat. Those pledges won him a second, five-year term in last year’s elections, fuelling substantial capital inflows into Indonesian assets.

The stock market index has doubled over the past year, bonds yields have dropped, and the rupiah was the best-performing Asian currency. Normally jittery over capital outflows, Indonesia instead grew nervous about strong inflows.

“It’s too early to say all is over for reform,” said Marcus Mietzner of the Australian National University, noting that other key reformers are still in place, like Vice President Boediono and Presidential Delivery Unit chief Kuntoro Mangkusubroto.

“I don’t think it’s a huge watershed unless we see a bad successor, someone who is clearly a proxy for a party.” The most important sign of commitment to reform will come from Yudhoyono’s choice of Indrawati’s successor, and whether that person is seen as capable of taking on vested interests.

“He wants the reform agenda to continue, so he wants a person with integrity, capability, who is going to create change,” said Hatta Rajasa, coordinating economic minister and a close friend of the president. He expects another technocrat to get the job.

Choice of successor is key

Some analysts see Darmin Nasution, currently acting governor of the central bank, as the person who could most easily meet those ideals. He worked closely with Indrawati in the finance ministry, and was head of the tax office during its shake-up, implementing reforms and pushing investigations of tax evaders.

“He has the guts to stand up to tax evaders,” said Fauzi Ichsan, economist at Standard Chartered Bank. Anggito Abimanyu, who heads the fiscal policy unit at the finance ministry, is considered the favoured candidate of the Golkar Party, which is part of Yudhoyono’s coalition but has often been very resistant to reform.

Tycoon Aburizal Bakrie, who leads Golkar, had made no secret of his disdain for Indrawati. The resulting discord within the coalition clearly unsettled the consensus-seeking Yudhoyono. The departure of the feisty Indrawati, who refused to compromise in dealing with the old guard, could improve relations between the coalition members.

“Maybe the reason behind Golkar’s call for Anggito is that they see him as a guy who is willing to cooperate with the political leaders, as someone who can compromise,” said Aleksius Jemadu, political scientist at the University of Pelita Harapan.

“From the perspective of the public, that could be problematic. The more the technocrats compromise with the political parties, the more they deviate from the reform the public wants to see.”

Tax probe a key barometer

Analysts predict that Yudhoyono may take his time deciding on a replacement. So even before a new finance minister is named, investors should watch whether there is any backsliding on reform pledges or in the fight against corruption.

Units of Bakrie’s mining firm Bumi Resources are among the companies under investigation for tax evasion, while numerous politicians and civil servants face corruption probes.

If these investigations begin to lose steam, it is a signal that reformists are losing clout in the cabinet. Although he won a strengthened mandate in elections last year that gave him a second term, Yudhoyono still needs to rely on the support of coalition partners suspicious of reform, so the composition of his cabinet is a delicate balancing act.

He has to ensure coalition partners have enough influential cabinet positions to keep them sweet, while also deploying respected technocrats like Boediono, Mangkusubroto, Trade Minister Mari Pangestu, and Investment Co-ordinating Chief Gita Wirjawan in the jobs where they can be most effective.

“The issue now is not just about picking the right replacement but to also re-evaluate other key positions that could accelerate reform,” said Todung Mulya Lubis, a leading lawyer and local board member of Transparency International.

So another thing to watch is whether Yudhoyono shuffles any posts in the next few months to change the balance of power between technocrats and political appointees in the cabinet.

“It is too early to say that it is an inflection point in the struggle between reformers and vested interests,” said David Kiu, a political risk analyst at Eurasia Group.

“For there to be a real and deep process of reform in the country, the reform movement cannot be tied to just one person."