No panic reaction
Although the financial market in Jakarta did not panic after Thursday's bomb attack near the Australian embassy compound, it is no longer business as usual in so far as the market's perception of Indonesia's country risk is concerned.
The huge terrorist attack, the third in the past three years, certainly increased the degree of concern about security and safety affairs -- the No. 1 enemy for investors and tourists.
Stocks on the Jakarta Stock Exchange (JSX) did tumble more than 4 percent on the news of the mid-morning bomb blast but recovered quickly in afternoon trading so that the JSX price index was down only a mere 0.8 percent to end that day at 782.65.
Likewise, the rupiah weakened 1.2 percent against the dollar immediately after the attack but rebounded later to regain most of its loss to close at Rp 9,300. The financial market also remained firm on Friday.
Businesses in the country have indeed been operating under continued fear and warnings of terrorist attacks, especially after the first devastating bombs in Bali in October, 2002. But the financial market seemed already capable of distinguishing an isolated incident from deep-rooted trend that could damage the fundamentals of the economy. Whether this perception would sustain or turn into heightened fears depends on the speed and credibility with which the government can resolve these terrorist threats.
However insignificant the initial impact of the bomb attack seems to be, the blast will certainly slow down the process of regaining investor confidence. If before last week's terrorist attack, it was mainly the political risks related to the presidential election that stood in the way of capital inflows, the causes of uncertainty have now increased to include high security risks.
The financial market is most vulnerable to uncertainty as portfolio investors can easily shift their investment from one place to another. True, volatility is the natural character of a financial market, but too-high fluctuations make sensible business-risk calculations almost impossible.
Moreover, due to its huge foreign and domestic debt burdens, the state budget is also highly vulnerable to the movements in the currency and interest rates. The government has estimated that every Rp 100 depreciation of the rupiah rate against the U.S. dollar will immediately add Rp 9.70 billion to its foreign debt-servicing burdens.
Yet more damaging is that a weakening rupiah always increases inflationary pressures (imported inflation) as the costs of imports accordingly become higher and this in turn will require the central bank to tighten its money policy by raising interest rates to control inflation.
The problem though, is that higher interest rates will immediately increase the interest charges on government bonds. The finance ministry has estimated that every single percentage point rise in the central bank's benchmark interest rate will add almost Rp 2.3 trillion (US$247 million) to the domestic debt- servicing burden.
Tourism is another sector that could immediately get a severe hit. The growth of tourist arrivals, which reached as high as 31 percent in the first seven months of this year, may slow down, cutting into the revenues of airlines, hotels, restaurants, souvenir shops and other related businesses such as suppliers of food and water and land transport services.
Insurance premiums on doing business in and with Indonesia will also rise. Worse still, heightened fears of security disturbances may prompt buyers overseas to divert orders from Indonesia to other countries out of concerns about delivery. Further down the line, sharp drops in exports would adversely affect the balance of payment conditions and consequently increase downward pressures on the rupiah.
These ominous signs are quite saddening indeed because the pace of Indonesia's economic recovery was poised to increase after the presidential election.
However, the damage could still be contained and the healing (confidence-rebuilding) process could be speeded up if the latest bomb attack can be resolved quickly and credibly -- meaning that those masterminding the attack are caught -- and the presidential election on Monday runs smoothly and fairly. Anything less would abort the economic recovery and could lead the country into an even worse crisis.
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