FILE PHOTO: Indonesia's Finance Minister Sri Mulyani Indrawati delivers her speech during the Mandiri Investment Forum in Jakarta, Indonesia, February 11, 2025. REUTERS/Willy Kurniawan/ File Photo

By Ankur Banerjee and Rae Wee

SINGAPORE (Reuters) - The abrupt removal of Indonesia's influential finance minister Sri Mulyani Indrawati has stunned markets, as investors fear the hard-fought fiscal credibility could be eroded by the populist and costly spending plans under President Prabowo Subianto.

The news of the finance minister's removal sent the rupiah tumbling over 1% on Tuesday, prompting Bank Indonesia to intervene in a bid to stabilize the currency. The rupiah was last 0.9% weaker at 16,440 per U.S. dollar. Jakarta stocks also sank 1%, with banking stocks the biggest drag.

Indonesia's central bank was also active in the bond market, buying longer-dated government bonds in an attempt to stabilise the market, two traders told Reuters.

Global investors have viewed Sri Mulyani, one of Indonesia's longest-serving finance ministers in three different stints, as crucial to their bets in Southeast Asia's biggest economy and her previous departures sent markets tumbling.

"Mulyani was the safeguard of prudent fiscal policy," said Hasnain Malik, EM equity and geopolitics strategist at Tellimer. "Her departure will stir up fears of widening deficits under an unconstrained and, after the protests, under-pressure Prabowo."

The move to replace Sri Mulyani with Purbaya Yudhi Sadewa, an economist who has promised accelerated growth, comes at a delicate time for Indonesia as it grapples with widespread protests and unrest that have raged for two weeks.

Calls for a fairer taxation system have erupted as Prabowo faces the biggest challenge of his presidency so far while his flagship free meals programme that seeks to provide meals to over 80 million Indonesians has struggled in its first year.

"IDR may have to bear the brunt ... until greater confidence about what the cabinet reshuffle entails for any prospective shifts in budgetary outlays and funding sources," said Aninda Mitra, head of Asia macro strategy at BNY Investment Institute.

"Market participants will want certainty about policy settings and a steady hand at the fiscal till."

NEW FINANCE MINISTER'S CHALLENGES

Sri Mulyani has won plaudits for reforming the taxation system and is widely considered the lynchpin behind improving Indonesia's fiscal performance in the past decade and winning investor approval.

That fiscal prudence though has been at odds with Prabowo's spending plans and the challenge now lies with the new finance minister to find room in the budget to accommodate the president's wishes and tackle growing economic worries.

"To afford the lunch program, she (Mulyani) had to make the difficult decision of cutting expenditure very aggressively to maintain fiscal sustainability," said Trinh Nguyen, senior economist for emerging Asia at Natixis.

Purbaya told reporters the president's target of 8% economic growth was "not impossible" and that he would find ways to quickly boost the economy and push for more involvement of both the private sector and the government.

"The issue is how is the new FM going to afford the 1.5% of GDP lunch program and raise spending for sectors such as defence without punching a larger hole in the deficit," Nguyen said.

"For investors, that will be a key concern.

Beyond the rupiah market, investors were also keeping tabs on Indonesia's international bonds which fell on Monday. The focus is on whether Sri Mulyani's departure could force an exodus of global investors, although their exposure has drastically reduced in the past decade.

Foreigners hold less than 14% of outstanding Indonesian government securities, down from around a quarter back in December 2020, with the high-yielding bond market notoriously volatile during Indonesia's previous episodes of skyrocketing inflation.

With foreign exchange reserves at $150.7 billion at the end of August, down from the $152 billion a month earlier, suggesting ample firepower for the central bank to defend the currency in the near term.

"Bank Indonesia will continue to be present in the market to maintain exchange rate stability and sufficient liquidity of the rupiah," said Erwin Gunawan Hutapea, the central bank's head of monetary management.

(Reporting by Ankur Banerjee and Rae Wee in Singapore, Stefanno Sulaiman in Jakarta, additional reporting by Twesha Dikshit in Bengaluru; Editing by Shri Navaratnam)