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 DPR, 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. Mr Yudhoyono's current government has proved even less effective than the one that he led during his first term, owing to the conflicting views of its various member parties on a number of reform issues.

Divisions within the coalition have been most apparent in relation to the scandal surrounding a medium-sized local lender, Bank Century, which the authorities rescued from collapse in late 2008. Opponents of the most prominent reformer in the cabinet at that time, Sri Mulyani Indrawati, who was finance minister, 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, fuelling suggestions that Mr Yudhoyono had asked her to go (or at least did not request that she stay) in an attempt to repair relations with two major coalition parties, Golkar and the Prosperous Justice Party (PKS). Such speculation was heightened by the appointment soon after Ms Mulyani's resignation of Golkar's head, Aburizal Bakrie, as managing chairman of the coalition; Mr Bakrie, 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, prospects for an improvement in standards of governance will worsen. If, however, Mr Yudhoyono and leading reformers in the government continue to confront such interests, it may be only a matter of time before conflict erupts again within the coalition. In January 2011 Mr Yudhoyono appointed the vice-president, Boediono, and Kuntoro Mangkusubroto, the head of a presidential taskforce on "judicial mafia" (bribery, blackmail, witness intimidation and other wrongdoing within the justice system), 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. The appointments appear to suggest that the president is indeed prepared to take a tougher line against vested interests.

Among the companies that Mr Tambunan has testified to taking "fees" from are three mining firms owned by the Bakrie family. Senior figures in the PD have suggested that an evaluation of the composition of the coalition will be launched, focusing particularly on Golkar and the PKS, although disregarding coalition stability and realigning the balance of power within the government would require Mr Yudhoyono to display hitherto unseen strength. However, his position was strengthened in February, when the DPR voted narrowly against a full-scale investigation of corruption in the tax department. It is likely that Golkar legislators were hoping 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.

The opportunity also exists for Mr Yudhoyono to become more assertive in promoting religious tolerance. In the past year violence against religious minorities, such Christians and members of an unorthodox Islamic sect, the Ahmadiyah, has risen, characterised by incidents in which the police have done little to prevent persecution. The brutal murder of three Ahmadi in Java in February triggered only an impotent response from the government, not least because of the influence two powerful cabinet members, the religious affairs minister, Suryadharma Ali, and the justice minister and human rights minister, Patrialis Akbar, who are unsympathetic towards the Ahmadiyah. Only when faced with a growing backlash did Mr Yudhoyono promise to make efforts to disband organisations that advocate violence, but firm action has yet to be taken.

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.