Outlook for 2011-15

• The president, Susilo Bambang Yudhoyono, has a strong mandate to pursue his reformist policy agenda, having won re-election comfortably in July 2009, but his reforms are encountering resistance from vested interests.
• Indonesia will elect a new president to succeed Mr Yudhoyono in 2014. A requirement of the election law means that the next president is likely to be the nominee of one of the country's three main political parties.
• Bank Indonesia (BI, the central bank) will tighten monetary policy in 2011-12 by gradually raising interest rates.
• The fiscal deficit will widen in 2011, to the equivalent of 1.2% of GDP, but it will narrow later in the forecast period, leading to a fall in government debt.
• The Economist Intelligence Unit forecasts that real GDP growth will accelerate to an average of 6.3% a year in the forecast period, driven mainly by private consumption and fixed investment.
• We expect the current account to record an average surplus equivalent to 1% of GDP in the forecast period. The income account will remain in deficit, owing to the repatriation of earnings by foreign-owned companies.

Monthly review

• In May Mr Yudhoyono was embarrassed by the findings of an opinion poll which showed that he was less popular than Soeharto, a former president who ruled Indonesia as a dictator from 1965 to 1998.
• A corruption scandal focused on the construction of athletes' dormitories in Palembang for the forthcoming Southeast Asian Games has resulted in the sacking of the treasurer of Mr Yudhoyono's Democratic Party (PD).
• The UN High Commissioner for Human Rights has expressed concerns over rising religious violence in Indonesia and has urged the government to accept a visit from the UN's special rapporteur on religious freedom.
• In May Mr Yudhoyono signed a much-anticipated moratorium on forest conversion. This was an important milestone in the struggle to reform Indonesia's deeply corrupt forestry sector.
• The Ministry of Finance submitted its basic economic assumptions for 2012 to the House of People's Representatives (DPR, the legislature) in May. The assumptions paint an optimistic picture of the economy.
• Prospects for car sales have been clouded by the earthquake and tsunami disaster that struck Japan in March, which has caused severe disruption to production of components and also to supply chains.

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, thus calling into question the advantages of his consensual approach.

Recent divisions within the coalition have been most apparent in relation to calls by two parties in the ruling alliance, Golkar and the Prosperous Justice Party (PKS), for a full parliamentary investigation into corruption at the Taxation Department. The calls followed the conviction in January of a former tax official, Gayus Tambunan, whose trial for bribery and other offences had exposed sensational examples of official corruption. Among the firms that Mr Tambunan confessed to taking "fees" from were three mining companies owned by the family of Aburizal Bakrie, Golkar's 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 DPR were widely seen as an attempt to discredit leading reformers in the government, notably the vice-president, Boediono, and the head of a presidential anti-corruption task-force, Kuntoro Mangkusubroto. Only days prior to 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.

This is not the first time that Golkar has tried to use parliamentary probes 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 resigned as finance minister 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; the latter had been Ms Mulyani's chief opponent.

In the event, parliament voted narrowly in February against Golkar's calls for an investigation into corruption at the tax department. But the episode brought the 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, who was Mr Yudhoyono's predecessor as Indonesia's president. If Mr Yudhoyono and leading reformers in the government continue to confront vested interests, it may be only a matter of time before conflict within the coalition erupts again. 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 crimes rather than their victims.

Terrorist activity increases in Indonesia

On January 25th, around three months before US special forces killed the leader of the al-Qaida international terror network, Osama bin Laden, in a city in north-western Pakistan, Abbottabad, Pakistani intelligence officers in that town arrested an Indonesian terrorist, Umar Patek. A senior member of the Jemaah Islamiah (JI) group, who was wanted in connection with the 2002 Bali bombings, Mr Patek is alleged to have been seeking an audience with Mr bin Laden. He is presently being held at a secret location in Pakistan. According to Indonesia's National Anti-Terror Agency (BNPT), three countries-Indonesia, Australia and the US-are keen to extradite Mr Patek so that he can face charges related to the Bali bombings.

There is no evidence that Mr Patek was plotting attacks in Indonesia on this occasion. Until recently he was thought to have been in the southern Philippines, where he fled after the Bali bombings with another high-ranking JI member, Dulmatin. But Indonesian newspapers have recently reported a senior anti-terrorism official as saying that Mr Patek spent time in the Indonesian capital, Jakarta, in 2009-10 and that he was involved in establishing a large terrorist training camp in the province of Aceh. Although it is impossible to confirm, the official's statement seems credible: the Aceh camp, which was raided by police in early 2010, was led by Mr Patek's close associate, Dulmatin.

