September 9, 2025 | 03:43 pm
TEMPO.CO, Jakarta - On September 8, 2025, President Prabowo Subianto replaced Finance Minister Sri Mulyani with Purbaya Yudhi Sadewa, former Chair of the Board of Commissioners of the Deposit Insurance Corporation (LPS).
Purbaya was inaugurated at the State Palace in Jakarta, marking a significant shift in Indonesia’s economic leadership.
Immediate Market Reaction
The markets responded quickly. On the day of the reshuffle, Indonesia’s Composite Stock Price Index (IHSG) fell roughly 1.6 percent, one of its largest daily drops since mid-year, despite hitting an intraday record above 8,022 just days earlier.
“This volatility reflects how quickly investors reassess fiscal credibility after Sri Mulyani’s departure,” said Listya Endang Artiani, a lecturer and researcher at the Islamic University of Indonesia (UII) in Yogyakarta.
The foreign exchange market also experienced pressure, with the Rupiah weakening more than 1 percent to Rp16,488 per USD. Bank Indonesia intervened to stabilize the currency.
“The sharp depreciation on the announcement day shows investors are concerned about fiscal policy certainty under Purbaya,” Listya noted.
Fiscal Space and Market Concerns
Indonesia’s fiscal space is limited. The previous government set the 2025 budget deficit at 2.78 percent of GDP, aiming to reduce it to 2.48 percent in 2026 and achieve a balanced budget by 2027–2028.
“Fiscal discipline has been a key credibility asset for Indonesia in the market,” Listya said. “Without a clear strategy to boost state revenue, populist spending programs, like free meals consuming 1–1.5 percent of GDP, could jeopardize these targets.”
Purbaya acknowledged market jitters but described the reaction as normal.
“I’ve been in the market for over 15 years, so I understand how to improve the economy,” he said after his inauguration. He added that President Prabowo has tasked him with boosting economic growth to 8 percent within his first 100 working days.
Reasons Why Markets React: Policy Credibility and Political Cycles
Economists emphasize the importance of public expectations for economic policy effectiveness. Policy credibility theory (Barro & Gordon, 1983) suggests that when markets trust a government to maintain fiscal discipline, risk premiums drop, bond yields decline, and capital flows stabilize. Doubts about credibility, however, can increase debt costs and trigger capital outflows.
“The replacement of the Finance Minister can create a time inconsistency problem: will policies stay aligned with fiscal promises or shift under short-term political pressures?” Listya explained.
Political business cycle theory (Nordhaus, 1975) also warns that governments may loosen fiscal policies near major political events to gain popularity.
In Indonesia’s current context, the transition in economic leadership could open doors to populist spending,” Listya said.
“The market demands certainty, and any uncertainty only heightens volatility risk.”
Eka Yudha Saputra contributed to the writing of this article.
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