Investors in Indonesia should beware corruption scandal

Indonesia has enormous potential, but it also has an enormous problem with corruption. So investors should keep an eye on a scandal that’s being dubbed ‘Indonesia’s Watergate’ for reassurance that attempts to deal with it are still on track.

The story is long, but briefly, the Komisi Pemberantasan Korupsi (KPK) or Corruption Eradication Commission, created in 2003, has had significant success in tackling the country’s culture of graft; enough that a large number of officials were very rattled.

So an attempt by the police to go after two top figures in the KPK on allegations that they took bribes, was immediately seen as an attempt to undermine the agency. That suspicion seems to be justified: the officials’ lawyers have produced wiretapped conversations between a businessman and the attorney general’s office that appear to show a high-level plot to frame the men.

Two senior law officials have resigned and President Susilo Bambang Yudhoyono has said more action will be coming. But the president has already been criticised for not defending the KPK more strongly. He will need to act decisively if he wants to defuse growing anger among voters, who strongly back the KPK – and to satisfy investors that his pro-reform image is more than just talk.

After a convincing victory in July’s elections, and a larger share of seats for his party in the April parliamentary poll, hopes were high that his second term would see him push through changes faster than before. But many voters felt let down after the announcement of his new cabinet in mid-October – while the best officials from his previous administration stayed on, and some capable figures were appointed to key roles, many posts were handed out to undistinguished figures from parties that had promised to support him.

Following this partial disappointment, failure to show a strong anti-corruption stance could sour the rapidly improving sentiment on Indonesia.