Meanwhile, there are signs that the terrorist threat in Indonesia is increasing. On April 21st police in Jakarta defused nine bombs outside a Christian church. The devices, several of which were buried beneath a gas pipe, had been set to detonate during a service the following morning for Good Friday. A week earlier a suicide bomber, Muhammad Syarif, blew himself up and injured 30 others at a mosque inside a police compound in Cirebon, West Java. That attack followed the delivery of book bombs to the offices of a moderate religious leader, a former head of the police's anti-terrorism unit and two other addresses in Jakarta on March 15th. No one was killed in those attacks.

Compared with Indonesia's past terrorist bombings, the latest series of attacks seem clumsy. Those responsible for the attempted church bombing even contacted an Arabic-language news broadcaster, Al Jazeera, to ask it to film the attack. Experts at the International Crisis Group (ICG), a think-tank, recently concluded that Indonesia's terrorists had become more fragmented, with small cells planning attacks on the police and other local targets while receiving only limited support from regional groups such as JI and Jemaah Ansharut Tauhid (JAT), a group founded by an extreme Islamist preacher, Abu Bakar Bashir, in 2008. The three recent attacks appear to support the ICG's conclusions. Although he is alleged to have belonged to JAT, Mr Syarif seems to have been acting alone. The book bombs and the attempted church bombing were the work of the same small group, led by Pepi Fernando. But Mr Fernando, who was arrested on April 21st, was no expert bomb-maker. He is reported to have told police that he learned to make bombs by watching clips on a website, YouTube-a very different education from JI's chief explosives expert, Azahari Husin, who had a doctorate in engineering and learnt his skills in Afghanistan.

Nonetheless, three attempted attacks in the space of six weeks suggest that terrorist activity is on the rise again in Indonesia. The perpetrators may lack the expertise of figures like Mr Azahari, and they may for now have decided to direct their attacks towards local targets rather than foreigners, but Mr Patek's arrest and the reports of his relatively recent presence in Jakarta suggest that the risk of al-Qaida-inspired attacks cannot be discounted altogether. Although Mr Patek was one of only a small number of terrorists in Indonesia to have had direct contact with al-Qaida leaders, Mr bin Laden still has a following among Indonesian extremist groups such as JAT. The Indonesian authorities have rightly stepped up security following his death.

Indonesia will elect a new president to succeed Mr Yudhoyono in 2014. Parliamentary elections will also be held in that year and will have an important bearing on the outcome of the presidential poll. According to the election law, only political parties (or groups of parties) that win at least 20% of seats in parliament or 25% of the vote in the legislative election are eligible to nominate presidential candidates, meaning that the next president is likely to be the nominee of one of the country's three main parties-the PD, Golkar and the PDI-P. Mr Bakrie is a strong contender for the Golkar nomination, but he would be a controversial choice owing to the possibility of conflicts of interest arising from his extensive business empire. The PDI-P is again expected to nominate its own leader, Ms Megawati, despite the fact that she lost to Mr Yudhoyono in both the 2004 and the 2009 elections. The news in March that one of Mr Yudhoyono's sons is to marry a daughter of Hatta Rajasa, the chairman of the National Mandate Party (PAN), has led to speculation that the ruling party might nominate Mr Rajasa as its candidate for either president or vice-president. Such a move would reduce the likelihood of a reformer, such as Boediono, securing the party's presidential nomination in 2014.

Indonesia has become more prominent in international organisations in recent years, serving as a non-permanent member of the UN Security Council in 2006-08, being elected to the UN Human Rights Council and taking a seat at meetings of the G20 group of the world's major economies. There is an opportunity for warmer relations with the US, given that the president of that country, Barack Obama, spent several years in Indonesia as a child. Ties with China are also likely to strengthen-in April Mr Yudhoyono and the Chinese premier, Wen Jiabao, pledged to double trade between the two countries by 2015. Chinese businesses have become major foreign investors in a variety of sectors in Indonesia. Moreover, owing to the likelihood that the world's advanced economies will grow relatively slowly in the forecast period as they recover from the 2008-09 global financial crisis, Indonesia will rely increasingly on China as an export market. However, there will be opposition to closer economic ties with China, as demonstrated by the backlash among local manufacturers against the free-trade agreement between China and the Association of South-East Asian Nations (ASEAN) that came fully into effect in January 2010. Indonesia's foreign policy will continue to be influenced by the principle of non-alignment, and the government will resist becoming too closely associated with either the US or China. There will be intermittent disputes with Malaysia and Singapore over a range of long-standing issues. At the start of 2011 Indonesia took over the chair of ASEAN for one year.

