SCENARIOS-Possible market impacts from Indonesian polls

(For full coverage of the elections click on [ID:nIDELECT]) JAKARTA, July 7 (Reuters) - Indonesia holds presidential elections on Wednesday which will determine the pace of reform and influence the performance of Southeast Asia's biggest economy and its financial markets over the next five years.

Opinion polls have consistently shown that President Susilo Bambang Yudhoyono is well ahead of his rivals, former president Megawati Sukarnoputri and Vice President Jusuf Kalla.

These elections come at a critical time. Bank Indonesia (BI), the central bank, has forecast GDP growth of 3-4 percent in 2009, slowing from last year's 6.1 percent expansion and below the 6 percent economists say is needed to create jobs as more people enter the workforce.

Here are some of the implications for Indonesian stocks <.JKSE>, bonds, and the rupiah as a result of possible election outcomes.

YUDHOYONO WINS FIRST ROUND WITH A MAJORITY

This is the most likely scenario and has been factored in to market thinking. It would still be bullish for markets though because they would expect the current pro-reform economic policies to continue and even accelerate if Yudhoyono picks technocrats rather than politicians for his cabinet.

Indonesia's main stock index <.JKSE> has already rallied some 40 percent since April's parliamentary elections. A decisive Yudhoyono first-round win could spark a rally of 10-15 percent in the weeks afterwards, propelled by foreign investors snapping up liquid stocks in the banking, telecoms and resources sectors.

The rupiah , up some 10 percent against the U.S. dollar since the April's polls, would also rally. It is currently trading around 10,200 per dollar but could break a psychological barrier at 10,000 in the days after the election. If cabinet appointments are seen as the right choices to push the economic reform agenda, it could test 9,000 per dollar.

Opinion polls predicting a clear victory for Yudhoyono have already prompted analysts to predict the rupiah could rise to 9,750 per dollar by the end of 2009. [ID:nSP488317]

In bonds, the benchmark 5-year fixed-rate bond , would rally on a Yudhoyono win, pushing yields down below 9 percent from 9.5 percent now, providing investor sentiment towards emerging market assets also continues to hold.

If Yudhoyono follows up victory with policies that suggest fiscal and balance of payments sustainability, investors would be tempted into longer-dated bonds.

Yudhoyono has nominated his reformist finance minister, Sri Mulyani Indrawati, to be the next central bank governor, but there is still uncertainty over who will become the new finance minister.

YUDHOYONO GOES TO SECOND ROUND RUN-OFF

This is less likely. But since markets have priced in the best-case scenarios, expect stocks, bonds and the rupiah to sell off.

The extent of the declines will depend on Yudhoyono's showing in the first round: the worse it is, the bigger the falls.

Indonesia is very susceptible to capital outflows, both from foreign and local investors, and the rupiah could easily fall to test key support around 10,800 per dollar if it looks like the election will go to a second round in September, creating political uncertainty.

A weaker rupiah, coupled with a surge in commodity prices, would have a knock-on inflationary impact, given that Indonesia still imports a substantial amount of food from abroad.

While that might reduce the risk of further rate cuts by the central bank, economists had only expected one last cut before the end of the year anyhow. The central bank cut its policy rate by 25 basis points to a record low of 6.75 percent on July 3.

So instead, markets might start to price in an earlier than expected rate rise for sometime in 2010, pulling bonds lower.

The stocks most likely to be hit include major lenders such as Bank Mandiri , Bank BCA and Bank Rakyat Indonesia as well as Bank Negara Indonesia (BNI) particularly if it looks like the central bank will stop easing or could even hike rates sooner than expected.

YUDHOYONO LOSES IN FIRST ROUND OF ELECTIONS

Highly unlikely and to many investors, especially foreign investors, this is the worst-case scenario.

Expect the rupiah to drop sharply against the dollar as foreign investors sell local assets and move their money offshore. Foreign investors hold about 15 percent of the rupiah government bond market, so their selling would offset any support from local investors looking for a relatively safer asset.

Stocks would fall sharply, although some would be supported by safe-haven flows as investors seek out politically connected firms, particularly in the energy and mining sectors, or those with strong export earnings that limit exposure to the domestic economy.

Neither Kalla's Golkar Party nor Megawati's PDI-P Party have strong track records in tackling corruption and pushing reform.

Both have said they would renegotiate "unfair" contracts with foreign investors in the natural resources sector, and give priority to domestic investors.

Most worryingly for the bond market, Megawati's vice presidential running mate, Prabowo Subianto, has said he wants to renegotiate the terms of Indonesia's debt. LINKS: Reuters offers daily evaluated reference prices for Indonesia's conventional bonds on <0#ARRPSID> and for sukuk <0#ARRPSSUKUKID=>. Reuters speed guide on Indonesian debt can be found at . (Reporting by Gde Anugrah Arka, Dicky Kristanto and Tyagita Silka in Jakarta and Kevin Yao in Singapore; Editing by John Chalmers and Neil Fullick) ((ga.arka@thomsonreuters.com; Reuters Messaging: ga.arka.reuters.com@reuters.net; +62 21 384 6364 ext 911))