Bill Guerin, Jakarta – Indonesia is bracing itself for more hardship following Tuesday's Jakarta hotel bomb attack. As well as the death toll of at least 14 Indonesians and one foreigner, there may be serious consequences for an economy that had been on the mend.

The second major terrorist strike in the space of 12 months is a serious blow to President Megawati Sukarnoputri's administration after it appeared that she was slowly but surely gaining control of the country and reviving the economy.

Analysts have warned that the fate of the economy now depends greatly on the government's will to crack down even more on terrorism. This will affect the perception of risk and without it the confidence of investors in an economy, which had just started to recover from the Bali attacks, will remain shattered. And, as in Bali, the bombing will hit Indonesians much harder than foreigners despite the fact that foreigners were the focus of the attack.

There had been a growing sense of optimism over the past 12 months. Some of the militant groups seemed to be on the run and the Bali trials were up and running. Amrozi, the "smiling bomber" has just been sentenced to death for his part in Indonesia's last major terrorist strike, the October 12, 2002, bombing of two crowded Bali nightspots, which killed 202 people.

The severe acute respiratory syndrome (SARS) pandemic and the Iraq war came and went, leaving Indonesia relatively unscathed. As the world economy, slowed Indonesia's own year-on-year growth of 3.4 percent in the first quarter of this year encouraged the government to restart large infrastructure projects that had been mothballed.

The rupiah had been slowly appreciating during the past year or so. Following several months of stability near Rp 10,500 per US dollar around the end of 2001, it appreciated quite steadily, interrupted only by the Bali bombings last October, to approach Rp8,000 per US dollar by late May.

Tuesday's carnage is a major setback and certain to put the issue of law and order back into the news again. The ease with which the attack on the JW Marriott Hotel occurred despite supposedly heightened security in the capital may result in Jakarta being a "no go" area for many Westerners, at least in the short term. There are concerns about confidence in the ailing economy as nervous investors might shelve investment plans and the local corporate sector could find problems in raising cash overseas.

Tourism is the cause for most concern as tourism receipts are certain to plunge. While Jakarta has never been a must-see destination, the combination of the current bomb blast with the Bali blast a year ago is certain to reinforce tourist perceptions that Indonesia is a dangerous destination. Tourism is Indonesia's biggest hard-income earner, sustaining some 8 million people. In 2002, tourism brought in $4.3 billion in foreign exchange, 20 percent less than the preceding year. If tourism is badly hit the malaise will spread to other related sectors and affect the jobless total. An estimated 40 million are still unemployed.

Offices, other hotels, especially international hotels and offices, now have virtual rings of security around them. Australian resource companies surveyed at the Kalgoorlie Diggers and Dealers conference held in the Western Australian gold mining town of Kalgoorlie Wednesday said that they see no need to beef up security at their Indonesian operations but they would stop all non-essential travel through Jakarta.

The macroeconomic consequences of Tuesday's blast are predicted to be substantial though the short-term response from the financial markets appears to be one of "wait and see". Dradjad Wibowo, an economist with the Institute for the Development of Economics and Finance (Indef), warned that the central bank should closely guard the movement of the rupiah to avoid further panic selling or speculation.

Containing the rupiah within a relatively stable band, he said, would also serve as a benchmark for the country's macroeconomic indicators.

Stocks and currency rose Wednesday as investors saw buying opportunities. Some fund managers were even discounting the latest terror threat, mindful of the fact that immediately after the Bali bombing, Indonesian blue chips were a great buy.

The Jakarta Composite Index rose 1.2 percent after falling to an 11-week low Tuesday after the blast. It had risen more than 47 percent since the Bali bombing and soared 21 percent this year alone, making it Asia's fourth-best-performing stock-market index in dollar terms.

Dealers warn that although shares ended higher Wednesday as bargain hunters, mostly locals, bought blue chips that were hit badly Tuesday, overall sentiment remains wary. Many investors are watching for what the government might do to uncover those behind the bombing.

This is the same point made by local analysts. Pande Raja Silalahi, a leading economist the Center for Strategic and International Studies (CSIS), believes the crucial task now is for the government to show that it is in earnest in fighting terrorism and not merely talking about it.

Following the Bali carnage last year, Jakarta delivered up Rp10 trillion ($1.22 billion) in a stimulus package designed to cushion the economic impact. Minister of Finance Boediono said on Wednesday that the government would introduce a similar stimulus package to help revive investments after the latest terror attack, which the International Monetary Fund (IMF) said was a "terrible tragedy" to the economy, The agency has full confidence in the government's ability to restore economic stability, according to Daniel Citrin, a senior IMF advisor. "I'm sure the government will do whatever it needs to do to stabilize the situation, and to maintain its economic program on course," Citrin said in Jakarta.

Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti, who said he was confident that economic recovery would remain on track, struck a similar note of optimism. "The recovery after the Bali bomb was faster than expected, showing our economy's resilience," he said.

Long-term damage to the economy was discounted by Singapore's Trade and Industry Minister George Yeo. Urging Singaporeans to continue investing in Indonesia, he said the latest terror attack would dampen business confidence in Singapore and Asia in the short-term, but it should not affect longer-term economic recovery.

The fallout from the bombing will have an impact on trade, though not all of it negative. A sustained depreciation of the rupiah would increase the cost of imports but would drive up the cost of debt denominated in foreign currencies. Conversely, exports would be boosted as they become more competitive.

The general consensus is that it's all down to the government now. Actions taken in the next few weeks will determine whether or not any remaining confidence foreign investors still had in the country will return.