After successfully guiding Indonesia through the 2008-09 global financial crisis, the president, Susilo Bambang Yudhoyono, showed that he had retained the backing of voters by winning a second term in the July 2009 election. However, he has since lost some of that support. Too often Mr Yudhoyono has chosen to side with conservatives rather than reformers, in an apparent attempt to preserve the unity of the governing coalition in the House of People's Representatives (DPR, the legislature). Mr Yudhoyono's Democratic Party (PD) performed well in the April 2009 parliamentary election, becoming the largest party in the legislature, but it fell short of an overall majority. Given these circumstances, the president followed his natural instinct to rule by consensus, building a six-party coalition that controls two-thirds of the seats in parliament. But Mr Yudhoyono's current coalition has proved even less effective than the one that he led during his first term, with various member parties routinely voting against the president on reform issues, calling into question the advantages of his consensual approach.

Recently divisions within the coalition have been most apparent in relation to calls by two coalition parties, Golkar and the Prosperous Justice Party (PKS), for a full-scale parliamentary investigation into corruption at the tax department. The calls followed the conviction in mid-January of a former tax official, Gayus Tambunan, whose trial for bribery and other offences had exposed sensational examples of official corruption. Among the companies that Mr Tambunan confessed to taking "fees" from were three mining firms owned by the family of Aburizal Bakrie, the Golkar chairman and one of the country's richest pribumi (ethnic-Indonesian) businessmen. Far from seeking to clean up the tax department, calls by Golkar and its allies for an investigation by the legislature were widely seen as an attempt to discredit leading reformers within the government, notably the vice president, Boediono, and the head of a presidential anti-corruption taskforce, Kuntoro Mangkusubroto. Only days before the calls for a parliamentary investigation, Mr Yudhoyono had announced that he was placing Boediono and Mr Mangkusubroto in charge of the government's efforts to eliminate tax fraud. The announcement appeared to signal that the president had at last resolved to confront those with a vested interest in preserving the corrupt status quo.

It is not the first time that Golkar has tried to use parliamentary investigations to discredit reformists who have challenged vested interests. In May 2010 the leading reformer in the cabinet at that time, Sri Mulyani Indrawati, resigned from her post as finance minister following an investigation by the DPR into a scandal surrounding the bail-out of a medium-sized local lender, Bank Century. Despite being absolved of any blame in relation to the ballooning cost of the bail-out, Ms Mulyani stepped down to take up a senior position at the World Bank, fuelling suggestions that Mr Yudhoyono had asked her to go (or at least had not asked that she stay) in an attempt to repair relations with Golkar and the PKS. Such speculation was heightened by the appointment soon after Ms Mulyani's resignation of Mr Bakrie as managing chairman of the coalition. Mr Bakrie had been Ms Mulyani's chief opponent.

In the event, parliament voted narrowly in late February against Golkar's calls for an investigation into corruption at the tax department. But the episode brought the ruling coalition to the brink of collapse, with Mr Yudhoyono said to have been ready to replace Golkar and PKS cabinet ministers with members of two opposition parties, the Indonesian Democratic Party-Struggle (PDI-P) and the Great Indonesia Movement Party (Gerindra), only to change his mind at the last moment because of difficulties in concluding a power-sharing agreement with the leader of the PDI-P, Megawati Soekarnoputri. If Mr Yudhoyono and leading reformers in the government continue to confront vested interests, it may be only a matter of time before conflict erupts again within the coalition. If, however, the government abandons its efforts to hold such interests to account for the sake of coalition unity, the prospects for an improvement in standards of governance will worsen. The Economist Intelligence Unit believes that the most likely scenario is a succession of messy compromises between conservatives and reformists in the coalition.

The threat of separatist violence in Indonesia's northernmost province, Aceh, has diminished in the past few years, with a peace accord signed with the separatist Free Aceh Movement (GAM) in 2005 and orderly local elections taking place in 2006. However, separatist tensions continue to simmer in the eastern province of Papua. Most importantly for foreign investors, the terrorist threat will remain severe. Indonesia suffered a series of bombings in 2002-05 that specifically targeted foreigners. The first major attack in almost four years, at the JW Marriott and Ritz-Carlton hotels in the capital, Jakarta, in July 2009, killed nine people, demonstrating that the threat of large-scale bombings persists. Violence is increasing against religious minorities, such as Ahmadi Muslims and Christians, with the police often protecting the perpetrators of the hate crimes rather than the victims.