S'pore 'vulnerable' to Indonesian unrest

S'pore 'vulnerable' to Indonesian unrest

SINGAPORE (Dow Jones): A repeat of Indonesia's May 1998 social
and political upheaval could deliver a significant blow to
Singapore's economy, according to a new study examining the
relationship between the two countries.

Such a flare-up in Indonesia, which saw widespread rioting and
atrocities committed against the wealthy Chinese minority, could
cause a sharp drop in the Singapore dollar, local stocks,
exports, bank loans and property prices, while jacking up
interest rates, DBS Bank economists Friedrich Wu and Lee Wee Liat
wrote in a paper published in the Journal of Asian Business.

While financial markets cheered the election of President
Abdurrahman Wahid and Vice President Megawati Sukarnoputri in
October 1999, the political situation in Indonesia has become
much more tenuous in recent months.

The Indonesian government faces a "myriad of formidable
challenges, including a bankrupt economy, rampant corruption,
socio-religious conflicts, regional separatist movements,
widespread poverty and unemployment, as well as a discredited but
still influential military," according to the report.

Failure of the government to swiftly remedy the problems
"would sow the seeds for further violence and social
fragmentation" that would spill over to Singapore economy, the
report continued.

Given Singapore's open economy and close proximity to
Indonesia, the city-state to a large certain extent is at the
mercy of developments in the neighboring country, according to
the report.

Using econometric models, Wu and Lee attempted to quantify the
negative contagion effects on Singapore stemming from the
heightened political tension in Indonesia. The study found a high
correlation between a number of economic variables between the
two countries.

With zero indicating no relationship between the variables and
1 indicating a perfect relationship, Wu and Lee found that there
was a 0.85 correlation between movements in the Singapore dollar
and Indonesian rupiah.

The correlation between the Straits Times Index and the
Jakarta Composite Index was estimated at 0.82, while the
correlation between interest rate movements in the two countries
was placed at 0.61.

The Singapore dollar would be the first to bear the brunt of
Indonesian turmoil amid a capital withdrawal from Southeast Asia,
the report said.

The direct impact would be a 5.4 percent drop in the value of
the Singapore dollar, according to the model. The Straits Times
Index would plunge 18.4 percent, while the three-month interbank
rate would shoot up by 323 percent.

The indirect impact would include declines of 17.0 percent in
property prices, 6.2 percent in exports, 4.8 percent in bank
loans, 4.5 percent in private consumption and 0.7 percent in the
inflation rate.

While much of what happens in Indonesia is beyond the control
of authorities in Singapore, steps should be taken to minimize
the impact of the Indonesian contagion, Wu and Lee wrote.

"In view of the potential adverse direct and indirect impacts
from its close neighbor, Singapore would need to manage bilateral
relations with Indonesia carefully and creatively.

"It is also imperative for the Singapore government to devise
policies and contingency plans to soften the impact of such
external political shocks from Indonesia on the Singapore economy
and financial markets."