FACTBOX-Key political risks to watch in Indonesia

By Neil Chatterjee

JAKARTA, Jan 28 (Reuters) - Indonesia's economy is expected to have grown at over 6 percent again in 2012, and to accelerate further this year on rising domestic consumption and investment, 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 will draw more fund money to southeast Asia's biggest economy.

However, labour unrest and nationalist economic and trade policies are emerging as an increasing risk to investors. Recent upheaval in the regulation of the vital mining industry has also been unsettling.

Some analysts say President Susilo Bambang Yudhoyono - who cannot stand again and has not named a preferred successor - is becoming a lame duck president ahead of elections set for 2014, 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+



Following is a summary of key Indonesia risks:


Mining companies in Indonesia have laid off more than 200,000 workers since a government ruling in May halted exports of some minerals, and total dismissals could swell to more than 3 million, a union said last year.

That disruption led to a slump in nickel ore and bauxite exports to top buyer China. The government's ruling was later partially annulled by the highest court, a decision that could pave the way for a resumption of exports by junior miners who were hit hard by the restriction, and the government is in the process of preparing new mining export regulations.

Aside from mining, Southeast Asia's biggest banking takeover bid was thrown into limbo in April when the central bank said it would not approve a $7.2 billion bid by Singapore's DBS Group Holdings for Bank Danamon until it finalised new rules on bank ownership.

Those rules only allow 40 percent foreign ownership, but the possibility of exemptions for well capitalised foreign banks are keeping the door open for the DBS bid.

The latest unexpected policy move has come in the energy industry, as the constitutional court in November scrapped oil and gas regulator BPMigas and handed its authority to government ministries. As a result, analysts and executives have begun to worry about legal certainty of production contracts.

Outside investors fear that the passage of laws without prior consultation, and their retroactive impact, will make their holdings less secure, and Indonesia a less attractive market.

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.

In a budget proposal in August, Yudhoyono said spending on fuel subsidies was expected to surge 41 percent from this year to $20.4 billion, though the government has since moved to try to limit consumption by banning plantation and mining firms from using subsidised fuel.

The government plans to raise $18.67 billion of debt via bond issues in 2013, 11 percent above revised 2012 issuance plans, as it takes advantage of lower borrowing costs after its ratings upgrades.

In January, the central bank held its key interest rate steady at 5.75 percent for an eleventh straight month as it seeks to support domestic demand.

What to watch:

- Progress of new mining laws, and how they affect exports. Further layoffs and other disruption in the mining industry.

- Mine shutdowns. A stoppage by tin producers in response to low prices expanded to 90 percent of smelters, an industry association said in August.

- Progress of the DBS takeover bid.

- Policy statements from the central bank.


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.

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, in June secured the Golkar Party presidential nomination. He will be a serious contender.

What to watch:

- Pace of lawmaking and implementation of reforms heading towards the 2014 poll.

- How the new entrants into political life position themselves, and the identity of the ruling party's candidate.


In October, Indonesia arrested 11 suspected Islamic militants it said planned to attack the U.S. embassy. The exposure of the alleged plot could increase the pressure on Yudhoyono, who has been criticised for not doing enough to curb religious intolerance in the country which has the world's largest Muslim population.

In March, the shooting of five suspected militants said by police to have been planning attacks on holiday island Bali reawakened the spectre of large-scale bombings on Indonesian soil.

The risk of a big attack like the ones in Jakarta in 2009 and on Bali in 2002 had been thought 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.

However, the five men, who were shot dead by police, were linked to JI which carried out nightclub bombings on Bali a decade ago that killed 202 people.

Serious security threats in Bali could discourage tourists from visiting, which would be catastrophic for the island's economy.

Security risks from labour unrest are also becoming a concern for investors in manufacturing. Demonstrations over wages and the use of outsourcing turned violent at some industrial estates in Java and Batam islands last year.

Workers want a greater share of profits from the growing economy, and are likely to keep pushing for higher wages through strikes and protests.

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.

- More arrests, and possible trials, of suspected militants, plus more information about alleged attacks being planned by the men killed by police in March.

- Labour strikes, and whether they turn violent, or are successful in winning hefty pay rises for workers. (Editing by Daniel Magnowski)