UPDATE 1-Proposed Indonesia c.bank shuffle raises concern on future finance minister
* Parliament to decide if Martowardojo passes first hurdle
* Opposition MP says likely to back him, Golkar not decided
* If he is accepted, focus will be on new finance minister
(Adds comment by MPs in paragraphs 6-10)
JAKARTA, March 5 (Reuters) - Moves by Indonesia's President Susilo Bambang Yudhoyono to put his finance minister in charge of the central bank are leading to concerns that he may be seeking someone more malleable to run the state coffers ahead of next year's elections.
Yudhoyono made the surprise announcement on Feb. 22 that he wanted Agus Martowardojo to run the central bank when the current governor's term ends in May. He has given no explanation for not seeking to extend Governor Darmin Nasution's term.
Nor has there been any explanation why the president wants to move Martowardojo out of the cabinet to take charge of monetary policy for Southeast Asia's biggest economy.
On Tuesday night, parliament is due to take the first step by deciding whether Yudhoyono's sole candidate for the five-year term is eligible to face the fit and proper test he must pass to take over the governorship of Bank Indonesia (BI) from late May.
The president had proposed Martowardojo for the job before, in 2008, but parliament rejected him, in a decision seen then as more related to politics than objections to Martowardojo.
A member of parliament with Indonesian Democratic Party-Struggle, the leading opposition party, said it would likely back Martowardojo this time despite reservations of some of its MPs.
"Most probably we will accept his nomination," the MP told Reuters, asking not to be identified because the party has yet to announce its position.
Ruling coalition member party Golkar said it has not decided. That party has the second largest block of votes in the parliamentary finance commission that decides on the new governor.
Some MPs have asserted that Martowardojo lacks monetary policy skills and have questioned the integrity of the former banker, who is highly regarded by many analysts.
Golkar's Harry Azhar Azis, deputy head of the commission, said he wants to know why Martowardojo is being moved.
Born in Amsterdam 57 years ago, Martowardojo has spent almost his entire career in the banking industry, culminating in his role as head of state-controlled Bank Mandiri, which he is widely credited as having turned around.
If Martowardojo does switch to the central bank, attention will turn to whether his successor at the finance ministry allows political considerations to outweigh fiscal prudence.
"Will his successor be a person of equal credibility as Martowardojo? Or would the replacement be accommodative to the political pressures prior to 2014 (elections)?" said Fauzi Ichsan, senior economist at Standard Chartered in Jakarta.
One of the biggest challenges the next finance minister will face is how to cut back on fuel subsidies which gobble up around 15 percent of the annual budget and went 54 percent over budget last year, an issue Martowardojo was able to only partially tackle.
"The worry is a more fiscally lax replacement may compromise the perception of Indonesia's fiscal soundness, more so ahead of the elections," said one Indonesia economist who asked not to be named because of bank policy over talking to the media.
Speculation over who might succeed Martowardojo at the finance ministry ranges from the outgoing BI chief, in a straight job swap, to current chief economics minister Hatta Rajasa.
Rajasa, more career politician than technocrat, is close to Yudhoyono and often seen as the president's preference to be the next leader of the world's fourth largest country. Yudhoyono, who won a second five-year term in 2009, can't be a candidate in the 2014 election.
Martowardojo took over the finance ministry in May 2010 from Sri Mulyani Indrawati, effectively driven from office by a political and business elite upset with her tough stand against graft, frequently cited as the biggest drag on one of the world's fastest growing economies.
For all the speculation that Martowardojo is being sidelined, he denies he is being pushed out of his current job.
His only comments about his proposed move to the central bank have been to say he will watch inflation and also expects reciprocity with other countries in banking.
That appears to be a direct threat to the already long-delayed bid by Singapore's DBS Group Holdings $7.2 billion for Bank Danamon, unless the island neighbour changes policy and lets Indonesian banks operate there.
In his ministerial role, Martowardojo has been prepared to take on both foreign and politically influential domestic investors. Analysts point to his willingness to confront the Bakrie Group, whose head is also in charge of the powerful Golkar party, over the purchase of a stake in a major gold mine.
He opposed a project to build a bridge to join the islands of Sumatra and Java and which is thought to be something Yudhoyono had hoped would be a legacy of his 10 years in office.
(Additional reporting by Randy Fabi and Rieka Rahadiana; Writing by Jonathan Thatcher; Editing by Simon Cameron-Moore and Richard Borsuk)