Only a panic reaction

The financial market predictably reacted quite negatively to the terrorist bomb attack at the J.W. Marriott hotel here on Tuesday, as evidenced by the 3.1 percent decline in the Jakarta stock exchange main index and the 2.1 percent depreciation of the rupiah.

However, the negative sentiment seemed short-lived, reflecting more a panic reaction rather than a great concern over the economic fundamentals, as the market immediately began to rebound, though slightly, on Wednesday.

This development once again demonstrates the strength and resilience of macroeconomic stability. A similar trend took place in the aftermath of the October, 2002 terrorist bomb attack in Bali, proving that the market has been more rational, more able to distinguish the main factors that influence economic fundamentals from developments that could turn out to be only isolated incidents.

Senior economic officials and analysts also share the same view that the blast at the Jakarta business hotel would not significantly affect the market perception of the economic outlook for the rest of the year.

This optimism, however, is heavily qualified, as it assumes that a similarly devastating bomb attack will not occur in another public place in the near future and that the police will soon be able to solve the Marriott bombing case.

Certainly, the impact of Tuesday's terrorist bombing should not be exaggerated. But complacency and a laid-back attitude, expecting that things would automatically become normal again, is not well advised either.

However short-lived the market panic seemed to be, the Marriott bombing surely added a new negative factor to Indonesia's overall outlook. The bomb blast in the heart of Jakarta heightened security concerns, thereby increasing Indonesia's country risks.

This in turn will raise the costs of Indonesian borrowing from the international market at a time when the government and an increasing number of private and state companies are planning to float foreign-currency debt instruments.

The bitter fact that even such a prestigious business hotel as J.W. Marriott, which is well known for its elaborate security system, turned out to be highly vulnerable to a terrorist bomb attack, is making foreign visitors more jittery about Indonesia's security situation.

This concern would not only further dampen whatever little confidence foreign investors still have in the country but could prompt existing investors to put on hold any business plans, especially in connection with the political turbulence and high emotions the nation will likely face during the 2004 election.

Whether the financial market will regain the losses incurred by the bomb attack and soon return to the path of robust recovery for the rest of the year will depend on new positive factors the government could create within the next few weeks.

A quick investigation and solving of the incident and the establishment of effective security precautions at public places are surely positive factors that could accelerate the recovery process.

Timely and adequate intervention by Bank Indonesia into the foreign exchange market could arrest speculative attacks on the rupiah and prevent a negative self-fulfilling prophesy about the country's economic condition.

A credible verdict for the first defendant in the Bali bombing scheduled to be meted out on Thursday also would help increase public confidence in the government's ability to handle terrorists.

The restoration of confidence would be accelerated if the 2004 draft budget the government will propose to the House of Representatives on Aug. 15 is perceived by the market as realistic, especially with regard to the assumptions to be taken for fiscal sustainability. The market sentiment would be more bullish if the new reform agenda, which will be unveiled next week to replace the reform program with the International Monetary Fund next year, is highly credible.

The confidence-building process will be faster if the current review by the IMF of Indonesia's policy performance for the third quarter concludes with a positive endorsement.