Harry Su +6221 250 5735 (harry.su@bahana.co.id)
Fakhrul Fulvian +6221 250 5081 Ext. 3602 (fakhrul.fulvian@bahana.co.id)
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New cabinet members: No significant change
Following weeks of delays, finally Jokowi announced a reshuffle in his working cabinet. For the economic team, in line with market expectations, Darmin Nasution (exhibit 5) was appointed as Coordinating Minister of Economy. No changes were made to the Ministry of Finance, despite plenty of market speculation suggesting a replacement. Former investment banker, Thomas Lembong, assumes the position of Minister of Trade, while Sofyan Djalil has been shifted as Minister of National Development Planning. In political post, Luhut Pandjaitan was upgraded from his position as Chief of Staff to be Minister of Coordinating Political, Legal and Security Affairs. In other posts, former Ministry of Finance, Rizal Ramli, becomes Coordinating Minister of Maritime Affairs while PDIP’s politician, Pramono Anung is the new Cabinet Secretary. It is worth noting that this cabinet reshuffle does not change the cabinet composition in terms of the number of professionals versus politicians (exhibit 2). On the political-party appointment, PDI-P managed to gain a ministerial post (Cabinet Secretary) and now has a total of 7 ministers (out of 34), at the expense of Surya Paloh’s NasDem.
Fiscal team: Also no significant change
Interestingly, no significant change has occurred within the fiscal team, although government spending has been the main focus for the economy. That said, we do not expect any surprises on the fiscal side for the rest of the year. On a more positive note, the new cabinet has more technocrats as Darmin Nasution joins the team. Another newcomer, Thomas Lembong’s background is much more similar with predecessor Gita Wirjawan, with a Harvard degree and investment banking experience. Previously, he served as Senior VP in the Indonesian Banking Restructuring Agency (IBRA), and held strategic positions in Deutsche Bank, Morgan Stanley and Farindo Inv.
Key to success: Adaptability for fast execution
Current low government budget realization (exhibit 3) has already diminished the prospect of economic growth this year. Early this week, Jokowi stated that October will be the peak for government spending. Thus, adaptability of new ministers will be crucial to achieve the disbursement target. On the flip side, government’s ability to maintain the supply chain during the current economic slowdown is crucial to maintain inflation at bay and move Indonesia away from vicious cycle of IDR depreciation and high inflation. Note that reported shortage in the domestic poultry market has already increased ASP of local beef prices by 38% in the last 3 months.
Threats from external risks; Lower GDP outlook on the cards
The new members of the cabinet will be met with plenty of arduous tasks on hand, particularly due to the recent devaluation by the PBoC, which has already put pressure on most Asian currencies, further weakening the IDR, and is set to pressure inflation and domestic private consumption. Additionally, the Yuan’s depreciation will also undermine Indonesia’s exports to China. These external risks already increase downside risk to GDP growth as we had stated in our last economic report. We are now revisiting our GDP growth target, mainly due to the recent continued IDR depreciation.
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