FACTBOX-Indonesia reforms at risk with Fin Min’s departure

By Sunanda Creagh

JAKARTA, May 6 (BestGrowthStock) – Indonesia’s finance minister,
Sri Mulyani Indrawati, will move to the World Bank as a
managing director on June 1, raising questions over the pace of
reform in Southeast Asia’s biggest economy. [ID:nJAK189652]

Investors will pay close attention to the appointment of
her successor as a sign of President Susilo Bambang Yudhoyono’s
commitment to reform and potential to lift GDP growth from 4.5
percent in 2009 to over 7 percent in 2014. [ID:nJAK140547]

Here are the main areas of reform that could be affected:

CIVIL SERVICE

Overhauling Indonesia’s graft-ridden and bloated
bureaucracy is among the most important elements of reform to
improve efficiency, implement policy effectively, and curb
corruption, but with Indrawati’s departure, other ministers may
be less inclined to take up the challenge and cross the
anti-reformers.

As finance minister, Indrawati introduced merit-based
incentive structures within her own ministry, including new
hiring practices and salary raises to reduce the temptation to
accept bribes, and other ministries were supposed to follow
suit.

Since the Suharto era, the civil service has been a Golkar
Party stronghold, and Indrawati’s attempts to reform it have
been strongly resisted by Golkar’s leadership.

Vice President Boediono and Kuntoro Mangkusubroto, who
heads the Presidential Delivery Unit, both back bureaucratic
reform, but other ministers may now be wary of pursuing this
goal and risking Golkar’s wrath.

TAX AND CUSTOMS

Indrawati drove an overhaul of the tax and customs offices,
traditionally hotbeds of corruption, in a bid to increase state
revenues and reduce Indonesia’s reliance on the capital markets
to fund the budget deficit.

With her departure, the question remains whether her
successor will have the clout to push through further reforms
or whether there is a risk of backsliding or stasis.

“It will unwind. The pressure is off for the shake-up of
the tax department,” said Kevin O’Rourke, a Jakarta-based
political risk analyst.

Indrawati raised salaries, fired corrupt officials, and
introduced more transparent work practices including open plan
offices and computerised records. But she hasn’t been able to
eradicate graft, and recently announced further reforms
including a proposal to install CCTV cameras in tax office
rooms and a shake-up of the tax tribunal.

Under Indrawati, the tax office has cracked down on alleged
tax evaders including Bumi Resources (BUMI.JK: ), run by the
family of Golkar party chief Aburizal Bakrie.

That and other investigations could now stall, analysts
say, because her successor is unlikely to pursue such cases as
vigorously. In Bakrie’s case, that could mean the group has
more cash at its disposal to pursue acquisitions.

ENERGY AND MINING

Indrawati’s departure raises questions about the commitment
to cut expensive energy subsidies and raise electricity
tariffs.

Reducing fuel subsidies is a sure way to create political
enemies — something a new and politically inexperienced
finance minister may want to avoid – while hikes in electricity
tariffs are unpopular but necessary to address the enormous
operating loss suffered every year by state power firm PLN.

Her departure may also affect a long-running feud over who
buys shares in a lucrative copper and gold mine run by Newmont
Mining Corp (NEM.N: ). Bumi has been eyeing that deal for some
time as it expands its mining interests, whereas Indrawati had
been open to finding other buyers. [ID:nJAK365046]

SOCIAL SPENDING

Indrawati channelled budget funds away from ministries and
toward direct social spending such as successful community
programmes, health insurance and school funding.

Her departure may pave the way for ministries to reverse
the measures, and have funds disbursed via the ministries
instead which increases the risk of corruption.

Stock Analysis

(Editing by Sara Webb)

FACTBOX-Indonesia reforms at risk with Fin Min’s departure