By Sara Webb

JAKARTA, INDONESIA - 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.

Indonesia, which a decade ago was the sick man of Asia and appeared on the verge of disintegrating, has achieved relative political stability, domestic security, and strong economic growth in the past five years. GDP growth is expected to hit 3-4 percent this year, from 6.1 percent in 2008.

Today, some analysts see Indonesia as on the brink of realizing its economic potential, even one day joining the elite, or BRIC economies of Brazil, Russia, India and China.

"The 2009 election results suggest continued stability in this democratic political framework and is a critical factor in unleashing Indonesia's growth potential, in our view," said investment bank Morgan Stanley in a report in June subtitled "Indonesia, adding another I to the BRIC story?"

HAMMERING CORRUPTION

Indonesia's powerful anti-corruption agency, or KPK, has already made some progress in tackling the endemic graft which plagues many national institutions, deterring foreign investment and curbing economic growth and development.

"That's one of the main reasons for his (Yudhoyono's) popularity, and I don't see any reason why he couldn't hammer corruption harder," in a second term, said Richard Robison, emeritus professor at Murdoch University, in Perth, Australia.

That means ensuring the work of the KPK and corruption court continues and big fish -- including politicians and tycoons who have so far proved untouchable -- do not escape prosecution.

The clean-up also has to target tainted institutions such as the police, bureaucracy, parliament, and the courts.

Foreign investors also cite stringent laboUr laws and red tape as deterrents, especially in the manufacturing sector.

Legal uncertainty and shrill nationalism over the mining and energy sectors must also be addressed, especially after Indonesia missed out on the commodity boom driven by Chinese and Indian demand for resources such as copper, gold, tin, coal and gas.

The failure to attract billions of dollars of investment has taken a serious toll on the country. Infrastructure in many parts is in a dire state, from potholed roads to dilapidated ferries and inefficient power networks.

Ordinary Indonesians berate their public health and education services. Those who can afford to get medical treatment or an education overseas do so: those who can't are increasingly resentful of a social contract where they receive such poor services in return for their taxes.

"This is his last term. He can clean up the bureaucracy and put in good governance," said Robison.

"But what he has to do is identify someone to take over from him and bring them forward" to ensure his legacy lasts. --REUTERS