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."