What does Indonesia’s cabinet reshuffle mean for investors?

• Highly regarded finance minister Sri Mulyani Indrawati has been replaced, sparking some market concern

• The volatility could persist over the short and medium term as investors assess the new finance minister’s credibility

• However, any correction offers selective buying opportunities in the consumer and commodity sectors

Finance minister replacement raises concerns

Indonesia’s financial markets were jolted this week by President Prabowo Subianto’s major cabinet reshuffle, where he replaced five ministers and introduced a new Ministry of Hajj and Umrah. The most consequential change was the replacement of prominent finance minister Sri Mulyani Indrawati with Purbaya Yudhi Sadewa, a lesser-known economist with strong political ties.

As one of Indonesia’s longest-serving finance ministers, Sri Mulyani worked under three presidents, and earned widespread respect for her role in modernising the tax system and steering the economy through multiple crises, including the global financial crisis and the COVID-19 pandemic. Between her two terms, she served as a Managing Director at the World Bank, further cementing her global credibility.

Short-term volatility could continue

Yesterday, following the surprise cabinet reshuffle, the Jakarta Composite Index (JCI) fell 1.3 percent and government bonds dropped. Indonesia’s currency weakened as well, prompting the central bank to intervene to maintain the rupiah’s stability.

This volatility reflects investors’ unease over the removal of a highly respected finance minister and is likely even more pronounced among foreign investors, who see Sri Mulyani as a symbol of stability given her experience and track record. Her departure could accelerate the foreign investment outflows that had already begun following the anti-government protests in late August.

However, UOBAM’s Indonesia analysts believe that there are factors in place that can help to cushion any short-term volatility. Indonesia has a low debt-to-GDP ratio (around 40 percent) and limited foreign ownership of both bonds and equities. There is also historical precedent - Sri Mulyani previously stepped down in 2010 which caused a short-term dip but markets eventually recovered.

New finance minister could open up new growth opportunities

Ultimately, the market’s longer-term trajectory will depend on whether the new finance minister can uphold fiscal discipline and provide policy clarity. At this point, there are both positive and cautionary signs.

On the positive side,

• Purbaya is a Purdue-trained economist with a strong technocratic background, having served in various government and state-owned enterprise roles, including as Chair of the Indonesia Deposit Insurance Corporation (LPS). Historically, the appointment of technocrats to economic posts has often preceded positive policy shifts, such as deregulation packages in 2015, the 2016 tax amnesty, or the COVID-19 vaccine rollout.

• Purbaya is pro-growth. He believes that an 8 percent GDP growth target for Indonesia is achievable within two to three years. If realised, this would be a major tailwind for equities. In contrast, growth under Sri Mulyani had stalled in the 5 percent range over the past decade, given her focus on fiscal stability. She has kept Indonesia’s budget deficit ratio to about 3 percent of GDP to ensure the Indonesia government spends prudently.

• His close ties to the current government may also improve coordination and speed up budget realisation - a key bottleneck under previous administrations.

• Seeking to reassure investors, he has pledged that the 2026 budget will proceed as usual, suggesting that fiscal discipline should remain intact.

But markets are on the lookout for fiscal degradation

• While Purbaya is a seasoned economist, his lack of direct experience in managing state finances could raise concerns, especially among foreign investors who valued Sri Mulyani’s global stature and proven fiscal leadership.

• Top of mind for investors would be whether fiscal credibility can be preserved, given President Prabowo’s ambitious spending commitments for social programmes such as free school lunches. Purbaya’s tenure at the Indonesia Deposit Insurance Corporation (LPS) suggests he brings a disciplined approach to financial stability, but his close ties to the current administration may prompt questions about fiscal independence. Investors will be closely watching the 2026 state budget for signs of fiscal loosening to fund the President’s social programmes.

• It remains to be seen if Purbaya will be able to successfully convince both domestic and global investors that policy discipline and budget sustainability remain top priorities.

Select opportunities in the consumer and commodity sectors

In the interim, we remain cautious on some sectors, in particular banks and financial stocks which have higher foreign ownership and so may face greater short-term pressure amid the current uncertainty.

We continue to emphasise bottom-up stock selection, favouring corporate action-driven names, rate-sensitive stocks, high-yield opportunities, and gold proxies, especially ahead of the anticipated Fed interest rate cut.

In addition, we think select consumer stocks could benefit from higher government spending. The commodity sector also looks attractive in this environment given the softer rupiah. Commodity exporters tend to generate revenues in USD and the rupiah’s 2.3 percent fall against the US dollar will enable them to boost their earnings when converting their dollars into the local currency.

Overall, we believe Indonesia’s long-term outlook remains constructive. The current market volatility therefore represents a potential buying opportunity for investors.

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