Reforms aimed at addressing the shortcomings of Indonesia's business environment will move forward in a stop-start manner, reflecting the conflicting views on reform that exist within the governing coalition. The anti-corruption drive will continue, but the Anti-Corruption Commission (KPK) will face constant opposition, as will other statutory bodies charged with tackling graft. Several changes, including reform of the country's restrictive labour laws and removal of energy subsidies, may not prove politically feasible. Reform of the inefficient civil service, which was cited by Mr Yudhoyono as a priority for his second term, is making only slow progress. The government has, however, submitted draft legislation to parliament on land acquisitions. If passed, the measure will make it easier for the state to acquire land for development purposes, thus removing a major bottleneck obstructing much-needed improvements to infrastructure.

As a consequence of the inability of the civil service to spend fully the funds allocated to it, the Indonesian government generally fails to operate an effective countercyclical fiscal policy, and macroeconomic management therefore has to be achieved primarily through monetary policy. Bank Indonesia (BI, the central bank) will tighten policy in 2011-12 by raising interest rates in the face of inflationary pressures generated by strong economic growth. Maintaining the stability of the currency amid strong inflows of foreign capital will remain a priority. BI has tightened restrictions on purchases of central bank bonds, known as BI certificates, by introducing a minimum one-month holding period in June 2010, which it then extended to six months in May 2011. Although the authorities remain eager to attract long-term foreign investment, the risk of currency instability stemming from a sudden change in investor sentiment was judged too great to be ignored. Further restrictions on capital flows remain a possibility.

We expect the fiscal deficit to widen to the equivalent of 1.2% of GDP in 2011, from an estimated 0.8% in 2010. This compares with the target of 1.8% of GDP in the 2011 budget. Despite attempts by the finance minister, Agus Martowardojo, to reward ministries that achieve their spending targets and to penalise those that miss them, underspending will remain a problem. The recent rise in global oil prices poses the main risk to our forecast. Despite the fact that fuel subsidies mainly benefit Indonesia's middle class, the government has baulked at proposals to allow prices for petrol, diesel and other fuel products to rise and fall in line with market trends. The international price of oil (dated Brent Blend) was around US$113/barrel in late May, well above the Indonesian government's 2011 budget assumption of US$80/b, meaning that spending on subsidies this year could easily exceed the official projection of Rp187.6trn (US$22bn). The recent upward revision to our forecast for global oil prices in 2012-15 means that government subsidies are likely to remain high, keeping the fiscal deficit at 1.2% in 2012-13. We expect the deficit to narrow marginally in 2014-15. A healthy rate of economic growth should cause government debt to fall further relative to GDP, and this could mean that Indonesia's sovereign debt rating improves to investment grade, thus enabling the government to raise funds in international markets more cheaply.

Monetary tightening will continue during the remainder of 2011, following BI's decision on February 4th to raise its main policy interest rate, the BI rate, by 25 basis points to 6.75%. Previously BI had left the rate at 6.5%, the lowest level since it was introduced in 2005, owing to concerns about the effect that a widening interest rate differential with major global economies would have on capital inflows (given that rates in such countries are likely to remain low). Continued concerns about capital inflows, as well as signs that government intervention has succeeded in stabilising inflation, mean that BI's governors will raise interest rates only gradually this year. They left interest rates on hold at their meetings in March, April and May, preferring to use other policy options, notably rupiah appreciation, to address the strengthening of inflationary pressures. But as core inflation is now near the 5% level at which BI has indicated that it will tighten policy, the next increase in the BI rate is likely to come in the next month or so. Interest rates will continue to rise in 2012, before stabilising in 2013-15.

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Indonesia was affected less severely by the 2008-09 global financial crisis than many neighbouring economies, largely because exports account for a relatively small proportion of its GDP. Economic growth accelerated in 2010, with real GDP expanding by 6.1%. Growth slowed to 6.5% in the first quarter of 2011, from 6.9% in the fourth quarter of 2010, and in the year as a whole the economy is forecast to grow by 6.1%. Growth will then average 6.3% a year in 2012-15. Private consumption will remain a major engine of GDP growth in 2011-15, expanding by an average of 5.3% a year as the unemployment rate falls and real wages grow steadily. Fixed investment will expand by 8.6% a year on average, supported by strengthening demand. Exports of goods and services grew at double-digit rates in 2010, largely owing to healthy Chinese demand for Indonesia's commodities, but growth in overseas sales will slow in 2011, in line with a weaker global economy. Exports will expand at an average annual rate of 10.6% in 2011-15. Owing to healthy import demand, the external sector will make only a modest contribution to GDP growth in the forecast period.

