Only a panic reaction

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.