The finance minister was dismissed, Indonesia's bond market plummeted, and the Indonesian rupiah fell by 1.1%

The sudden dismissal of Indonesia's finance minister has raised concerns in the market about the country's long-term fiscal outlook, putting pressure on both the Indonesian rupiah and bonds.

On September 9, Indonesian President Prabowo dismissed the highly respected finance minister Sri Mulyani Indrawati, triggering worries about the country's long-term fiscal prospects among international investors. The Indonesian rupiah fell more than 1%, marking the largest intraday drop since early April, while sovereign bonds also declined, with the yield on the benchmark 10-year government bond rising by 5 basis points to 6.4%.

Since the beginning of this month, overseas investors have sold approximately $845 million worth of Indonesian stocks and bonds, increasing the pressure of capital outflows in the market. Due to the sharp decline of the Indonesian rupiah, the central bank was forced to intervene in the market today to maintain exchange rate stability.

Analysts pointed out that this personnel change has intensified investors' concerns about Prabowo's populist policy tendencies, just days after the most severe anti-government protests in years erupted in Indonesia.

Although Indonesia has appointed economist Purbaya Yudhi Sadewa to take over this key position, Indrawati's extensive reputation in the global investment community is hard to replace.

It is reported that Indrawati previously earned the trust of international investors due to her strict budget discipline, but her conservative fiscal stance diverged from Prabowo's growth agenda.

Exchange rate and bond market face severe setbacks, central bank intervenes urgently

After the news of the finance minister's dismissal, the exchange rate of the Indonesian rupiah against the US dollar fell below 16,483, with a decline of over 1%. The Jakarta Composite Index opened lower but later recovered. Prices of Indonesian sovereign bonds fell.

An official stated that the Indonesian central bank is intervening in the market to maintain exchange rate stability. Citigroup's Jakarta economist Helmi Arman wrote in a report to clients:

"We believe the central bank will focus on exchange rate stability in the near term and will not cut interest rates this month. The increasing uncertainty may accelerate the outflow of foreign portfolio investments that began after the social unrest at the end of August."

So far this year, the Indonesian rupiah has depreciated by more than 1%, performing only better than the Indian rupee among Asian currencies. Weak economic conditions and the central bank's dovish stance are the main drag factors. During the same period, the Jakarta Composite Index has risen by 9.7%, but underperformed compared to its Asian emerging market peers.

According to data compiled by Bloomberg, overseas investors have sold approximately $845 million worth of Indonesian stocks and bonds this month, and earlier market concerns about Indrawati potentially resigning after the protests have already impacted the Indonesian market.

Carl Vermassen, a portfolio manager at Vontobel Asset Management AG, stated:

"This is not exactly what we want to see," and the signs of weakened policy-making independence in the central bank's statement are concerning. "Such events will prompt us to reduce our risk exposure." Bloomberg economist Tamara Mast Henderson pointed out:

Indrawati's departure poses the risk of scaring off investors at a time when trust is most needed—the government and central bank are working to advance new burden-sharing arrangements that will monetize part of government spending. This move has already put policy on a slippery slope.

New Finance Minister Promises to Drive Economic Growth to 6%-7%

According to media reports, Indonesia's new finance minister has promised to drive economic growth to 6%-7% through more aggressive fiscal policies to quell recent public protests. He stated:

The president's directive is to reverse the economic downturn and create faster economic growth. He expects Indonesia's economy to achieve growth of over 6% and 7% in the near future, and it is even possible to reach President Prabowo's target of 8% within two to three years.

Currently, Indonesia's economic growth rate is about 5%. According to surveys, economists expect a growth of 4.8% this year and 4.9% in 2026. The World Bank's June report estimated Indonesia's average annual economic growth at 4.8% from 2025 to 2027.

It is noteworthy that faster growth may require more expansionary fiscal policies, particularly increasing funding for Prabowo's priority projects, including free lunches and public housing, which enhance his personal approval ratings.

The new finance minister has promised to maintain the health of the national finances but also stated "if we don't spend money, the economy won't run." He has not yet made specific comments on whether to keep the budget deficit below the statutory limit of 3% of GDP, a figure that is of great concern to investors.

The Indonesian government estimated last month that the budget deficit for 2025 would be 2.78% of GDP and 2.48% for 2026.

OCBC Bank economist Lavanya Venkateswaran stated:

"His approach remains to be seen, but there is increasing inherent pressure for fiscal policy to shift towards a more populist direction."