The market jitters

Most analysts agree that last weekend's riots have not adversely affected the confidence of businessmen on the prospects of Indonesia's economy, especially now that order has been restored and life has almost returned to normal in the bustling city of around 10 million.

Nonetheless last week's incident has made people nervous, especially the foreign portfolio investors and foreign exchange traders. This is normal because they are the ones who can react immediately by unloading their stocks or by closing their rupiah positions in favor of the American dollar or other major foreign currencies. This once again shows the disadvantage of short-term capital flows. They can help beef up the capital account but they can also fly away simply because of rumors. This is why the monetary authority is uncomfortable with too much short-term funding, no matter how badly it is needed given the large current account deficit.

Unlike portfolio investors, foreign direct investors are not highly susceptible to one-off incidents or rumors because they look more at long-term trends. A greater worry for them is inconsistency in policy. It is therefore most imperative that the government should never show an inclination to reverse even a few of the economic reforms that it has introduced.

We are encouraged, however, to observe that the speculative attacks on the rupiah early this week were not as strong as those in early 1995, during the Mexican financial crisis. To our knowledge, the dollar rush early this week has not forced the central bank to intervene heavily in the market. The central bank's move in mid-June to widen the dollar-rupiah trading band seems to have succeeded in quelling a big wave of currency speculation.

We fully agree that the nervousness among businessmen which was caused by the riots will be temporary because the fundamentals of the economy are sound and almost all economic factors remain strong. However, if the rumors continue, even the general public will get edgy, but not as edgy as the foreign investors who are staking their money in the country primarily because of its stability. In an atmosphere where freewheeling public discussion is restricted and the mass media is heavily guided by the government, rumors can still have an impact however insensible they may be.

It will therefore take a few weeks of steady calmness and order, bereft of rumor, to overcome this temporary anxiety. Scenes of street demonstrations, although peaceful, are always unnerving partly because such dramatic events attract mass media attention and are "exotic" food for the TV broadcasting services, notably the foreign ones. Hence, the firmness with which the security officials have acted to restore law and order is highly understandable.

Hopefully, the costs exacted by last week's riots -- either in human life, burnt office buildings, motor vehicles and other fixed assets or lost sales and business opportunities because of offices and shops being temporarily closed -- will improve our appreciation of the great importance of stability which we have enjoyed over the past three decades.