Analysis: Indonesia's Reformers Under Attack, Worry Investors

Also: Fight Over Bank Century Worrying Indonesia's Investors

Indonesia’s improving political and economic outlook was a big draw for investors this year, but a fight between reformers and cronies may prove to be a tipping point in sentiment for the region's biggest economy. At stake is whether Finance Minister Sri Mulyani Indrawati and Vice President Boediono, two technocrats considered among the architects of reform in President Susilo Bambang Yudhoyono's cabinet, are elbowed out by old-school political rivals.

For now that prospect seems unlikely. Indrawati and Boediono have vigorously defended their role in last year's 6.7 trillion rupiah ($709 million) bailout of a small lender, Bank Century. But the fact they may be questioned by a parliamentary committee next month about the deal means investors are paying closer attention to the case because of the political risk, particularly since it pits Indrawati against long-time rival Aburizal Bakrie, a powerful politician and tycoon.

If Sri Mulyani was forced out many would be worried as she represents the high ground, change, and anybody with aspirations of a cleaner Indonesia.
The departure of Indrawati, a former IMF official with an international profile and a pro-foreign investment agenda, would reduce prospects for a much-needed overhaul of the civil service, police, and judiciary, as well as the fight against corruption. It would also remove a firm advocate of sound economic and investment policies, potentially hitting short-term capital flows into the domestic financial markets and long-term commitment to infrastructure, manufacturing and natural resources projects.

Behind much of this year's enthusiasm for Indonesian assets, whether stocks, bonds, the currency or through direct investment in key sectors of the economy, is the realisation that the country may at last be able to achieve its full potential.

Its abundant natural resources -- gas, coal, tin, copper, palm oil -- are in hot demand, while its population of about 240 million people make it an increasingly appealing consumer market for companies ranging from PT Unilever Indonesia, which sells soaps and shampoo, to PT Astra International, which sells cars and motorbikes.
The re-election of President Yudhoyono this year spurred hopes of improving economic growth, seen topping 4.3 percent this year, and has helped drive the rupiah up 16 percent against the dollar, and stocks up 85 percent, while bond yields have contracted.

"INDONESIAN LOVE AFFAIR"

What has had investors and economists talking about this G20 emerging economy in a far more favourable light, one capable of winning an investment grade credit rating within two to three years and a place alongside the BRIC economies Brazil, Russia, India and China, is its push for political and economic reform.

A shift in perceptions comes only a few weeks after senior central bankers suggested Bank Indonesia was considering controls on hot money inflows, prompting a sudden sell-off in the rupiah.

Yudhoyono won a second, five-year term in July thanks to his continued commitment to tackling endemic corruption and spurring economic growth. Much of the success on this front has been thanks to Indrawati and the Corruption Eradication Commission. Both have taken on powerful, corrupt officials, making many enemies in the process. Now, it seems, it's payback time.

The anti-graft agency (KPK), one of the key weapons in fighting endemic graft, came under attack from the police and attorney-general's office, both of which regularly rank among Indonesia's most corrupt institutions. Instead of acting swiftly to intervene in support of two senior KPK officials who were apparently framed by police and state prosecutors, sparking a massive public outcry, Yudhoyono insisted the appropriate legal procedures had to be followed. The president eventually spoke out about the need for legal reform and the two wronged KPK officials were released and returned to their jobs.

But many ordinary Indonesians who have grown tired and frustrated with the level of corruption in the legal system were disappointed by the president's dithering. More recently, finance minister Indrawati has been criticised over her role in the bailout of Bank Century last year, and is likely to be questioned by a parliamentary committee stacked with politicians who oppose her push for reform.

Both Indrawati and Boediono, who was central bank governor at the time, have said the bailout was necessary to maintain investor confidence in its financial system during the global credit crunch, at a time when financial institutions in several other countries were rescued. Local media have reported that businessmen who benefited from the bank bailout may have been donated to Yudhoyono's political campaign. Indrawati, Boediono and Yudhoyono have all denied any wrongdoing and urged a full investigation to prove that. By Sara Webb (Reuters) - Indonesia's($1=9450 Rupiah)

Fight Over Bank Century Worrying Indonesia's Investors

Stock markets could tumble and foreign investors look elsewhere if the Bank Century bailout saga ends with the removal of the nation’s two key economic policy makers, Finance Minister Sri Mulyani Indrawati and Vice President Boediono, analysts said on
Monday.

Rising political tension created by the Century controversy was already making market players nervous as the average trading values on the Indonesia Stock Exchange (IDX) had fallen sharply in the past two weeks as the recriminations over the Rp 6.7 trillion ($710.2 million) bailout of the bank have escalated. The average daily value of trades on the exchange fell to Rp 2.7 trillion last week, compared to Rp 3.7 trillion a week earlier, according to IDX data.

In recent weeks analysts have predicted the imminent demise of Boediono, who was central bank governor at the time of the Bank Century bailout in November 2008, and Sri Mulyani, who backed the decision to save the troubled lender.

The Corruption Eradication Commission (KPK) and the House of Representatives are both investigating the bailout amid accusations that money from the bank flowed into the coffers of the Democratic Party or illegally found its way back to businesspeople with government connections. Boediono and Sri Mulyani are respected technocrats but analysts say they are vulnerable because they do not have strong political bases.

There has been persistent speculation that figures within the Golkar Party, led by businessman Aburizal Bakrie, as well as other members of President Susilo Bambang Yudhoyono’s coalition government, are plotting to oust the vice president and finance minister in the hope of promoting their own nominees to these powerful positions.