Indonesia Gets a New Finance Minister

Muhammad Chatib Basri, the current head of Indonesia's investment promotion agency and an ally of former finance minister Sri Mulyani Indrawati, is expected to take over the job she was pushed out of to go to the World Bank in 2010, Coordinating Minister for the Economy Hatta Rajasa said Monday.

If Chatib is appointed, it would be welcomed by the international investing community, which has been beset by rising economic nationalism in recent years.

One reason Chatib is generally well liked by both local and foreign businessmen is that he is relatively blunt and realistic about the challenges the economy faces. "I say openly to investors that you're going to see problems in Indonesia," he told the American Chamber of Commerce in Indonesia during a recent interview. "I don't deny the problems, they are legitimate and real."

Despite a long run of good economic news in recent years, the prospects for significant structural reform in the face of relentless political pressures have not recovered since Sri Mulyani, a free trade disciple and tough reformer, was basically driven from her position under pressure largely orchestrated by allies of tycoon Aburizal Bakrie, whose mining empire was a target of her tax reform attempts.

Since her departure, the drumbeat of economic nationalism also has been steadily rising.

Sri Mulyani was replaced by Agus Martowardojo, the chief executive officer of Bank Mandiri, who was recently named governor of Bank Indonesia, the country's central bank.

Agus, also a tough-minded reformer with few political ties to the administration, was abruptly removed in circumstances that have yet to be fully explained. His departure, with just a year and a half to go in President Susilo Bambang Yudhoyono's second and last term, puzzled and worried some investors at a time when regulatory issues have been erratic in a number of sectors.

At the forefront of rising economic nationalism has been Hatta Rajasa, who as coordinating economic minister is instrumental in appointing Chatib to the finance ministry. Chatib's appointment was widely expected.

One byproduct of recent restrictions put in place on mining exports and the renewal of oil and gas contracts held by multinational companies has been a rising budget deficit that Chatib will inherit. With a short time in office, it is doubtful that he can make any dramatic headway other than holding the line on spending. If the government moves ahead on promises to cut crippling fuel subsidies that have blown out the budget as export earnings have fallen, it will fall on Chatib to implement the changes.

Most nationalist-driven measures (particularly in agriculture and natural resources) are so far along and driven to such an extent by political considerations that it is unlikely a finance minister - even one as well respected as Chatib - would have much impact on the broad directions of policy.

For the past year, the 47-year-old Chatib has been in charge of Indonesia's Investment Coordinating Board (BKPM). He is considered to be a professional and has no political party affiliation. He has served as a consultant to a wide range of international agencies including the World Bank, the Asian Development Bank and the Asia-Pacific Regional Advisory Group of the International Monetary Fund. He was also a consultant to the Institute of Southeast Asian Studies in Singapore and a number of local and international companies.

"Obviously we are still [sticking with a replacement for finance minister from] within the cabinet, and clearly not from a political party. He is a professional," Hatta told local media. Hatta has been acting finance minister since Agus Martowardojo's appointment to the central bank was announced.

Indonesia has come under increasing criticism for leaving a policy vacuum at both the finance ministry and the Bank, the country's two most important government finance institutions.

Chatib takes over at a time when concern is rising over the state of Indonesia's economy, with inflation rising at a 5.57 percent clip in April, marginally down from March at 5.6 percent. The rupiah has also continued to shed value, falling to 9,736 to the US$1, marginally down from April. He is the third finance minister since President Susilo Bambang Yudhoyono was reelected in 2009. Analysts say the central bank has left its benchmark policy rate at 5.75 percent, a record low level, far too long, further threatening the value of the rupiah.

The government has been struggling with an unsustainable US$22 billion annual domestic fuel subsidy but risks a political conflagration if the subsidy is withdrawn, with an election looming in 2014. Tax revenues are not rising fast enough to meet an increasing fiscal deficit, much of it driven by the unsustainable subsidy.

After leaving the Finance Ministry in 2010, Chatib served as an independent commissioner at publicly traded companies Astra International, Gresik and Indika Energy until his appointment to the investment board last year. He oversaw record amounts of money coming in from abroad despite the roadblocks set in front of international investors, with FDI climbing to US$20 billion, an all-time high, with an additional US$10 billion from local sources.

"In general, we need a minister of finance who is capable, who has a good background, who is disciplined and can work professionally," Raden Pardede, the president commissioner of the State-owned Asset Management Company, told the Jakarta Globe.

"It will be hard for him to make any kind of long-term planning in one-and-a-half years. So he needs to prioritize controlling spending, so that the budget deficit doesn't get too big. When it comes to spending, this will include the fuel subsidy policy. He needs to do something smart about this."

Peter Fanning, chairman of the International Business Chamber in Indonesia, said the group would be confident with Chatib as finance minister, particularly looking at Indonesia in the bigger context.

"His work tends to be with the bigger picture, not really about the details like what we are concerned about. He has a good grasp of the bigger picture," Fanning said.

Still, Fanning was skeptical that anyone appointed as finance minister now would be able to achieve much.

"We do not expect him to make a lot of significant changes in such a short period of time," he said. "The economy has been managed pretty well, and I believe that he will continue to do so."

(With reporting from the Jakarta Globe)