Bomb blast may stall recovery

Puspa Delima Amri, Jakarta

Shock, anger and frustration are probably three words that best describe the current mood of many Indonesians. Just when things seem to be moving along the path towards economic reform and democratic consolidation, another act of terrorism darkens Jakarta skies, taking the lives of eight innocent people, injuring more than 130, and damaging many buildings situated in the Kuningan business and financial district, where the explosion took place.

A surge of sadness and anger has flowed through the city's streets. People are upset and bitter that this country has become such an easy target for terrorist acts. They are tired of seeing innocent people become the victims of these demonic creatures the media calls "terrorists".

But an early look at the market indicators showed that the psychological impact of the blast seemed to have far outweighed the economic one. Stock prices and the exchange rate, two indicators that mirror instant market reaction to economic and political instability, remained relatively flat.

The blast nonetheless triggered some panic immediately after the mid-morning explosion, pushing the Jakarta Stock Composite Index down by some 4 percent, and depreciating the rupiah by some 1.5 percent to the U.S. dollar, but the reaction was momentary. At the end of the day, the stock market index only fell by 0.8 percent compared to the previous day. Meanwhile, the rupiah remained largely stable.

This was not the case after the previous bomb attacks that rocked Indonesia. The Bali bombings in October 2002, and the explosion outside the J.W. Marriott Hotel in early August 2003 had a significant and immediate impact on the economy. The Jakarta stock market index in Bali's case plummeted by more than 10 percent, while the rupiah depreciated by more than 3.5 percent to the U.S. dollar. The Marriott incident pushed down the stock market index by 1.5 percent. In the case of the Bali blasts, the repercussions were even more severe, as the tourism sector, a labor-intensive industry, has suffered greatly.

This time around, the market reaction was less severe. One may argue that the impact of the blow was mitigated, thanks to better macroeconomic fundamentals. Compared to the situation in October 2002, when the Bali bombings occurred, the current macroeconomic picture is in much better shape. The growth rate has picked up to 4.6 percent in the third quarter of this year (compared to 3.6 percent in the fourth quarter of 2002), inflation is down to an annualized rate of 6.7 percent (against 10.33 percent), interest rates fell to 7.4 percent (from 13.2 percent) and the stock market index is now much higher at the range of 740-780 (against 360-400 in the fourth quarter of 2002).

Another explanation proposed is that market players nowadays are believed to be more "mature" in reacting to such events. They are becoming less driven by political motives in formulating their decisions. Statements made by officials from Bank Indonesia show that the central bank is a proponent of this idea.

Is that really the case? The following argument gives reason to suggest otherwise. Neo-classical economic textbooks tell us that market players base their decisions on rational expectations. In other words, they adjust their current behavior to future expectations, including the risks. The fact that Jakarta market players remained relatively calm by the end of the day may actually imply that worries of Indonesia being an evident terrorist target have been recognized, and incorporated into the calculations of risk premiums.

The real cost inflicted by this incident is the loss of credibility, particularly in the eyes of the international community. What used to be referred to as "threats of terrorism" has now become transformed into a undeniable fact: That Indonesia is indeed a target of terrorist attacks and that the country is the home of militant terrorists.

If investors were only taking a wait-and-see approach in the hope for an improved climate, particularly after the elections, they are now taking a "wait, worry and see" approach. As long as this credibility problem remains, we can forget about attracting significant levels of investment, enough necessary to accelerate growth.

Against this backdrop, can we still say that the economic impact of the bomb in Kuningan was insignificant? Maintaining the idea that the incident has left the economy unscathed runs the risk of oversimplification and taking things for granted.

Consider the following fact. This incident is the third of its kind, in three consecutive years. That's not even mentioning the other explosions that took place in between the three incidents; blasts on a smaller scale that caused less damage. That these attacks can continue is frustrating enough for many.

It doesn't stop there. Imagine that frustration, coupled with a similar wave of irritation felt by many economists and business players these days. Much debate has taken place about the desperate need for Indonesia to attract more investment and boost exports in order to accelerate growth and thereby absorb employment and eradicate poverty. We have the macroeconomic fundamentals in place, but that the real economy has yet to recover is beginning to aggravate people.

For that reason, this incident could not have happened at a worse time, amid our desperate efforts to escape from this low- growth low-investment trap that we are caught in. Worse yet, we also have to deal with a handful of external challenges, such as spiraling world oil prices, the shift of the U.S. towards a tight monetary policy and the slow-down of the China's economy, all of which have implications on the domestic economy.

To deal with this issue, a two-pronged approach must be taken; the first, to immediately tackle the political consequences of the incident. The pressure on the government is high, both from the domestic and the international community. The country's leaders must show their goodwill and serious commitment to combating terrorism. There is no room to be complacent about past achievements when dealing with the perpetrators of the Bali and Marriott bombings. Ideas to create an early warning system to prevent such disasters from happening again must also be considered.

The second part of this solution is for the government to seriously continue with its efforts to pursue economic reform. A tall order? Indeed it is, but in this case, there can be no compromise.

The writer is a researcher at the Centre for Strategic and International Studies (CSIS), Jakarta