There are still a number of downside risks to our forecast. The most serious is that fiscal-austerity programmes in Western economies might lead to a rapid slowdown in global economic growth. In addition, the loose monetary policy stance adopted by Western central banks has led to strong flows of capital into Asian countries, creating concerns that asset price bubbles could develop there. The bursting of bubbles can trigger a deleveraging process that hurts a country's real economy. Indonesia was a recipient of strong flows of foreign finance in 2010, and it will continue to attract substantial inflows in 2011. As a result, local asset prices are likely to rise. However, Indonesian companies and households are not highly leveraged, and a period of strong lending growth could benefit the economy, particularly if funds are invested in productive areas, such as improvements to infrastructure.

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On an annual average basis consumer price inflation accelerated to 5.1% in 2010, from 4.8% in 2009, and inflationary pressures will rise again this year as economic activity accelerates. A large increase in 2011 in international prices for oil and non-oil commodities, notably grains, will also exert upward pressure on domestic prices. However, average inflation should remain just within BI's 4-6% target range. After accelerating in January to 7% year on year, its fastest pace for 21 months, inflation slowed in each of the following three months, with prices rising by 6.2% in April. The rupiah's continued appreciation against the US dollar, and the start of the main domestic rice harvest in March, should limit inflation in the coming months. Inflation will remain at 6% in 2012, before accelerating to 6.4% on average in 2013-15. The primary risk to our short-term forecast comes from the possibility that high global oil prices could force officials to raise domestic fuel prices to keep the budget deficit under control, especially given that their assumption that oil prices will average US$80/b this year looks unrealistically low. But there is little sign that the government will find raising fuel prices politically palatable; it has repeatedly postponed plans to end the sale of subsidised fuel to owners of private cars on Java.

The rupiah appreciated by 14.4% against the US dollar on average in 2010, and by the end of the year it had reached Rp8,991:US$1, more than regaining the ground lost since late 2008, when the currency plunged as international investors fled risky emerging markets. Interest from international investors in carry trades (whereby speculators borrow in countries where interest rates are low, such as the US and Japan, to purchase assets in countries with higher rates, including Indonesia) has been an important factor in the rupiah's appreciation. Healthy domestic economic growth has been another factor encouraging foreign investment in Indonesian assets. Substantial capital inflows are expected in 2011, when Indonesia's GDP growth performance and interest rates will compare favourably with those of Western economies. Although BI will continue to intervene to prevent the rupiah from appreciating too sharply, the central bank seems content for now to let the currency strengthen as a means of controlling inflation. The rupiah is forecast to strengthen by 5.6% in 2011, before weakening slowly in 2012-15. The currency will remain vulnerable to sudden swings in sentiment.

A recovery in merchandise exports, led by commodities, caused the trade surplus to rise in 2010, to US$31.1bn, and we forecast that the surplus will continue to grow in the forecast period, to stand at US$48.5bn in 2015. The deficit on the income account widened in 2010, partly owing to a rise in interest and dividend payments. The income deficit will widen throughout 2011-15, as foreigners continue to repatriate earnings while Indonesian investments abroad still earn relatively meagre returns. Limited employment opportunities at home will force more Indonesian workers to seek jobs overseas, leading to an increase in inward remittances and support for the transfers account. We expect the current account to record a surplus equivalent to 1% of GDP on average in the forecast period.

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In May the president, Susilo Bambang Yudhoyono, was embarrassed by the findings of an opinion poll which showed that he was less popular than Soeharto, who ruled Indonesia as a dictator from 1965 to 1998. In the survey, conducted by a local firm, Indo Barometer, 37% of respondents named Soeharto as their favourite president, with only 21% preferring Mr Yudhoyono. Moreover, 41% of respondents agreed that conditions had been better during Soeharto's rule, while only 23% disagreed. Under Soeharto the country was stable and the economy grew strongly, but his New Order regime was also associated with numerous human rights violations and with widespread corruption.

The poll's findings do not imply that Indonesians wish to return to an era of dictatorship, but they may reflect a growing disillusionment with democratic governance as it is currently practiced in Indonesia, with reforms drifting and elected officials pursuing their own interests. A greater concern is that the lasting popularity of Soeharto that is reflected in the poll could offer conservative politicians an opportunity to roll back some of the democratic gains made since Soeharto was ousted in 1998.

