Economic impact of the JW Mariott blast

Ari A. Perdana, Economist Centre for Strategic and International Studies (CSIS), Jakarta, Ari_Perdana@csis.or.id

The wounds have yet to heal. The pain caused by several bombing incidents in the last few years had yet to become relief while yet another explosion hit the country. The issue here is not about where it happened -- it was in one of Jakarta's business districts. It is not about the target -- JW Mariott is part of a U.S.-based hotel syndicate. The issue is the economy! For Indonesia, a country still crawling toward the exit from the crisis, any small social-political-security disturbance would create havoc. And it is we, whether the rich, and especially the poor, who suffer in the end.

So far this year, the economy has shown few improvements. The exchange rate of the rupiah has been relatively stable, stock market sentiment has improved and inflation has been under control. All of these create room for a fall in interest rates.

In the real sector, the gross domestic product (GDP) recorded a growth of 3.4 percent in the first quarter of the year -- good enough, considering last year's Bali blasts, the SARS epidemic and this year's war in Iraq. Moreover, gross domestic fixed capital formation and exports of goods and services have also grown since the second half of 2002, after a few years of negative growth. During the first half of 2003, exports increased by 10.53 percent compared with last year, although the growth was mainly fueled by the oil and gas, rather than the non-oil sector.

Another positive development is the increasing approval of foreign direct investment (FDI). The Investment Coordination Board (BKPM) recorded a 43 percent increase in FDI approved during the first half of this year. On the other hand, domestic investment approvals declined by 35 percent, but such a decline may be due to many conversions of domestic investment projects into FDI.

In general, the country is still suffering a net private capital outflow. But the net outflow had declined to below US$2 billion by the end of 2002. In 2001, net outflow was still more than $8 billion. At the peak of the crisis in 1998, it was more than $13 billion.

However, the achievements, expressed as statistics, are only part of the story. The economy still faces a number of problems. Production activity has not yet fully recovered. The agriculture and manufacturing sectors, the two largest contributors to GDP, only grew at 3.2 percent and 1.7 percent in the first quarter of the year. Some non-oil commodities are still showing negative growth. The situation in the real sector cannot be detached from that in the banking sector, which has yet to be fully restored to its intermediary function.

In addition, problems related to security, institutional reform, legal and political uncertainty are also factors that hamper recovery of the business climate.

A series of bombing incidents in Jakarta, including the latest at JW Marriott Hotel, will of course add to the negative factors impeding an economic recovery. It is not impossible that the incident will wipe out the small economic achievements. We may have to wait for about two to three months before the real impacts are felt. But at least we can draw part of the big picture by comparing the recent incident with last year's Bali blast.

On the day of the Marriott explosion, rupiah trading closed at the rate of 8,600, from 8,845 per U.S. dollar the day before. Meanwhile, the Jakarta Stock Exchange (JSX) Composite Index recorded a 15.4-point decline to 488.5 at stock market closing time. The impact was somehow smaller than that of the Bali blasts of Oct. 12 last year.

On the first working day after the Bali blasts, the rupiah dropped by 340 points (Oct. 14, 2002), closing at Rp 9,500. The JSX index also dropped by 39 points to 337.5. As of March 2003, the exchange rate was still hovering within the 8,800 to 9,200 range, and the JSX index at 380 to 420. Only since the second quarter has the rupiah strengthened to Rp 8,100 to 8,200, and the average JSX index crawled toward the 500 level.

After the Bali blasts, GDP in the fourth quarter of 2002 declined by 2.61 percent from the previous quarter. Tourism, accounting for 3 percent to 4 percent of GDP, was down by 0.91 percent.

Exports also dropped significantly by 23.01 percent from October to November 2002. But the impact of the Bali blasts did not last too long. From the fourth quarter of 2002 to the first of 2003, GDP had already grown by 2.04 percent, while tourism grew by 0.47 percent. Exports, too, returned to grow at 10.67 percent in December.

The above data illustrates that the economy was able to survive the prolonged, negative impact of the Bali blasts. Among the reasons behind it have been the central bank's ability to control the money supply, and the stimulus injected by the government through the state budget. However, there are several things to note before we become too complacent about the strength of the economy.

First, the government is unlikely to be able to provide another fiscal stimulus. Before the JW Marriott blast, finance minister Boediono had indicated that next year's budget would have a much smaller stimulus. The government targeted next year's budget deficit at 1 percent of GDP, and smaller loans from the Consultative Group on Indonesia. Hence, it would have to tighten its belt.

Meanwhile, the second semester 2003 budget position has yet to be secured. Revenue collected from the privatization of state- owned enterprises and asset sales by the Indonesian Bank Restructuring Agency (IBRA) is still below target. At the same time, the government must spend more, including on the military operation in Aceh.

Second, the central bank may face a dilemma in implementing its monetary policy. On the one hand, the policy cannot be tightened further, as that would harm the real sector. On the other, a loosening of monetary policy would risk higher inflation and currency depreciation. Under current circumstances, people may not prefer to hold rupiah, which makes a further decline in interest rates dangerous for the currency.

Third, post-bombing market sentiment is also uncertain. Despite excellent work by the police following the Bali blasts, bombs still exploded in vital locations such as the Soekarno- Hatta Airport, a UN office and the legislature. The mood of investors will not be the same as last year, making it more difficult to return confidence to the country's business climate.

There are still many issues outstanding, apart from the three mentioned above. These are mainly unsolved problems such as law enforcement, corruption, political wrangling and so forth, which only increases the difficulty of dealing with the bombing problem. Without first dealing properly with these chronic issues, we simply leave our wounds exposed.