Economic impact of the JW Mariott blast

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.