Many of the achievements of the reform era since Soeharto's fall are now being challenged, and vigilance on the part of civil society and reformists is required to protect these gains. Local democracy is threatened by proposals to end the direct election of provincial governors. Institutions established to fight corruption face emasculation through legislative amendments currently under deliberation in the House of People's Representatives (DPR, the legislature). Meanwhile, protection of minority rights and religious freedoms has weakened rapidly under the watch of the current government. Mr Yudhoyono wishes his legacy to be a strengthening of democracy in Indonesia, and seeks stability and consensus in order to achieve this goal.

A corruption scandal focused on the construction of athletes' dormitories in Palembang in South Sumatra province for the Southeast Asian Games has embroiled senior figures in Mr Yudhoyono's Democratic Party (PD), damaging the party's reputation and public standing. The PD's treasurer, Muhammad Nazaruddin, who was dismissed from his post on May 24th, is suspected of having arranged illegal payments from the project, which was commissioned by the Ministry of Sports and Youth Affairs. The minister for sports and youth affairs, Andi Mallarangeng, is a senior figure in the PD, but he has not yet been implicated in the scandal. The scandal ignited in April, when the Corruption Eradication Commission (KPK) caught a contractor, Muhammad El Idris, providing a kickback of Rp3.2bn (US$375,000) to the secretary-general of the sports ministry, Wafid Muharram. A broker who arranged the meeting, Mirdo Rosalina Manulang, was found to work for a company owned by Mr Nazaruddin. An internal party investigation by the PD concluded in May that Mr Nazaruddin was not linked to the scandal, thereby raising suspicions of complicity and a cover-up in the senior ranks of the party. However, in an embarrassing volte-face, the party's ethics committee then decided to dismiss Mr Nazaruddin, describing the move as "good for the party's image". The former treasurer may also be subject to an investigation by the KPK.

The PD is the largest party in parliament, and Mr Yudhoyono serves as chairman of its advisory board. It was formed in 2001 to offer a clean break from the tainted secular-nationalist political parties established during the New Order era, including Golkar and the Indonesian Democratic Party-Struggle (PDI-P). Its popularity stems from this perception that it has provided a fresh start, as well as its pledges to ensure clean governance and to tackle corruption. The recent scandal therefore has the potential to inflict severe damage on the PD. More worryingly, given its strength in the legislature and its likely influence in terms of shaping the development of Indonesian politics beyond 2014, when Mr Yudhoyono's second presidential term expires, signs that the PD could be succumbing to the corrupt and self-interested ways of other parties auger ill for reform and cleaner governance in the long term.

Parties across the political spectrum in Indonesia are known to use corruption and kickbacks to raise funds, through activities such as the licensing of forestry concessions and land clearance, and mark-ups on procurement and construction contracts. There is a heightened level of risk that corruption will worsen as party fundraising for the 2014 legislative and presidential election campaigns begins. A special report in Indonesia's leading national newspaper, Kompas, in late May highlighted such concerns and detailed how all major political parties are sourcing kickbacks to fund their participation in the 2014 elections.

A decision by the finance minister, Agus Martowardojo, to use the State Investment Agency (PIP) to purchase a 7% stake in a local mining firm, Newmont Nusa Tenggara (NNT), has set the minister on a collision course with powerful business interests. NNT runs the Batu Hijau copper mine on Sumbawa and was established by a US mining firm, Newmont, and a Japanese industrial group, Sumitomo. Newmont and Sumitomo are obliged to sell a 51% stake in the mine under the terms of their contract of works. A previous divestment of 20% was purchased by an Indonesian mining company, Pukuafu Indah. Another stake of 24% was bought by Multi Darerah Bersaing (MDB), a partnership between an investment vehicle of the Bakrie Group (headed by Aburizal Bakrie, the chairman of the Golkar party and one of the country's richest ethnic-Indonesian businessmen) and local governments in Sumbawa. Raising its stake to 31% would give MDB a controlling interest in the project, representing the culmination of its strategy to gain control of the mine.

The Bakrie Group has a controversial history. Companies within the group are variously alleged to have avoided royalty payments due on coal-mining operations, to have conspired with tax officials to avoid corporation-tax payments, and to have caused the Sidoarjo mud-volcano disaster in East Java through shoddy drilling practices. The group, however, denies these allegations. Mr Martowardojo's intervention may have been intended to ensure that good standards of corporate governance are maintained at NNT.

Unfortunately, Mr Bakrie has a history of using his political influence and the legislature to further his family's business interests. Signs of his response to Mr Martowardojo's move are already evident. At a special parliamentary hearing called to investigate the purchase, a Golkar legislator, Nusron Wahid, denounced the move as illegal and said that it required the prior approval of the DPR. He also called on the State Audit Agency (BPK) to investigate, and warned Mr Martowardojo to halt the purchase before it led to his being sent to jail of forced to resign. The finance minister maintains that the purchase was legal and within his authority.

