Bomb blast may stall recovery

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