Bombs, fuel could hurt rupiah and stocks

Bombs, fuel could hurt rupiah and stocks

Reuters, Jakarta

Indonesian stocks and the rupiah could suffer a double blow this week after deadly bomb blasts on the island of Bali on Saturday and higher-than-expected fuel price rises that came into effect the same day, analysts said.

The coordinated blasts at restaurants in Indonesia's prime tourist destination killed 25 people and wounded more than 100.

"This is one of the worst combinations ever," Purbaya Yudhi Sadewa, an economist at Danareksa Research Institute, said, referring to the bombs and fuel price increases.

"The decline might not be as steep as after the first Bali bomb, but still it will be very hard on the market. Fundamentally the rupiah could be pushed weaker due to higher expected inflation and, sentiment-wise, it is being hammered by these bombs," he added.

The almost simultaneous explosions in Bali came nearly three years after militants linked to al Qaeda bombed nightclubs there, killing 202 people, mostly foreign tourists.

The rupiah lost 3.2 percent in the first trading day after the 2002 bombings and the stock market plunged 10.4 percent.

The Indonesian government unveiled the huge increases in fuel prices late on Friday.

The aim is to reduce state subsidies on domestic fuel and thus bring down the government budget deficit, as well as to curb demand for fuel imports to help the trade balance, which should support the rupiah.

But, whatever the longer-term beneficial effects for the economy, some analysts fear social unrest and higher inflation in the short term.

"I would say this is (President Susilo Bambang Yudhoyono's) biggest political gamble ... If there is no social unrest, then he's done fiscally the most prudent thing, but if there is social unrest, all that economic logic doesn't work," Standard Chartered economist Fauzi Ichsan said.

The Jakarta Composite Index rose nearly three percent on Friday, closing at 1,079.275, after protests ahead of the fuel price rise proved relatively limited, but that was before the size of the increase was known.

The rupiah gained more than one percent at one stage on Friday to around 10,190 per dollar as worries about social unrest linked to the fuel price rise eased, but it was last indicated around 10,300. It hit a four-week low of 10,450 on Thursday.

"We could have some correction. The rupiah would suffer more than the stock market. But I think the government's move to steeply raise fuel prices is actually very positive," said Winang Budoyo, an analyst at Mandiri Sekuritas.

"If the police can deal with this quickly, as happened in the Kuningan bombings, the market would recover soon," he added.

Around a year after the first Bali blast, a car bomb hit the J.W. Marriott Hotel in Jakarta's diplomatic area of Kuningan and a year after that a bomb in a van exploded at the gate of the Australian Embassy, also in the Kuningan area.

Those events were followed relatively quickly by a series of arrests.

The latest blasts are another blow to the tourist industry, Bali's lifeblood, which has only recently recovered from the devastating 2002 blasts.

Bali, 960 km (595 miles) east of Jakarta, has been packed with tourists in recent weeks, including many young Australians. Restaurants, hotels and shops were brimming with visitors in similar numbers to pre-October 2002 levels.

Police have blamed Jemaah Islamiah, which intelligence experts say is al Qaeda's Southeast Asian network, for a series of attacks against Western targets in the world's most populous Muslim nation, including the 2002 Bali blasts.