Prospects even bleaker for next year's investments

Prospects even bleaker for next year's investments

Puspa Delima Amri, Centre for Strategic and International Studies,
Jakarta

Immediately after the weekend blasts in Bali, markets in
Jakarta reopened to stock indices and the rupiah taking a deep
plunge. Over the weekend, the Jakarta Stock Composite Index
(JSCI) plummeted by more than 10 percent, closing at 337.48, the
lowest ever since the height of the 1998 financial crisis.
Meanwhile, the rupiah managed to depreciate by more than 3.5
percent to the U.S. dollar.

The Jakarta Stock Exchange suffered from panic selling by both
foreign and local investors, driving stock prices down further.
For the first time in months, Bank Indonesia was forced to
intervene in the rupiah's market to prevent the currency from
falling even further.

Nevertheless, government officials remain upbeat on the
outlook of the Indonesian economy. Over the past couple of days,
we have heard optimistic notes from both Coordinating Minister
for the Economy Dorodjatun Kuntjoro-Jakti and Minister of
Industry and Trade Rini Suwandi that the infrastructure of the
economy has not been impaired.

It is clear that the market reacted adversely and
instantaneously toward the bombing, reconfirming a longstanding
thesis that security and political stability are the first and
foremost factors in attracting foreign investment.

As can certainly be seen, the next immediate impact of the
bombing will be felt in the tourist sector. With the exodus of
tourists and numerous cancellations for near future travel plans,
we can forget about reaping a significant amount of income from
tourism for the rest of this year.

Statistical data in 2000 reveals that the tourism sector
contributed to approximately 4 percent of the gross domestic
product, 30 percent of which came from foreign tourists.
Consequently, national income may contract by roughly 1 percent,
a very significant number considering that GDP growth for this
year is targeted at 3.5 percent upto 4 percent. It is especially
saddening due to the fact that tourism is a labor-intensive
industry, which means that mass layoffs can be expected following
the fall in the sector's performance.

These immediate reactions, however, serve only to exacerbate
an already gloomy investment climate that Indonesia is facing
this year. Up to the second quarter of 2002, GDP data shows that
overall investment growth remains weak. The growth of gross fixed
capital formation, which measures accumulative physical
investment, has been declining since the third quarter of 2001.
It contracted by 3.7 percent (quarter-on-quarter) in the second
quarter of 2002. Furthermore, Investment Coordinating Board
(BKPM) data in August 2002 revealed that overall approved
investment declined by 42 percent for foreign investment and 72
percent for domestic investment.

This bleak investment performance is worrying as it will
undoubtedly affect economic growth figures as investment is a
significant source of growth. In 2000, investment contributed 24
percent to GDP growth. Serious concern has been raised on whether
the government will be able to meet its target of 4 percent
growth this year.

While it is true that the Bali explosions, which seem to add
weight to the international perception that Indonesia is a target
for terrorists, will affect foreign investor sentiment, the core
of the problem lies much more in fundamental noneconomic factors.

Again, security and political stability remain the primary
factors in determining investors' decisions as to where to put
their money, and this is especially true for foreign investors.

Another problem that may inhibit the inflow of long-term
capital in the near future is the fact that the government and
the House of Representatives still fail to agree on the
investment bill, a necessary legal basis for investors in doing
business in Indonesia.

Finally, other problems such as the tax and labor policies
will also further discourage domestic investment. Those combined
factors will result in further relocation of investment to other
countries.

Nevertheless, the government still faces serious challenges in
the aftermath of the Bali explosion. Not only is our nation's
credibility to fix the investment climate at stake, but the
bigger challenge ahead of us is how to restore international
confidence.

Within an instant, the Bali incident wiped out the momentum of
economic recovery that had been building up throughout the year,
as macroeconomic conditions of declining inflation, a more stable
exchange rate and lower interest rates paired with political
stability had been strengthening.

Therefore, the government needs to exercise extra caution with
its response to this tragedy, as failure to tackle the issue of
terrorism would set a precedent that could drive investors
further away from Indonesia. Unless serious efforts are made to
resolve the issues contributing to the long-term risk premium,
such as security, institutional problems and legal certainty, the
risk premium will not fall soon and big investments, either
foreign or domestic, are unlikely to take place in the near
future.