Region shares Indonesia's worries

Region shares Indonesia's worries

Lim Say Boon, Director OCBC Investment Research Pte Limited,
The Straits Times, Asia News Network, Singapore

Jakarta's actions to date against suspected terrorists are
unlikely to restore international investor confidence.

Sadly, the theater of the absurd surrounding the detention of
Abu Bakar Ba'asyir -- the suspected spiritual leader of Jamaah
Islamiyah -- has only reinforced the perception of Jakarta's
political weakness.

The delays in bringing Ba'asyir in for questioning on grounds of
ill-health; the standoff outside the hospital; the deferential
attitude of the police; the radical cleric's dictation of terms
to the police on how he is to be questioned -- this is not the
stuff that will inspire confidence.

Jakarta's criticism of Australia for its moves against
suspected terrorists within its own territory adds nothing
either.

Indeed, the actions needed of Jakarta to restore confidence
extend beyond cracking down on terrorist suspects; they go to the
heart of law and order in Indonesia.

And whatever the more polite of international observers say,
the damage done by the Bali bombings is likely to have been
serious and regional in scope.

Recently, IMF chief economist Ken Rogoff said one should be
careful not to over-dramatize the economic impact of the Bali
bombings. He may have been trying to play the gracious guest to
the region -- that is, he may have wanted to avoid doing more
damage to Southeast Asia by further alarming foreign investors.

But for those who live in the region, I regret the damage has
been done -- the dangers that numerous analysts and leaders have
been warning about have become tragically clear and present.

Some economists may view the Bali bombings as having imposed
the equivalent of a terrorist-risk tax on the region; slowing
growth by the amount that taxes do.

That is, it increases the costs of doing business in the
region -- raising the cost of building insurance, shipping
insurance, transport, specific security and general defense
spending.

And presumably, you could factor all these increased costs
into a model and churn out a result that says the impact would be
the loss of, oh, some portion of one percentage growth in gross
domestic product.

But that perspective would be too narrow -- one based on the
assumption of ceteris paribus, or all other things being equal.
But all other things are not equal now. The bombings have thrown
everything else off their trajectories.

The recent underperformance of the Southeast Asian markets
vis-a-vis the S&P 500 and even North Asia is no coincidence --
investors are telling you what they think.

From its Oct. 9 low, the Standard & Poor ratings 500 had
rallied, at the time of writing, some 14 percent. The Jakarta
Composite index is still in negative territory from Oct. 10, as
is the Philippines Composite Index. Malaysia, which had taken
tougher and earlier action against terrorist suspects, fared
better with its index up 3.5 percent; and Singapore did a bit
better still with a gain of 6.3 percent. Thailand saw a gain of
7.4 percent on its stock exchange.

The S&P/IFC Asia index, buoyed by the North Asian markets, did
better with a gain of nearly 13 percent. Korea's Kospi was up 11
percent, and Taiwan was up some 17 percent.

The loss of confidence is not just about the Bali bombings per
se. More damage was incurred through the equivalent of an "after
shock" -- through confirmation of how politically fragile
Indonesia had become.

Analysts and regional leaders had warned the Indonesian
authorities for months that lack of action against suspected
terrorists within Indonesia could result in just such a disaster.
But what the rest of the world got was denial -- sometimes angry,
indignant -- and inaction. And, subsequently, death and
destruction.

The butchers of Bali would most likely have also calculated
this follow-on damage through the confirmation of the political
weakness of Megawati Soekarnoputri's administration -- and may
have wanted to simultaneously embolden other radicals and force
the President into action against Islamic radicals.

In short, they want to trigger a confrontation. So
confrontation becomes inevitable, whether Megawati has a stomach
for it or not.

Now, they have presented her an economic challenge as well.
This is a region that has yet to get itself firmly on its feet
from the shocks of the late 1990s Asian crisis.

Indonesia, Malaysia and the Philippines are still struggling
to bring back foreign investment. Indeed, data for foreign
investment applications approved in Indonesia shows a massive
slump from nearly US$30 billion in 1996 to only $9 billion last
year.

And this was before Bali.

Then, it was more about the inability to obtain judgments from
the Indonesian judiciary that made any sense to international
investors than about the lack of transparency, the weak
institutions of law and order, and the government's apparent
inability to ensure investors' property rights.

It was about the Dharmala Manulife saga, which required
Canadian government intervention before investors saw anything
resembling an internationally acceptable legal decision.

It was about the circus surrounding the Tommy Soeharto trial.
It was about the failed Chinese tycoons running rings around the
government on debt repayment.

But underlying all that was the same political impasse facing
all post-Soeharto governments -- the electoral-college system,
the splintering of the parliamentary forces, the endless
political horse-trading, and ultimately administrative and
political paralysis.

Yes, Indonesia is looking at 3 percent to 4 percent gross
domestic product growth per year but it needs 6 percent to absorb
the 2.5 million job seekers entering the work force each year.

So the ranks of the unemployed and underemployed, which may be
anything up to a third of the work force, will continue to swell.
And it wouldn't take much for a terrorist to figure out that by
further undermining confidence, you accelerate the growth of the
army of unemployed.

And you thereby increase the pool of the discontented from
which you can recruit. And all that against the background of
China's massive supply of cheap labor and exports -- sucking up
foreign direct investments destined for emerging markets.

The prospects are worrying for Indonesia. And to the extent
that Indonesia's problems are the region's problems -- witness
the haze -- it is immensely worrying for the region as well.