Bali attack puts fragile economy at risk

Berni K. Moestafa, The Jakarta Post, Jakarta

Economists feared an overall weakening of the economy following the deadliest terrorist strike this country has ever seen.

They warned of bearish markets in a reaction that could stoke inflation and capital flight as the country braced for new instability.

Coordinating Minister for the Economy Dorodjatun Kuntjoro- Jakti would meet businessmen Monday to brief them about the government's planned response to the apparent terror, said a press statement by Dorodjatun's office.

Saturday's bombings killed at least 182 people in a crowded tourist area of Bali. The popular island was long viewed as a safe heaven, exempt from the numerous armed conflicts across the country, including bomb blasts and unruly protests in Jakarta.

"The first reaction will be a run on the U.S. dollar," said Bank Mandiri chief economist Martin Panggabean on Sunday.

A steep fall in the rupiah would add to inflationary pressures and might prompt Bank Indonesia to raise its benchmark rates. "If it (the rupiah) starts to drive interest rates up then there is a risk to the overall economy," Martin said.

The explosion has stirred new concern over Indonesia's fragile crawl up from the impacts of the 1997 economic crisis.

Investment continues to fall but the rupiah's relative stability this year has driven Bank Indonesia's rates down and made bank loans more affordable. A jump in the central bank's rates would choke off lending and raise interest payments on government and private debts, pulling money away from much needed investments to drive the economy.

"I think the central bank will stop cutting its rates for the moment and might even start raising them again," Martin said.

The rupiah has been hovering at around 9,000 to the dollar over the past few weeks. Yet the stock market has already been under selling pressure since September, led by a downturn in Wall Street. Last week the Jakarta Stock Exchange Composite index lost a hefty 7 percent to end trading at 376.46.

Analysts commenting on the blast in Bali now predicted panic selling on the money and stock market when trading opens Monday.

According to Martin, the damage to the economy however would be manageable if the rupiah fell to no further than 9,500.

University of Gadjah Mada economist Sri Adiningsih said the investment climate would take a big hit. "We might see weaker exports and foreign direct investment."

Overseas buyers could cancel orders from Indonesia and place new ones elsewhere, she added.

"How bad the impact will be on our economy depends on how effectively the government deals with the terrorism threat," she said.

Martin, however, said that cracking down on suspected terrorists would do little to halt the loss of capital.

"Capital is pouring out of Indonesia, with or without terrorists here, it has been this way for the past five years," he said, citing corruption and legal uncertainties as the main reasons why investors had been leaving the country in droves since 1997.

Chairman of the National Economic Recovery Committee Sofyan Wanandi warned the government that the Bali terrorist strike could squash what little was left of investor confidence here.

"I am to meet 300 Singaporean businessmen tomorrow (Monday) who are mulling investments here, and on Wednesday a Swedish business delegation," said an emotional Sofyan. "What am I going to tell them?"

He said several local and foreign businessmen called him up, and "the foreigners talked about leaving, and the local investors said they would not make any new investments with security like this... this is bad," Sofyan mumbled.