TIS Weekly: macro edition

- Main story: Finance minister’s appointment has investors uneasy about future Investors are yet to react strongly to the surprise appointment of a political figure as acting finance minister, but may become jittery if he remains in the post for too long

- Roundup: Asian investors drive surge in Indonesia FDI, while inflation may ease in coming months  

Finance minister’s appointment has investors uneasy about future Coordinating Minister for Economy Hatta Rajasa has been appointed as acating finance minister to replace minister Agus Martowardojo, who will take over as Bank Indonesia (BI) governor, in a surprising move that could further taint a fading legacy for President Susilo Bambang Yudhoyono.

Yudhoyono’s appointment of his longtime lieutenant has caused some concern in markets: Hatta has little hands-on economic experience, having only the coordinating minister role under his belt, and there has been speculation that he may have been given the post for political purposes – possibly to prepare him for higher office in 2014’s general elections, with Yudhoyono’s party lacking a viable candidate said to fear an opposition that could investigate allegations of corruption.

While Hatta is only acting finance minister, it’s noteworthy that he is the first politician to hold the post since Bambang Sudibyo (also of the National Mandate Party, or PAN, which Hatta heads) in 1999-2000, which is a very real risk of tarnishing the investor goodwill Yudhoyono built up during most of his administration by choosing qualified, reformist technocrats for key economic posts.

There have also been rumors that Hatta may have been placed in the role in order to have access to funds for political campaigns ahead of the election.

While this claim may be contentious, at least initially it appears significant that Hatta immediately upon taking office released budget funds for the national school exam program that had been blocked due to suspicions of a markup.

Hatta has sought to address concerns over his appointment, saying that he has no plan to make policy changes and will seek in the role to manage the trade deficit and oversee smooth budget implementation and government spending.

Markets calm for now, but may become uneasy without action Analysts and market participants have remained neutral so far, as they view the appointment only as temporary.

But if the president doesn’t name a permanent finance minister soon, market participants may become edgy as Hatta’s position as chairman of a national party will make him preoccupied with campaigns and increasing the possibility that the country’s fiscal prudence could be compromised.

“There are many problems at the Ministry of Finance. In the near term, how to mitigate risks regarding energy subsidies, optimizing tax revenue, [ineffective] budget spending, and pressures on our macroeconomics fundamentals, and global economic slowdown,” according to parliamentary vice chairman Mohamad Sohibul Iman.

“I hope the President will soon name a definite finance minister as Hatta Rajasa’s position as chairman of a political party and coordinating minister has taken much of his time and energy,” said Iman, a member of Prosperous Justice Party—among the rivals of Hatta’s National Mandate Party.

Iman also added that not having a definite finance minster could cause legal problems as the country’s law stipulates finance minister, and not an acting minister, as the one who is mandated to manage the state finances.

Minister’s background raises questions Hatta's tenure as transport minister between 2004 and 2007 was marred by some of the worst airline incidents in the country’s history, and serious reforms in the industry didn’t gain traction until he was replaced.

As economics minister his “Hattanomics” policies were perceived by many as protectionist and interventionist, as they have included higher royalties from foreign miners like Freeport McMoran Copper & Gold Inc. (FCX) and PT Vale Indonesia (INCO), import quotas, export restrictions and foreign ownership caps which while they have some nationalistic appeal have not generally been regarded by investors as successful.

Among the most affected have been miners, some of the biggest foreign investors in Indonesia, who say an impending ban on raw ore exports and requirement for mining firms to develop domestic smelters has wreaked havoc in the industry.

There have also been suspicions that these policies are intended to constrict the flow of mining royalties to politicians in mineral-rich regions, who often align with Golkar or the PDI-P. Nonetheless, the finance ministry does have a capable bureaucracy headed by deputy ministers Anny Ratnawati and Mahendra Siregar, who themselves were both mentioned as potential candidates for the role.

It’s likely that Hatta’s appointment won’t have a drastic longterm effect on the ministry, one of the most reformed and relatively clean government institutions, especially as he will be replaced with a fulltime candidate before Yudhoyono’s term ends, but the impact on both Yudhoyono’s reputation and on the investment climate in the near term will be negative.

Potential candidates for the permanent role include trade minister Gita Wirjawan, Investment Coordinating Board (BKPM) chairman Chatib Basri, and outgoing Bank Indonesia governor Darmin Nasution.

Hatta, 59, is the chairman of PAN and may run for president next year, with his current poll numbers respectable. He served as research and technology minister during the administration of Megawati Sukarnoputri in 2001-2004 before being appointed by his former cabinet colleague Susilo Bambang Yudhoyono as transportation minister in 2004-2007.

