KUALA LUMPUR The fate of Indonesia’s jittery bond market may well hinge on who President-elect Prabowo Subianto chooses as his finance minister.

A technocrat like incumbent Sri Mulyani Indrawati, a former World Bank managing director credited with tackling the debt load, will be crucial for avoiding another costly run-up in yields, according to investors. That happened last month, with the cost of insuring the country’s debt against default also surging, on news that Prabowo was mulling an increase in spending that would push the debt load to a two-decade high.

The cases of France and Mexico this year illustrate just how willing investors are to take governments to task for loosening the purse strings. With market participants on tenterhooks about changes brewing in Jakarta, the spread between Indonesian and Indian bonds temporarily reversed in June, a sign investors were cooling on the former. The risk premium on the Southeast Asian country’s US-currency corporate debt also widened.

“If the finance minister is seen to be overly subservient to Prabowo rather than continuing to push for reform, the market is very likely to impose a greater risk premium on Indonesian fixed income,” said Philip McNicholas, Asia sovereign strategist at Robeco.

In her two stints as finance minister since 2005, US-educated Indrawati kept a tight lid on spending, cracked down on graft, and won plaudits from global funds for bringing down the deficit of the country, which was severely battered during the Asian financial crisis. President Joko Widodo often deferred to the technocrat about how to manage finances.

Investors have reaped the rewards, with dollar bonds returning about 47% over the past decade - well ahead of indexes for the region.

Citing the nation’s “realistic budgeting”, S&P Global upgraded the country’s credit rating to investment grade in 2017. Officials enjoyed so much credibility that they even were able to conduct quantitative easing during the pandemic -  virtually unheard of for an emerging market.

“There’s been a lot of good will built up,” said Arif Joshi, a US-based fund manager at Lazard Asset Management LLC.

But the era of stability is showing signs of unraveling. Blooomberg reported on June 14 that Prabowo’s administration planned to finance electoral spending pledges, including school lunches, by raising new debt. Adding to concerns was a report that the new administration was considering scrapping a ceiling on the deficit.

Construction of a new capital city in the jungle of Borneo is already proving a financial quagmire, and the US$800 billion building spree of President Joko Widodo has saddled state-owned builders with record debts.

“Any time there is a political change, portfolio managers always re-underwrite credits,” Lazard-banker Joshi said. Prabowo’s spending plans would constitute a “significant change to what we’re used to in Indonesia.”

While officials have tried to row back, stressing that Prabowo is committed to prudent finances, the president-elect hasn’t yet laid out his plans for the finance ministry.

Bloomberg reported in February, citing people familiar with the matter, that he had set his sights on former bankers for the role due to their leadership experience and expertise. The ex-general wouldn’t involve the minister post in political bargaining due to the need to manage the budget, according to the report.

The “finance ministry is a key thing for the markets and Prabowo doesn’t want to rock the boat,” said Rachana Mehta, co-head of regional fixed income at Maybank Asset Management. “I’m not that worried about it.”

But Thomas Djiwandono, the president-elect’s nephew, who is helming his economic transition team, has also been touted as a possible candidate, according to media reports. Before entering politics, Djiwandono helped run an agribusiness company and also worked as a financial analyst in Hong Kong. He studied in the US.

Indrawati has also kept mum about her next steps. At public events, she has stressed the need for prudent financial management to ensure sufficient reserves at times of crisis - buffers the country lacked in the 1990s, when a sliding rupiah led to an International Monetary Fund bailout and the public unrest that forced authoritarian President Suharto to quit.

In late June, she appeared at a press conference beside Djiwandono, the relative, and said the deficit would need to stay below the 3% ceiling in order to maintain public trust and market confidence.

“The next key area of focus will be the appointment of the next finance minister, with investors eagerly awaiting clarity on the government’s commitment to long-term fiscal discipline,” said Edward Ng, senior portfolio manager at Nikko Asset Management Asia Ltd.

When asked what characteristics he was hoping to see in the new appointee, he answered: technocrat.

  - Bloomberg