FACTBOX-Key political risks to watch in Indonesia

JAKARTA, March 22 Fri Mar 22, 2013 2:07am GMT

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JAKARTA, March 22 (Reuters) - Indonesia's economy grew at 6.2 percent in 2012, its third consecutive year of plus-6 percent growth, which has made it a magnet for foreign investors and a case of Asian strength in the face of Europe's debt crisis.

Indonesia has been rewarded with two credit rating agencies upgrading it to investment grade, decisions which are drawing more fund money and direct investment into Southeast Asia's biggest economy.

However, its rupiah currency is under pressure as weak exports and burgeoning imports have created trade and current account deficits. Lack of spending on infrastructure, and nationalist economic and trade policies are a risk for investors. Recent upheaval in the regulation of mining and energy has also been unsettling, coming as politicians try to control key sources of revenue ahead of 2014 elections.

President Susilo Bambang Yudhoyono - who cannot stand again and has not named a preferred successor - is becoming a lame duck president, while anyone who might be picked to follow him will suffer from association with a party widely seen as corrupt to the core.

RATINGS (Unchanged unless stated):

S&P: BB+

MOODY'S: Baa3

FITCH: BBB-

Following is a summary of key Indonesia risks:

STALLED REFORMS, NEW POLITICIANS

When Yudhoyono was re-elected with a strengthened mandate in 2009, many Indonesians hoped the former general would use his second and final term to fight corruption, and shore up his legacy as a progressive reformer. Instead, reforms have slowed and Yudhoyono's own party has been beset by graft scandals.

Potential challengers to Yudhoyono's party in 2014 elections are trying to raising their profile.

Foremost among them is Prabowo Subianto, a former general who has been accused of human rights abuses and a coup attempt, but who has reinvented himself as a businessman and popular politician.

Coal magnate Aburizal Bakrie, whose family controls a conglomerate, has secured the Golkar Party presidential nomination. He will be a serious contender, along with the chosen candidate from former ruling party the PDI-P, which has been bolstered by the popularity of its Jakarta mayor Joko Widodo.

What to watch:

- Moves by presidential contenders to select allies and get win backing from parties.

- A slowdown in policymaking as campaigning intensifies.

NATIONALIST ECONOMIC POLICIES

The government has taxed exports of mineral ores, slapped quota restrictions on certain food imports and pushed retailers to stock mostly locally-made goods, in a series of nationalist economic and trade policies in the past year. The government aims to boost local manufacturing and upgrade the economy from a commodity producer into an industrial powerhouse.

The policies have encouraged direct investment in areas such as palm oil and cocoa processing, but the side effects have been higher prices for imported food, and a slump in metals exports.

S&P, which declined to match Moody's and Fitch with an investment-grade rating for Indonesia, singled out policies in the mining sector, which generates about 12 percent of the country's GDP, as potentially damaging for growth.

Moves in the energy industry have also worried analysts and executives about the legal certainty of production contracts.

In November, the constitutional court scrapped oil and gas regulator BPMigas and handed its authority to the energy ministry. Government officials then called for the local chief of Exxon Mobil Corp to step down after several Indonesian firms failed to buy natural gas assets that Exxon had put up for sale.

In banking, a $7.2 billion bid by Singapore's DBS Group Holdings for the whole of Bank Danamon led the central bank to finalise new rules on bank ownership that will usually only allow 40 percent single ownership. The deal, which would be Southeast Asia's biggest ever takeover, is still stalled as Indonesia is now pushing neighbour Singapore to open up to its main state bank in return.

Monetary policy has been stable, though Yudhoyono has made a surprise bid to replace the central bank governor with his finance minister, a choice that needs to be approved by parliament. In March, the central bank held its key interest rate steady at 5.75 percent for a thirteenth straight month as it seeks to support domestic demand.

What to watch:

- Progress of the stalled DBS takeover bid.

- Further protectionist trade policies.

- Whether Yudhoyono's plans for a new finance minister and central bank governor lead to economic or monetary policy changes

SECURITY AND STRIKES

The risk of a big attack like the ones in Jakarta in 2009 and on Bali in 2002 appears to have been reduced by the arrest or killing of senior figures in militant network Jemaah Islamiah (JI), and by tighter security at some Jakarta buildings.

Security threats in Bali do not appear to discourage tourists from visiting, but another major attack would be catastrophic for the island's economy.

Yudhoyono has been criticised for not doing enough to curb religious intolerance in the country which has the world's largest Muslim population.

Security risks from labour unrest have become a concern for investors in manufacturing. Demonstrations over wages and the use of outsourcing turned violent at some industrial estates on Java and Batam islands.

Workers want a greater share of profits from the growing economy. They are likely to keep pushing for higher wages through strikes and protests, after winning minimum wage increases of up to around 50 percent for this year.

What to watch:

- Ability of militants to regroup and launch more attacks. Indonesia's markets have proven highly resilient to attacks and unless there is a sustained deterioration in security, any sell-off could be limited and brief.

- Annual wage talks, and whether labour strikes are successful in winning hefty pay rises for workers. (Editing by Daniel Magnowski)

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