Considered by many to be a close ally of Yudhoyono, he took the strategic post of state secretary in 2007-2009. When Yudhoyono was re-elected, he named Hatta as the coordinating minister for economics. Graduating from the Bandung Institute of Technology in 1973, he forged an even greater alliance with Yudhoyono when his daughter married the president’s son in late 2011.

Outgoing finance minister brushed aside The nature of the termination of Martowardojo, who is a technocrat from the commercial banking sector and is highly regarded by investors, also comes as a surprise including to Martowardojo himself, who unexpectedly learned while in the U.S. for a World Bank event that he would be taking gardening leave and had to be replaced after the first day of the five-day event by Armida Alishjabana, the national planning minister, who was also in attendance.

Martowardojo’s insistence on fiscal prudence and toughminded reformism is thought to have earned him few friends among the political elite, and it’s not farfetched to suggest that much like his predecessor, the highly regarded Sri Mulyani Indrawati, there was pressure to remove him from the role.

As BI governor, Martowardojo lacks the economic credentials of his well-regarded predecessor Darmin Nasution, who holds a PhD, however his experience in managing thousands of people—both during his tenure in Indonesia’s biggest lender Bank Mandiri (BMRI) and in the finance ministry—is considered crucial during transitory period this year and next when BI hands over its industry oversight role to financial services authority OJK.

Martowardojo may also be able to further strengthen the coordination between the central bank and the finance ministry, almost non-existent a decade ago – those traits might be the ones needed by a transforming BI. Monetary policy, given the fact that the remaining members of the board of governors are all career central bankers and decision making is collegial, is unlikely to see any dramatic change. 

Roundup: Asian investors drive surge in FDI, while food-driven inflation may ease in coming months

(Insider Stories) – Foreign and local investors poured money into Indonesia’s economy in the first quarter of the year, with a 27.2% surge in FDI to 65.5 trillion rupiah ($6.8 billion) led by $1.2 billion in Japanese investments in the automotive sector.

The Investment Coordinating Board (BKPM) said the U.S. was the second biggest contributor with $900 million in FDI, followed by South Korea with $800 million, Singapore with $600 million and the UK with $500 million.

Combined foreign and and domestic investment rose 39.6% from a year earlier to IDR93 trillion, with domestic investment growing  30.6% to IDR27.5 trillion. Among those pouring money into Indonesia is Japan’s Toyota Motor Corp. (TM, 7203), which plans to invest IDR13 trillion in the next few years to expand its plant in Karawang, West Java.

Further investment interest could result after Industry Minister M.S. Hidayat announced that the Indonesia-Korea Comprehensive Economic Partnership Agreemeent could be ready by October ahead of an APEC summit in Bali.

While far from a done deal, similar trade agreements between Korea and Asean countries have led to huge jumps in trade volume – the Asean-Korea Free Trade Area (AKFTA) increased trade between the region and Korea by 23% in the first year after its trade in goods provision was implemented.

However Indonesia seems more interested in the potential for more Korean investment than in bumping up trade volumes: Hidayat said after meeting his Korean counterpart that Hyundai Corp., Samsung Group and LG Electronics Inc. (066570) “want to deploy their full investment capacity” in Indonesia, and the government is seeking Korean investment and knowhow in industries including shipbuilding and toll roads.

It also wants more Korean capital in petrochemical refining, where Lotte Chemical Corp. (A011170) and SK Chemicals Co. are eyeing multibillion dollar investments with local partners, and steelmaking, where Posco (005490) is in the initial stages of a joint venture with state-owned PT Krakatau Steel (KKTS) that will eventually produce 6 million tons a year. 

Inflation set to ease in coming months  Inflation may ease by July as food prices look set to ease, which gives the government room to move on raising fuel prices to decrease the subsidy load. The CPI, the main inflation gauge, may rise 5.6% in April on year but fall by 0.04% from the previous month, according to a forecast by Bank Indonesia Deputy Governor Perry Warjiyo, an easing from March’s annual inflation of 5.90%–a near two-year high and above the central bank’s 5.5% inflation target cap–and overturning an on-month increase of 0.63% last month. 

“Shallot prices, although they remain high, are lower than the previous month while prices of chillies, garlic and gold have fallen,” according to Warjiyo, while “the deflation outlook in April is good news as it reinforces our view that food-driven inflation is manageable.

It shows the government can resolve logistic disruptions.” Restrictions on some agricultural imports have driven prices of horticulture staples like onions and garlic in recent months, feeding through to broader inflation.

“We expect low inflationary pressures through July due to harvest season. Although policy to adjust fuel prices is in government’s hands, it’s better to do it when inflationary pressures are low,” he said.