| JAKARTA, March 22
JAKARTA, March 22 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
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
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):
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
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
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
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)