Mr Martowardojo's predecessor as finance minister, Sri Mulyani Indrawati, faced an onslaught through parliamentary committees and BPK investigations after she too challenged the Bakrie Group's business interests, and eventually resigned from the post in 2010. The BPK is headed by a controversial former director-general for taxation, Hadi Purnomo, who has come under suspicion owing to the vast wealth that he accumulated while in that job. He was sacked by Ms Mulyani in 2006.

Indonesia was one of 15 countries elected to serve three-year terms on the UN Human Rights Council in late May. The foreign minister, Marty Natalegawa, said that the country's election confirmed the progress that Indonesia has made on human rights and democratisation over the past decade, as well as the consistency with which it has addressed these issues through its foreign policies. However, earlier in the same month the UN High Commissioner for Human Rights, Navanethem Pillay, wrote to Mr Natalegawa to express the organisation's concerns over rising religious violence in Indonesia, and urged the government to accept a visit from its special rapporteur on freedom of religion later this year. In her letter, Ms Pillay drew attention to the plight of the Ahmadiyah community, an Islamic sect viewed as deviant by mainstream Muslims. The Ahmadiyah in Indonesia face violence and constant intimidation by vigilantes, and in February three adherents of the sect were murdered by a mob in West Java. The group also faces illegal bans on its activities imposed by local governments. Ms Pillay further referred to the closure and burning of Christian churches, attacks on Christians and the forced removal of a Buddhist statue in North Sumatra. She said that such incidents were jeopardising the human rights guaranteed in the International Covenant on Civil and Political Rights, to which Indonesia is a signatory.

In May Mr Yudhoyono signed an eagerly anticipated moratorium on forest conversion-an important milestone in the continuing struggle to reform Indonesia's deeply corrupt forestry sector. The moratorium mandates a halt to the issuance of new forest-use permits for a two-year period over an area of 64.2m ha of primary forest and 30m ha of peatland. Indonesia's forests and peat swamps contain large stocks of carbon. Land clearance and fires result in vast greenhouse-gas emissions, making Indonesia the world's third-largest carbon emitter by some measures. International concern about the problem has been growing in recent years, and in a visit to the Norwegian capital, Oslo, in May 2010 Mr Yudhoyono signed a letter of intent jointly with Norway's prime minister, Jens Stoltenberg, under which that country would provide a US$1bn grant to support progressive forest-sector reforms aimed at reducing greenhouse-gas emissions resulting from deforestation.

The moratorium announced in May 2011 was one of the first steps mandated under this deal. Although its announcement represents significant progress, enforcing the policy will be a challenge. The moratorium was issued as a presidential instruction-a form of directive that has relatively weak legal status and is often difficult to enforce. A map describing the land covered by the moratorium has yet to be released, while a number of exemptions also provide scope to circumvent the policy. In particular, projects that have already received approval in principle from the Ministry of Forestry are exempt from, as are extensions of existing forest-use permits, and projects classed as vital to the national interest. The moratorium also does not cover 35m ha of secondary forest, leaving vast swathes of valuable existing forest vulnerable to clearance.

However, the measure represents a victory for Kuntoro Mangkusubroto, the respected head of the Presidential Delivery Unit (UKP4). Mr Mangkusubroto leads a task-force established by the president last year to implement a series of measures aimed at reforming the forestry sector and reducing carbon emissions from deforestation. In preparing the moratorium he was opposed by the forestry minister, Zulkifli Hasan, the environment minister, Gusti Muhammad Hatta, and the co-ordinating minister for the economy, Hatta Rajasa. These three ministers, all of whom are affiliated to the National Mandate Party (PAN), lobbied to weaken the terms of the moratorium. The final version appears to be a compromise between Mr Mangkusubroto's stringent policy recommendations and the PAN's weakened version.

Mr Mangkusubroto will now turn his attention to the other important reforms mandated in the first phase of Indonesia's US$1bn deal with Norway, including the establishment of an agency to oversee investments in reducing emissions from deforestation, an independent forest-monitoring agency, and a mechanism to channel international funding to support and incentivise the reforms.

Deforestation is the second-largest global source of greenhouse gas emissions, and the exploitation of forests in Indonesia makes the country one of the world's largest polluters. Indonesia has committed itself to reducing its greenhouse-gas emissions by 26% compared with business-as-usual levels by 2020 (rising to 41% with international assistance), identifying the country as one of the most progressive developing nations in the UN climate-change negotiations. However, scepticism exists about whether Indonesia will achieve this target, owing to rampant corruption in the forestry sector.

