JAKARTA, April 8 (Reuters) - Indonesia holds parliamentary elections on April 9. The outcome will determine who runs in the more important presidential poll on July 8 and influence how Southeast Asia's biggest economy performs in the next five years.
President Susilo Bambang Yudhoyono's Democrat Party is in the lead in the opinion polls, but it may still need the support of other parties in parliament. Yudhoyono himself is well ahead of his main rival, Megawati Sukarnoputri, for the presidency.
These elections come at a critical time. Bank Indonesia has forecast GDP growth of 3-4 percent in 2009, slowing from last year's 6.1 percent expansion and below the 6 percent needed to create jobs as more people enter the workforce.
To counter the impact of the global economic crisis, which has hit the rupiah currency and stock market, the government launched a 73.3 trillion rupiah ($6.5 billion) fiscal stimulus plan, partly funded by global and domestic bonds. Here are some potential investment implications as a result of possible election outcomes, placed in order of the most likely to least likely based on polls.
DEMOCRATS LEAD BROAD ALLIANCE, YUDHOYONO RE-ELECTED
Expect business as usual, with relatively slow progress in terms of key reforms.
Yudhoyono is a consensus-seeker. During his first term, when his Democrat Party won 7.5 percent of the votes and had a small number of seats in parliament, he had to rely on other political parties for support and appointed a rainbow cabinet of diverse political interests.
That often hampered his reforms, with his main partner, the Golkar Party, resisting efforts to shake up the overstaffed and inefficient civil service.
If Yudhoyono relies on Golkar again, he may find it hard to overhaul the bureaucracy and push ahead with big infrastructure projects. Improving infrastructure such as roads, ports and power plants is key for cutting business costs and lifting efficiency. But if Yudhoyono relies on an alliance of Islamist parties, they are likely to push for more nationalist policies, including fixed prices, subsidies and limits on foreign investment.
This is the scenario the markets appear to be pricing in for now, so there would be little impact on the rupiah, bonds, and stocks if this turns out to be the outcome.
DEMOCRATS WIN BIGGEST NUMBER OF SEATS, YUDHOYONO RE-ELECTED
A strong showing by the Democrats in parliamentary polls, and a Yudhoyono victory in July would allow the president to take a far more decisive line than in his first term, relying perhaps on just one or two coalition partners.
Investors want decisive government, and a clear win by Yudhoyono and the Democrats would give him a mandate to make more sweeping changes in the civil service, judiciary, military, and police, and to pursue his fight against corruption.
The issue here is whom Yudhoyono picks as his vice president and whom he chooses for the key ministerial posts of finance, economics, energy and mines and state-owned enterprises.
If Yudhoyono's Democrats do well in the parliamentary polls and he doesn't need to rely on the support of other parties, he could pick Finance Minister Sri Mulyani Indrawati, a reformer popular with investors, to be his vice president.
While investors might prefer to have Indrawati still in charge of economics and finance, as vice president she would probably continue to want to keep a close watch on those portfolios and pick another technocrat as her successor.
A Yudhoyono-Indrawati team would probably also put a more foreign investor-friendly technocrat in charge of the important energy and mines ministry, which has failed to attract enough investment, and in charge of state-owned enterprises where privatisation and efforts to improve efficiency have stalled.
That scenario would surprise on the upside: expect the rupiah to firm against the dollar, Indonesian bond spreads to tighten, and a bounce in the stock market.
PDI-P/GOLKAR FORM COALITION, MEGAWATI WINS
To many investors this is the worst-case scenario: given the history of both parties, it would probably mean more emphasis on traditional money-politics and an end to further reforms.
As president from 2001-2004, Megawati Sukarnoputri disappointed on the reform front, while her husband, the wealthy businessman Taufiq Kiemas, was regarded as being far too closely involved in government affairs.
Golkar is also close to many of the leading business groups and includes several very wealthy businessmen in its top levels.
So a combination of the two parties would probably fail to address conflicts of interest between politicians and their business interests, creating a far-from-level playing field and deterring investment at a time when Indonesia desperately needs capital.
Expect the rupiah to find a new low, bonds to sell off, and stocks to tumble as investors pull out. One possible bright spot: a very weak rupiah might be a plus for exporters.
WILD CARD WIN
Suharto-era ex-generals Prabowo Subianto and Wiranto have formed their own political parties, Gerindra and Hanura. While the polls show both polling well behind Yudhoyono and Megawati, each could form a coalition with several smaller parties and run for president.
Analysts consider this the most worrying outcome, given the human rights track records of both men, and regard it as highly unlikely. It would herald a return to Suharto-style rule. Expect panic-selling across the asset classes.
($1=11,275 rupiah) (Writing by Sara Webb; Editing by Jerry Norton)