JAKARTA: 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 South-East 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 US 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 unravelling. 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 the new administration was considering scrapping a ceiling on the deficit.

Construction of a new capital city in the jungles of Borneo is already proving a financial quagmire, and the US$800bil 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 since have tried to row back, saying 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.

 - Bloomberg