A financial mechanism known as Reducing Emissions from Deforestation and Forest Degradation (REDD+), which is currently under discussion as part of the UN climate-change negotiations, could provide Indonesia with important new incentives to control illegal logging and halt illegal land conversion. Under a REDD+ deal concluded in May 2010, Norway has pledged to provide US$1bn in performance-related payments tied to measures implemented by Indonesia to reduce deforestation.

The incentives provided by the grant, as well as the obligation to fulfil international commitments to reduce greenhouse-gas emissions, could help to galvanise Indonesia's long-standing domestic efforts to end corruption in the forestry sector. These measures include ongoing investigations by the Corruption Eradication Commission (KPK), which has stated publicly that corruption permeates every level of the sector. In April the KPK successfully concluded the prosecution of Wandojo Siswanto, a former lead negotiator for the Forestry Department in UN climate-change talks. Mr Siswanto was jailed for three years for accepting bribes to influence the outcome of a public tender for a radio system.

The Ministry of Finance submitted its basic economic assumptions for 2012 to the DPR in late May. The assumptions, which are used as the basis for the budget, paint an optimistic picture of accelerating growth, low inflation and a moderately weaker exchange rate. Real GDP growth is forecast to accelerate to 6.5-6.9% in 2012, compared with forecast growth of 6.5% in 2011. The faster rate of growth will be achieved by encouraging the development of Indonesia's outlying regions, and particularly the provinces of Papua and West Papua, as well as through investment in infrastructure to support inter-regional connectivity, according to Mr Martowardojo. Inflation is forecast to fall to within the range of 3.5-5.5% next year, compared with a forecast average rate of 5.3% in 2011, although containing inflationary pressures in a rapidly growing economy is likely to be challenging for Indonesia's monetary authorities. The finance ministry also expects the rupiah to fall back from the highs that it has reached this year, with an average exchange rate of Rp9,000-9,300:US$1 in 2012, compared with the current rate of around Rp8,500:US$1. Oil production is expected to remain steady in the range of 950,000-970,000 barrels/day, with oil prices projected to move in the range of US$75-95/barrel. The budget deficit next year as a proportion of GDP is forecast to widen from this year's target of 1.8%, but the finance ministry has yet to publish a detailed forecast.

Although year-on-year economic growth slowed slightly in the first quarter of 2011, to 6.5%, from 6.9% in the previous quarter, leading indicators continue to point towards a period of strong growth ahead. Private consumption, which grew by 4.5% year on year in the first quarter and accounted for 2.6 percentage points of GDP growth, is an important engine of the economy, and the outlook is positive. In April the consumer confidence index published by Bank Indonesia (BI, the central bank) remained steady at 106.9, compared with 107.1 in March (an index value greater than 100 indicates that optimists outnumber pessimists in the survey). Although the index covering current economic conditions stayed pessimistic, at 95.6, the index of future expectations was very optimistic, at 118.2.

Consumers' optimism over future prospects is matched in the retail sector, as reflected in BI's retail sales index, which captures the perceptions of 270 medium-sized and large retailers in five cities. The March index rose to 251.1, up by 1.6% month on month and by 17.6% year on year. Retail sales are expected to be particularly strong around August, the Muslim fasting month of Ramadan and the post-fast Eid al-Fitr holiday period.

However, prospects for car sales, a key element of consumer demand, have been clouded by the earthquake and tsunami disaster that struck Japan on March 11th. Sales rose by 29% year on year in the first quarter of 2011, to 225,061 units, according to the Indonesian Automotive Manufacturers Association (Gaikindo), boosted by the rupiah's strength against the US dollar. Despite this strong performance, sales are expected to fall in the second half of 2011 owing to severe disruption of production of components and of supply chains. Toyota and Daihatsu, which account for 90% of the local market, are both Japanese-owned marques. Although their vehicles are part-manufactured and assembled in Indonesia, many components are produced by factories in Japan. Inventories have been run down and shipments of parts from Japan have come to a near-halt. Sales of cars fell by 7% month on month in April, to 60,702 units, and Gaikindo has cut its 2011 sales forecast to 800,000 units, from 850,000 previously.

The motorcycle industry is less exposed to disruption in Japanese supply chains, as it uses 95% local components, with only electronic parts being imported from Japan. Increased sales of motorcycles may therefore take up some of the slack left by slumping car sales. Motorcycle sales rose by 21% year on year in March, to 2m units, according to the Indonesian Motorcycle Industry Association.

