Indonesia is re-emerging as one of the world’s hottest developing economies, a remarkable turnaround for a country that was once widely viewed as a basket case.

Despite the global financial crisis, Indonesia’s economy is on track to grow nearly 4% this year, making it one of only a handful of major economies — including China and India — that International Monetary Fund expects to expand in 2009.

Its stock market is up 50% for the year, and companies including Volkswagen AG and British American Tobacco PLC are making new investments there.

Much of the credit goes to Indonesia’s president Susilo Bambang Yudhoyono, a former army general who is widely expected to win re-election after five years in power. Under his watch, the government has stamped out Islamic terrorism and ended its civil war in the resource-rich province of Aceh. He has brought state spending under control and launched a popular anti-corruption drive, landing a number of senior politicians and central bank officials, including one whose daughter is married to Mr. Yudhoyono’s son, in jail.

But critics say Mr. Yudhoyono will have to do more to attack corruption if the nation is to reach its potential of China-style economic growth rates of over 8%. Last year, China attracted six times more foreign direct investment than Indonesia. Foreign businesses say that a corrupt legal system and bureaucracy are major deterrents to doing business in Indonesia.

For more than a decade, this ethnically-diverse archipelago nation of more than 17,000 islands — covering a distance greater than Los Angeles to New York — was known for corruption and chronic instability, with one of the world’s longest-running civil wars. Islamic terrorists struck Western targets in Indonesia with impunity, and foreign investors mostly steered clear. Indonesia seemed so unstable at times that some Western analysts feared it would turn into another Pakistan.

Recently, its fortunes are changing. Last month, a Morgan Stanley analyst report suggested Indonesia should be added to the famous “BRIC” grouping of fast-growing emerging markets that now includes Brazil, Russia, India and China.

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