Presidential election key to Indonesia's transformation

By Sara Webb

JAKARTA (Reuters) - With Indonesia's President Susilo Bambang Yudhoyono tipped to be re-elected on July 8, Southeast Asia's biggest economy is likely to see a renewed push for reform to attract foreign investment, create jobs and spur growth.

Opinion polls, which proved fairly reliable in predicting the outcome of the parliamentary elections in April, put former general Yudhoyono well ahead of his rivals, former President Megawati Sukarnoputri and the current vice president, Jusuf Kalla.

If Yudhoyono wins the first round with more than half the votes, on the back of his modest success in tackling graft and the best economic performance in a decade, stocks, bonds, and the rupiah are likely to surge on hopes of a more ambitious reform plan in his next five-year term and beyond.

Less likely, according to the polls, the presidential election could go to a run-off between the top two candidates in September. Either way, political parties may realign to form a ruling coalition behind Yudhoyono, 59, and an opposition bloc.

Indonesians and foreign investors will judge Yudhoyono's commitment to reform by whether he picks a high percentage of technocrats and reformers, at the expense of old guard politicians, for his new cabinet in October.

CONFLICTING INTERESTS

Yudhoyono's first five-year term was marked by compromise, as his tiny Democrat Party, which won just 7.5 percent of the votes in 2004, lacked the political clout to push through legislation. That forced Yudhoyono to allocate some plum cabinet posts to political allies with little zeal for reform.

But his party's strong gains in April, winning more than a quarter of the seats in parliament, means he may no longer have to pander to politicians with potentially conflicting interests.

Yudhoyono's dependence on Golkar, which dominated politics under former president Suharto, for support in parliament in his first term came at a cost.

Neither Jusuf Kalla, the vice president who heads Golkar and now running against him, nor Aburizal Bakrie, another businessman and minister with an eye on Golkar's leadership, were reformers.

Yudhoyono's Democrats have allied with Islamic and Islamist parties, which gives him a controlling bloc in parliament.

Some religious and ethnic minorities in predominantly Muslim Indonesia fear Yudhoyono's alliance with the Islamist Prosperous Justice Party (PKS) could undermine a tradition of tolerance. However, analysts say the PKS, which takes a tough line on graft, could be an important ally in pushing reform more aggressively.

"He will be a much more decisive leader because he's got a lot more confidence," said Gita Wirjawan, a Jakarta-based banker who now runs an energy-focused investment fund and who previously served on committees advising Yudhoyono.

"He's likely to have a much more technocratic cabinet. He will make sure his cabinet is filled up with people who know what to do, and you will see him really wanting to leave a very good legacy," Wirjawan said.

His team of reformers include Finance Minister Sri Mulyani Indrawati, nominated to head the central bank, and other relatively young technocrats, bankers, and academics.