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, Mr Yudhoyono has since lost some of that support. All too often in the most telling tests of his leadership, 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 DPR, but it fell short of an overall majority. Faced with 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. Mr Yudhoyono's current coalition has proved to be even less effective than the one that he led during his first term, owing to the conflicting views of the various parties on a number of reform issues.

Divisions within the ruling coalition have been most apparent in relation to the scandal surrounding a medium-sized local lender, Bank Century, which the authorities rescued from collapse at the height of the financial crisis in late 2008. Opponents of the most prominent reformer in the cabinet, Sri Mulyani Indrawati, who was finance minister at the time, used the ballooning cost of the bail-out as an opportunity to try to force her from her post. Despite being absolved of blame for the high cost of the rescue, Ms Mulyani left the government in May 2010 to become a managing director of the World Bank, fuelling speculation that Mr Yudhoyono asked her to go (or at least did not ask her to stay) in an attempt to repair relations with Golkar and the Prosperous Justice Party (PKS), two major parties in the coalition. Such speculation was heightened by the appointment, soon after Ms Mulyani's resignation, of the Golkar chairman, Aburizal Bakrie, as managing chairman of the governing coalition. Mr Bakrie, who is one of the country's richest pribumi (ethnic-Indonesian) businessmen, had been Ms Mulyani's chief opponent. Rivalry between the two escalated in late 2008, when Ms Mulyani refused to allow stockmarket rules to be manipulated in favour of companies owned by Mr Bakrie and his relatives, and began to investigate alleged tax evasion by mining firms owned by the Bakrie family.

Some commentators have argued that Ms Mulyani's resignation has made the coalition more stable by ending the in-fighting between two of the country's most powerful figures. The Economist Intelligence Unit is less sanguine. If, for the sake of coalition unity, the government abandons its efforts to hold vested interests to account, the prospects for an improvement in standards of governance will worsen. If, however, Mr Yudhoyono and leading reformers in the government continue to confront vested interests, then it may be only a matter of time before conflict erupts again within the coalition. Until recently Mr Yudhoyono's actions during much of the period since Ms Mulyani's resignation seemed to suggest that the president had decided to appease vested interests. But in mid-January Mr Yudhoyono appointed the vice president, Boediono, and the head of a presidential taskforce on so-called judicial mafia, Kuntoro Mangkusubroto, to take charge of efforts to eliminate tax evasion. The move followed the sentencing of a former tax official, Gayus Tambunan, whose trial exposed egregious examples of official corruption, to seven years in prison for bribery. Mr Yudhoyono's appointment of two senior figures to oversee cases of tax evasion suggests that the president may not have surrendered to vested interests after all.

The appointments could, however, have consequences for the ruling coalition. Among the companies that Mr Tambunan has testified to taking "fees" from are three mining firms owned by the Bakrie family. Golkar members of the DPR are already leading the calls for an investigation to establish whether the government should be censured for allowing corruption to continue unchecked at the tax department. It is likely that Golkar would attempt to use such an investigation to discredit Boediono and his probe into the companies that are alleged to have paid bribes to Mr Tambunan, including the Bakrie-owned firms. As a consequence, the unity of the coalition would be tested again.

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 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 were specifically aimed at foreign targets. The first major attack in almost four years, at the JW Marriott and Ritz-Carlton hotels in Jakarta in July 2009, killed nine people, demonstrating that the threat of large-scale bombings persists. Violence against religious minorities, such as Ahmadi Muslims and Christians, is increasing, with the police doing little to prevent it, if not actively promoting persecution of these groups.