UPDATE 4-Loss of Indonesia finance minister could hit reform

Wed May 5, 2010 6:39am EDT

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* Focus on replacement for commitment to reform

* Move could be blow for anti-graft campaign

* Indrawati wooed by World Bank, not pushed out - source (Recasts, adds details, quotes from president)

By Sara Webb and Janeman Latul

JAKARTA, May 5 (Reuters) - Indonesian Finance Minister Sri Mulyani Indrawati has quit after a bruising battle with anti-reformists in what could be a major blow to a crackdown on graft and tax evasion in Southeast Asia's biggest economy.

Indrawati, 47, has been named a managing director of the World Bank Group. The appointment shows the growing clout of emerging economies but her decision to move also underscores the difficulty Indonesia's reformers face in their bid to address corrupt practices and decades of poor governance.

Indrawati had come under increasing attack from political opponents who were threatened by her clean-up campaign, particularly over the past 18 months.

"She's fed up with the political pressures," said a close friend of Indrawati's, who asked not to be identified, adding the World Bank had approached Indrawati several months ago.

President Susilo Bambang Yudhoyono told a media conference Indrawati's move was a loss to the nation. "What is clear is that reform in finance, tax and customs will continue," he said.

Indonesian bond yields jumped to three-week highs after news of Indrawati's decision to quit, which raised fears the pace of reforms in Indonesia could slow. [ID:nSGE64403F][ID:nTOE644030]

"The foot might be taken off the reform accelerator so it is a significant loss to the team that is in place over there," said Kenneth Akintewe, a bond fund manager at asset manager Aberdeen.

Political analysts agreed. "I suspect she is disillusioned with firstly, SBY's failure to strongly support her and secondly, the continuing attacks upon her integrity by parliamentarians," said the Australian National University's Greg Fealy.

Palace officials were quick to say Indrawati had not been pushed out but some analysts blamed the president for not being outspoken enough in his support of Indrawati and her reforms.

Analyst Nick Cashmore, head of CLSA in Indonesia, said Indrawati's loss before her five-year term was up was "not good for Indonesia". "It shows that all these undercurrents are gathering pace," he said.

BAIL OUT

Opponents criticised Indrawati for bailing out Bank Century after the 2008 financial crisis, a decision backed by reformist vice president Boediono. A parliamentary inquiry, seen as an attempt to discredit the reformist pair, dragged on for months.

Investors will be watching who is appointed in her place for a signal on where the reform programme is headed. Yudhoyono vowed the next finance minister would continue his government's focus on "macroeconomic and fiscal policies which are prudent".

Chief Economic Minister Hatta Rajasa will run the portfolio until a replacement is appointed, presidential spokesman Julian Pasha said. Indrawati starts at the World Bank post on June 1.

Rajasa is well-known for his political skills. Indrawati has a doctorate in economics and is a former International Monetary Fund executive director. [ID:nSGE64404P]

Investors have been big buyers of Indonesian assets in the past 18 months, largely attracted by its pace of reform and liberalisation and the prospect of a surge in demand for its vast natural resources as the global economy recovers. [ID:nRISKID]

Local financial markets fell after the announcement of Indrawati's move, but analysts said the weakening in the rupiah IDR= to 9,090 per dollar from 9,030 and a 3 percent drop in the stock market .JKSE reflected broader investor concerns about emerging markets and risk related to the euro zone.

"Hopefully it is a short-lived (reaction), but it all depends on who replaces her," said Destry Damayanti, an economist at Mandiri Sekuritas in Jakarta. "What is needed is someone who is a professional, someone who is not politically biased."

Likely candidates include Anggito Abimanyu, the head of the ministry's Fiscal Policy Agency and Chatib Basri, an academic and special adviser to the finance minister. Also in the mix are Raden Pardede, an economist and former head of the state asset management company, and Agus Martowardojo, president director of Indonesia's largest lender Bank Mandiri (BMRI.JK). [nJAK546329]

Indrawati's departure comes when Indonesia is still without a governor for Bank Indonesia, the central bank. Darmin Nasution, senior deputy governor, has been acting governor since mid-2009.

"Vacancies in two of the most important economic posts will raise some concerns about the credibility of macro policies and the pace of reforms," said Citibank economist Johanna Chua.

"Nonetheless, we think despite her departure, Indonesia's track record of prudent fiscal policies will likely remain intact," she said in a research note.

Indrawati and Boediono took a tough public stance against corrupt politicians, officials and businessmen in a country that ranks among the most corrupt in the world.

Their reforms, for example in the tax and customs offices, led to improvements in revenue collection but much more remains to be done to clean up the civil service, including the police and judiciary.

Indrawati raised salaries at revenue departments, fired corrupt officials and introduced more transparent work practices, including computerised records. She also sent investigators from the anti-corruption commission on surprise raids.

Tax evasion remains a serious problem. There are only 16 million registered tax payers in a country with a population of about 240 million. [ID:nJAK441622] (Additional reporting by Gde Anugrah Arka, Muklis Ali and Sunanda Creagh in JAKARTA and Joanne Allen in WASHINGTON; Editing by Paul Tait)

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