Bank credit at the end of the first quarter of 2011 was up by 24.7% year on year and by 2.9% since the beginning of 2011. Outstanding credit to the mining industry rose by 53.5% year on year, while outstanding credit to agricultural enterprises, construction and manufacturing grew by 32%, 19.4% and 15.5% for the three sectors respectively, suggesting expansionary plans in all of these industries. Credit to service-oriented industries, including hotels and restaurants and financial services, also grew strongly on an annual basis. BI now expects growth in loans in 2011 as a whole to exceed the rate of 23.5% that was outlined in banks' business plans for the year.

Meanwhile, cement sales were up by 6% year on year in the first quarter of the year, to 10.3m tonnes, up from 9.7m tonnes in the first quarter of 2010, according to the Indonesian Cement Association (ASI), as demand was boosted by residential property developments and infrastructure projects, including toll roads and bridges, that are now under construction. The ASI expects sales to total 43m tonnes in 2011.

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Land area

1,904,443 sq km

Sea area (exclusive economic zone)

3,166,163 sq km (before deductions for sea area now under the control of Timor-Leste)

Total area

5,070,606 sq km

Population

240m (US Census Bureau 2009 estimate)

Main towns

Population in '000 (2000 census)

Jakarta (capital): 8,385 Medan: 1,792

Surabaya: 2,589 Palembang: 1,442

Bandung: 2,142 Semarang: 1,345

Climate

Tropical

Weather in Jakarta (altitude 8 metres)

Hottest months, April-May, 24-31°C (average daily minimum and maximum); coldest months, January-February, 23-29°C; wettest months, January-February, 300 mm average rainfall

Languages

Indonesian (Bahasa Indonesia), as well as some 250 other regional languages and dialects. English has replaced Dutch as the main second language and is widely spoken in government and business circles

Measures

Metric system

Currency

Rupiah (Rp). Average exchange rate in 2010: Rp9,088:US$1

Time

Western Zone 7 hours ahead of GMT, Central Zone 8 hours ahead, Eastern Zone 9 hours ahead

Fiscal year

January 1st-December 31st (since 2001)

Public holidays

New Year, January 1st; Chinese New Year, February 3rd; Mouloud, February 15th; Hindu New Year, March 5th; Good Friday, April 22nd; Waisak Day, May 17th; Ascension Day, June 2nd; Lailat Al Miraj, June 29th; Independence Day, August 17th; Eid al-Fitr, August 30th-31st; Eid al-Adha, November 6th; Islamic New Year, November 27th; Christmas Day, December 25th

Official name

Republic of Indonesia

Form of government

Power has historically been concentrated in the hands of the president, but recent constitutional amendments have given the legislature an expanded role

Executive

The presidency is the highest executive office, with authority to appoint the cabinet

Head of state

The president, Susilo Bambang Yudhoyono

National legislature

The People's Consultative Assembly (MPR) consists of a 550-member House of People's Representatives (DPR) and a 128-member Regional Representatives' Council (DPD)

National elections

April 2009 (DPR); July 2009 (presidential). Next elections: 2014 (DPR and presidential)

National government

Mr Yudhoyono's second-term government contains representatives of the Democratic Party (PD), Golkar, the National Mandate Party (PAN), the Prosperous Justice Party (PKS), the National Awakening Party (PKB) and the United Development Party (PPP)

Main political organisations

There are three nationalist secular parties: the PD, Golkar and the Indonesian Democratic Party-Struggle (PDI-P). The other main parties-the PPP, the PKB, the PAN and the PKS-have an Islamic orientation

President: Susilo Bambang Yudhoyono

Vice-president: Boediono

Key ministers

Agriculture: Suswono

Co-ordinating minister for the economy: Hatta Rajasa

Co-ordinating minister for people's welfare: Agung Laksono

Co-ordinating minister for political, security & social affairs: Djoko Suyanto

Culture & tourism: Jero Wacik

Defence: Purnomo Yusgiantoro

Education: Muhammad Nuh

Energy & mineral resources: Darwin Saleh

Finance: Agus Martowardojo

Foreign affairs: Marty Natalegawa

Forestry: Zulkifli Hasan

Health: Endang Rahayu Sedyaningsih

Home affairs: Gamawan Fauzi

Industry: M S Hidayat

Justice & human rights: Patrialis Akbar

Manpower & transmigration: Muhaimin Iskandar

Public works: Djoko Kirmanto

Religious affairs: Suryadharma Ali

Social affairs: Salim Segaf Aljufri

Trade: Mari Pangestu

Transport: Freddy Numberi

Central bank governor

Darmin Nasution