Macquarie Indonesian election - Golkar to pull out from coalition withDemocratic Party

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Event
The Golkar Party has said it will pullout from the coalition with the Democratic Party (SBY's political party), and the Indonesian Stock Index slightly corrected on the news.

Impact
This is not news to us since Golkar did not support the current president, SBY, as presidential candidate in 2004. It nominated Wiranto as its presidential candidate, leaving Jusuf Kalla free to run as an independent for the vice-presidential post under SBY. Nevertheless, after SBY and Jusuf Kalla won the presidential and vice-presidential seats, Golkar formed a coalition with the Democratic Party and nominated Jusuf Kalla as Golkar chairman.

Not final yet, national leadership meeting tomorrow will decide: Former Golkar head, Akbar Tandjung has said the decision is not final and that the meeting will have the legitimate decision of the Central Board. The national leadership meeting will take place tomorrow. By tomorrow night/Friday night, Golkar will need to make a final decision on who it will support to be its presidential candidate.

Several scenarios: Should Golkar decide not to form a coalition with the Democratic Party, there may be several scenarios: 1) Golkar will nominate its own president for a coalition with another smaller party; 2) SBY may appoint a vice-president from Golkar without Golkar's support - pretty much the same as it was in 2004; 3) Golkar will form a coalition with PDIP and nominate its own presidential candidate, together with PDIP, Gerindra and Hanura.

Action and recommendation
Despite the manoeuvre by the Golkar Party, we continue to believe Golkar will not become an opposition party.Golkar can appoints its presidential candidates or supportother presidential candidates but it would form a coalition later after the presidential elections. If the worst comes to the worst, the Democratic Party can still dominate the parliamentary seats without support from Golkar by forming a coalition with PKS, PKB, PAN and PPP. We believe that the political picture will remain unchanged, with SBY very likely to be re-elected and thus will not negatively impacting the market.