Indonesia's new finance minister faces an uphill battle on fiscal credibility

Indonesia just got its third third finance minister in two years, putting the spotlight on concerns plaguing Southeast Asia's largest economy, with analysts flagging the need for fiscal prudence and a shift away from "interventionist" policy.

President Prabowo Subianto fired Finance Minister Purbaya Yudhi Sadewa on Monday and replaced him with his deputy Suahasil Nazara.

The reshuffle comes weeks after Bank Indonesia Governor Perry Warjiyo abruptly resigned, intensifying scrutiny over how much control Prabowo now wields over fiscal and monetary policy.

For investors, elevating a known technocrat could restore confidence, after a combative year under Purbaya that saw credit-rating outlooks cut and the currency slide to historic lows this year.

Nazara, sworn in hours after Purbaya's dismissal, spent seven years as deputy finance minister and led the ministry's fiscal policy agency from 2015 to 2019.

"He is a known technocrat with deep Finance Ministry experience and strong links to the Sri Mulyani era," said Qi Hang Tay, senior Asia analyst at the Economist Intelligence Unit. His internal pedigree "lowers transition risk" because he already understands the budget machinery, Tay said.

Gareth Leather, senior Asia economist at Capital Economics, described it as "a welcome development," though more evidence of improvements in policymaking would be needed to conclude that Indonesia has "truly turned a corner."

Indonesia's economy came under pressure this year, squeezed by the Iran war-led energy crisis and mounting fiscal constraints. Surging energy costs drove up subsidy costs, forcing cuts to key flagship programs. Markets have reacted badly, with the benchmark index losing more than 25% this year, and the currency hitting record lows in June.

A subsequent pivot toward fiscal discipline, however, has helped stabilize sentiment over the past month.

The rupiah has strengthened, and was at 17,680 per dollar on Wednesday. DBS Bank economist Radhika Rao expects the currency to trade in a range of 17,600 to 17,800 near-term, with fiscal credibility underpinning the bond market and shoring up the currency.

The country's fiscal deficit is expected to widen to 2.85% of GDP in 2026, with Purbaya's 1-year tenure marked by credit outlook downgrades from Fitch and Moody's over policy uncertainty, even as the country's growth climbed to three-year highs.

"The new finance minister will need to be much clearer about his priorities and provide investors with more consistent signals on fiscal policy," Leather said. "Early signs are encouraging," he said, as Nazara, in his first remarks as minister, vowed to safeguard the budget's credibility and pledged to keep the deficit below 3% of GDP.