By Fransiska Nangoy
JAKARTA (Reuters) - Investment bankers and company executives are worried President Joko Widodo's drive for clean governance is falling apart amid a dispute between rival law enforcement agencies in Southeast Asia's largest economy.
Indonesia's main anti-corruption agency, Corruption Eradication Commission (KPK), has been severely weakened over the last few weeks in a tit-for-tat feud with the police led to an overhaul of the agency's leaders.
The KPK is widely popular among Indonesians and the international community for arresting cabinet ministers, lawmakers, central bankers and CEOs, exposing how widespread and systemic corruption is in Indonesia.
"Business people are seeing this as political instability, which may delay some developments," said Edward Lubis, president director of Bahana TWC Investment, which manages a 28 trillion rupiah ($2.15 billion) fund.
"They may have not turned negative about the capital market, but some investors planning to accumulate more have stopped to wait for more progress, more certainty on how quick this issue can be resolved."
Widodo came into office in October pledging to bring clean, effective government in one of the world's most corrupt nations.
But his anti-graft credentials came under fire after the president hesitated to withdraw Budi Gunawan as his nominee for police chief following the candidate's implication by KPK in a bribery scandal. Widodo eventually buckled to weeks of public outcry, withdrawing the nomination last month.
The president also suspended two KPK leaders, who were named as suspects by police in separate criminal cases, in a move many saw as a compromise to appease both rival law enforcement agencies.
Since then, KPK supporters and local media have said the anti-graft agency has become significantly weaker.
The agency, which has a 100 percent conviction record after naming someone a suspect, took the unprecedented step this week of giving up on the Gunawan case and handing it over to the attorney general's office.
"Indonesia's golden era of corruption eradication has ended," said an editorial this week in the Jakarta Globe, an English-language daily.
An instant poll of around 200 business executives and other attendees at a conference in Jakarta on Thursday found that most believed the top challenge facing Indonesia was not poor infrastructure or burdensome bureaucracy, but corruption.
"Investors are seeing that the government is very fast in making decisions on economic issues, but on this issue it takes so long," said Michael Tjoajadi, CEO of asset management firm Schroders Indonesia, which manages 64 trillion rupiah in assets.
"They are wondering what is happening."
($1 = 13,020 rupiah)
(Writing by Randy Fabi; Editing by Nick Macfie)