SINGAPORE, Oct. 5 (UPI) -- The satisfactory conclusion of the Indonesian presidential election has quickly translated into improved investors' sentiments with Fitch Ratings raising its outlook on the country from Stable to Positive. Yet, investors are pointing that new President Susilo Bambang Yudhoyono will need to play "smart politics" to garner legislative support for his reform agenda.
"Despite a big 'people's mandate' that Yudhoyono enjoys, the road to a successful presidency is not ensured. He needs to form a cabinet that is not only market friendly, but also supported by parliament," notes Fauzi Ichsan, analyst at Standard Chartered.
"The fact that he was elected by 'reaching out' directly to the electorate, instead of by building a coalition between political parties, as Megawati has done, could affect his chances to build a strong coalition government," he added.
Nicholas Bibby, analyst at Barclays Capital, said, "Our concern over the ability of the new government to push ahead with reforms stems from the fact that Yudhoyono does not control the House of Representatives."
In April's parliamentary elections, Yudhoyono's Democrat Party won only 56 (10.4 percent) of 550 seats. Even when all of the political parties that supported his bid either directly, or tacitly, are included he will still only hold 206 seats, or 37.5 percent of the votes.
"This means Yudhoyono has to entice a number of parties who backed Megawati in the election, which we think will be difficult, at least in the short term," Bibby said.
On Monday the chairman of the Golkar party, Akbar Tanjung, announced that the coalition that backed Megawati Sukarnoputri's presidential bid would serve as an opposition force and would not accept any cabinet seats if offered.
But given the size of Yudhoyono's popular mandate and the fact that party loyalty is weak by western standards, some are optimistic that the new president will be able to build the necessary support to execute his reform initiatives.
One hope for Yudhoyono is that Tanjung will lose the support of his Golkar party at their internal election in November. Tanjung forcefully supported Megawati during the election even though many of his party members in the outlying regions preferred Yudhoyono. Tanjung has tried to cement his position by expelling nine senior party members who had openly supported Yudhoyono but he will still likely to face a challenge come November.
"If Yudhoyono's supporters can take over the leadership of the party he should be able to engineer a workable coalition," Bibby predicts.
Markets have quickly rallied in the post-election environment. But investors are pointing that while this rally may continue a while longer, foreign direct investment is unlikely to pick up until next year.
For once, instead of introducing radical reforms in his first 100 days, the new president is likely to consolidate his power base first, they said.
As he forms his cabinet, analysts expect him to retain the well-respected Boediono as finance minister and offer human rights lawyer Mulya Lubis or reformist Marsilam Simanjuntak the attorney general position, a crucial post in his planned drive against corruption.
"The talk is that he will keep the current finance minister, Boediono in office. If this proves to be the case, it is likely to be greeted favorably by foreign investors - as Boediono is widely respected and the move would indicate that the current economic policies are likely to be largely kept in tact," Bibby said. These policies include keeping a tight rein on government spending and inflation.
The new president is scheduled to take office on Oct. 20 and he will name a cabinet on the same day.
"We advise investors against becoming too positive until policy changes are implemented. We believe that a timeframe of at least one year will be required to see if SBY will be able to implement policies," warned Sailesh Jha, analyst at CSFB.
Once the new government is formed and the privatization program resumes with the divestment of Bank Permata, which could induce further capital flows into the equity market, Indonesian assets should strengthen further.
But the government will be really judge on its ability to push ahead with reforms.
Fitch noted that outgoing President Megawati bequeaths to her successor an economy that enjoys a measure of macroeconomic stability, but one that has yet to complete the structural changes necessary to propel annual growth to 6-7 percent, reduce unemployment and forestall a potential rise in political and social unrest.
