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Will the economy be jolted by bomb blast?

Gloomy picture of national security

Only about a year after the JW Marriot Hotel bombing, which left 12 people dead and 180 others inured, Jakarta was rocked again with another bomb blast in front of the Australian embassy at Jalan Kuningan, only around 3 kilometers away from Marriot Hotel. The new terror bomb attack on Thursday, Sept. 9, killed at least 9 people and injured around 160 others. A number of high rise buildings were left in a mass with most of their windows and doors smashed, broken glasses scattering on their floor. Earlier in October, 2002, a more disastrous attack hit Bali, considered the country's most peaceful and secure place in the wake of the 1997 crisis. More than 200 people mostly foreign tourists were killed and hundreds of other were injured. There were also a series of minor bomb attacks in various areas including Jakarta showing that security still is an un unsettled problem in the country.

Bomb scares and threats continue to haunt people in Indonesian especially in Jakarta. The people feel unsafe to visit public places. There are always fears that at any place bomb may have been planted and will explode any time. There are no places entirely safe in the country.

Security concerns not only human safety but it is also vital in the efforts to accelerate economic recovery. We have been lagging behind in mending our ailing economy compared with other countries in this region, which were also hit by the regional crisis in 1997.

Impact on share and money markets

The business sector in the country has been getting used to bomb attacks, but the psychological effects remain damaging as reflected in a sharp fall in the share prices and rupiah value on the day the bomb blast occurred.

The tremors caused by bomb explosion were felt strong in the Jakarta Stock Exchange building causing panic selling resulting in share price fall. The composite price index (IHSG) of the JSX dropped 24 points. The first session ended with share closing 29 points lower. The panic that overcome investors was reflected by the value of the transaction that reached Rp 1,495 billion. The panic, however, was soon over. In the following day trade was normal again with the IHSG surged in closing session by 15.12 points to 797.77. Transaction involved 1,665 million shares with a turn over of Rp 1,011 million.

The share increase of IHSG this week was triggered by strong demand for blue chip stocks. The market condition was not significantly affected by the Australian embassy bombing. The market has been getting used to bomb explosions in Jakarta.

Moments after the bombing the rupiah value fell in inter-bank spot market to the level of 9,310 per U.S. dollar from 9,290. However, a dealer from a private banks in Jakarat said the rupiah was more sensitive to bomb explosion especially as many companies needed dollar to import basic materials. The condition was also influenced by the fall of yen against dollar following announcement of data that the Japanese economy grew only by 0.3% in in the second quarter of 2004 from 0.4% in the previous quarter. Yen dropped to the level of 109.97 per dollar from 109.56 before. The yen depreciation put pressure on other regional currencies such as Singaporean dollar, Taiwan dollar fell from 33.90 to 33.92, South Korean won from 1145.10 to 1146.10, and Philippine peso from 56.08 to 56.09.

Bomb explosion continue to terrorize Indonesia

Many people have fallen victims to terrorist bombs in the country indicating that security has not yet been well created in the country. Investors have been scared away the share prices fall because of unfavourable security in the country. Previous major bombings like the Marriot Hotel and Bali bombings served a major blow to the country's economy already depressed by the 1997 crisis.

A survey carried out by an economic observer from the University of Indonesia showed that bomb attacks in the past two years have resulted in a fall of the share prices including LQ45 and IHSG, but the decline was only temporary. The market recovered shortly. The IHSG and the 45 leading stocks rebounded in the following days. Smart investors could take short term advantage of the panic caused by the bombing. They buy share when the prices fall to be sold again when normal condition returns.

Impact of general economy

The tourism sector is one of the most sensitive to terrorist attacks. Travel warning always come to follow terrorist attacks. A number of countries wanr their citizens against travelling to Indonesia resulting in a sharp fall in the number of tourists. However, a deputy chairman of Indonesian tourism community (MPI), Meity Robot, said the impact of the recent bombing in front of the Australian embassy was not as bad as the Bali bombing two years ago. The impact could be more or less the same as the impact of the Marriot Hotel bombing a year ago.

The Bali bombing was the first attack with high explosive bomb and it hit the very hearth of the country tourism industry. The casualties were also much larger with more than 200 people mostly foreign visitors killed. The impact of the Australian embassy and Marriot Hotel bombings caused more damage politically and to the business in general. The impact on the tourism industry was not as damaging as the Bali bombing. However, for at least one week the hotels in Jakarta will suffer a decline in occupancy rate as a result of the bombing. Many foreign tourists are reported cancelled their plan to visit Jakarta In Bali hotels reported a sharp decline in occupancy rate to less than 30% immediately after the bomb blast in Legian. After two years the condition has not been fully restored in Bali. In Jakarta the hotel occupancy rate was almost stable at 50% on the average weeks after the Marriot Hotel bombing.

A question is will the bombing will cause a failure to reach the economic growth target of 5% in 2005? After the Marriot Hotel and the Bali bombing there was no sign of unusually big capital flight and the economy expanded by 4.3% in 2002 and 4.5% in 2003 as previously predicted. In 2004 the country's economy is predicted to grow by 4.8% despite the bombing of Marriot Hotel in August, 2003 and minor bomb attacks in various places in the country. Based on the past experience, barring unexpected and worse incident, such as the like of the May rioting in 1998, the country's economy could expand by 5.4% in 2005. Leading economist Marie Pangestu said the growth target of 4-5% could be reached assuming that security is under control. The 4.5% growth, however, will not be enough to reduce unemployment.

M Chatib Basri, another economic observer, said though in general the impact of the bombing is not so damaging, uncertainty as a result of the security problem will create an additional burden in the form of an increase in cost of transaction in economic activities. For example, there will be increase in the operating cost, shipping cost because of longer time needed in cargo inspection at port in the countries of destination, and there will be an increase in demand for basic materials to raise stock to be prepared for disturbance in supply as a result of possible security problem in the future.

Observers said the bombing will increase hesitation among investors but their hesitation will not go as far as causing capital flight. However, it will be more difficult to attract new investors especially as it is already difficult for the country to compete with other investment destination countries in this region such as Vietnam, Malaysia, Thailand and the Philippines. Indonesia is not competitive facing those countries. The government, therefore, needs to provide business stimulus to make up for the damage caused by the bombings. Stimulus should be intended mainly to increase capacity utilization of the production units amid the weak market demand. The stimulus therefore, should be able to increase demand on the domestic and international market.

Providing stimulus to boost economic growth driven by exports is not easy because of the security problem. Buyers abroad do not want to deal with countries that could not guarantee meeting delivery time because of security problem. The business risk in the country is higher as a result of the bomb attacks. One possible way the government could do to accelerate economic growth is by removing various restrictive regulations hampering business expansion. Therefore, it is necessary to have structural reform in taxes and import duty, labor regulation, government administration and legal system.
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Title Annotation:Focus
Publication:Indonesian Commercial Newsletter
Geographic Code:1USA
Date:Sep 14, 2004
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