Indonesia protests endanger president's pledge of tough reforms

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By Gayatri Suroyo and Maikel Jefriando

JAKARTA, Oct 1 (Reuters) - Indonesia's biggest student demonstrations in decades will test President Joko Widodo's pledge to go all out in his second term to boost growth in Southeast Asia's largest economy, a former finance minister and a government adviser say.

Tens of thousands of students have hit the streets in recent weeks to protest against a new law that critics say undermines the fight against corruption, alongside controversial plans to revise the criminal code and several other issues.

Widodo has vowed tough reforms, such as overhauling restrictive labour laws and freeing up foreign ownership in more areas, to reinvigorate an economy battling weak commodity prices and fallout from the U.S.-China trade war.

But protests risk making it harder to drive through reforms, by sapping not just the president's popularity but also that of the political parties that back him, said Chatib Basri, the finance minister in 2013 and 2014 under Widodo's predecessor.

"Structural reforms can go forward only if there is high political capital, such as when the president adjusted fuel prices," said Basri, referring to Widodo's landmark decision to cut subsidies on politically sensitive fuel prices soon after taking office in 2014, while riding a wave of popular support.

"Now he won't touch things like that. The current political condition makes it hard for the president."

Widodo, who will be sworn in for a new term on Oct. 20, has said he faces no burdens in doing what Indonesia needs, since a president can only serve a maximum of two terms.

But pressure from the student protests has been coupled with a spike in tension and unrest in Indonesia's restive easternmost region of Papua, as well as the worst forest fires since 2015.

And when two student protesters were killed last week, Widodo said he would consider revoking a law that critics say weakens one of Indonesia's most popular institutions, its corruption eradication commission (KPK).

Earlier, he ordered parliament to delay a vote on changes to the criminal code to ban extra-marital sex, punish insults to the president and prescribe jail for women who get abortions, unless they face a medical emergency or suffered rape.

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CABINET JOCKEYING

Widodo has been besieged by "extremely intense" jockeying for posts as he tries to build a cabinet of technocratic ministers, a presidential adviser said.

Initial acceptance of the controversial new laws was partly an attempt to appease parties denied cabinet posts and ensure their support in passing unpopular bills, said the adviser, who declined to be identified, due to the sensitivity of the issue.

Kevin O'Rourke, a political analyst based in the capital, Jakarta, said that while Widodo may be able to salvage the graft agency's independence to boost his anti-corruption credentials, the prospect of economic reform looked more remote.

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"The show of force by demonstrators may make Widodo reconsider certain economic reforms that inevitably engender resistance from certain groups," O'Rourke wrote in his newsletter Reformasi Weekly.

Reforms that could be stalled include fuel subsidy cuts, changes to labour market regulations resisted by unions and land administration rules that opponents can portray as being anti-poor, O'Rourke added.

Students have already called for Widodo to drop his planned revision to labour laws.

The widely respected finance minister, Sri Mulyani Indrawati, told reporters she hoped Widodo's reform agenda would not be bogged down by the protests.

"The public wants a better Indonesia and what have been voiced were legitimate, good messages, such as wanting to eradicate corruption," she added.

A special official for economic issues at the presidential office did not reply to a request for comment.

DROP IN FDI

With economic growth expected to slow for the first time since 2015 to 5.1% this year, Basri said there was limited room for fiscal and monetary policies to counter that momentum.

The government has forecast 5.3% growth next year, though Basri, who now lectures on economics, predicts growth could slip below 5% in 2020.

The central bank has cut interest rates three times this year and sought to inject liquidity into financial markets to lift growth.

Basri said flagging tax revenue meant the government had been forced to put a lid on spending, while bond issuances to plug a fiscal deficit were causing a "crowding out" of market liquidity.

"The only solution is to get money from abroad to come in through foreign direct investment (FDI)," he said. "But how can you attract investment without structural reforms?"

FDI in the first half of 2019 slipped 6.6% from a year earlier to $14.2 billion, government figures shows. (Additional reporting by Tom Allard; Editing by Ed Davies and Clarence Fernandez)

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