Gary LaMoshi, Denpasar – If you worried about the economic impact of the bombing of the JW Marriott in Jakarta on August 5, you're behind the times. Enlightened investors saw the bomb as a buying opportunity and jumped into the local stock market. The Indonesian benchmark index plummeted 3.1 percent on the day of the tragedy, but it's rebounded nearly 5 percent since, and the rupiah's exchange rate has stabilized after a brief hiccup.
The Jakarta stock market index is up nearly 50 percent since October 12, when a more deadly bomb killed 202 people in Bali. Fund managers now point to that disaster as a market bottom, the right moment to leap in. These modern thinkers embrace the instruction of famed nineteenth century British financier Nathan Meyer Rothschild that "when there's blood on the streets" it's time to buy.
Rothschild converted the family's fortune to dynastic proportions by buying from panic sellers during the Napoleonic wars. However, in his greatest investing coup, Rothschild wasn't exactly following his own advice. He learned ahead of others, via carrier pigeon, that the Duke of Wellington had defeated Bonaparte at Waterloo. With all market watchers' eyes on him, Rothschild sold, sparking the panic. He then bought at depressed prices to make a killing.
Indonesia dreamin' Ethics aside, the main thing to remember is that Rothschild made his bets only after he knew the outcome. Those investing in Indonesia today can be similarly confident only in their dreams.
Of course, dreaming always plays a part when investing in emerging markets like Indonesia because the reality isn't terribly appealing (and therein lie the opportunities for those with vision and imagination). Aside from Indonesia's battered economy, corruption and security concerns, treatment of minority stockholders throughout Southeast Asia makes most share purchases an act of faith rather than a rational investment.
Equity markets can become exercises in the greater fool theory: buy, then find a bigger fool to sell to. There's also an element of self-fulfilling prophecy, as demonstrated in the US markets during their bull run – as long as investors remain confident and buy when prices fall, they'll spark recoveries that push prices to new peaks. Eventually, though, fundamentals catch up with dreams, and the last buyer gets buried in the crash.
Fund managers do hedge their optimism about Indonesia with the qualifier: as long as there's not another terrorist incident. The US and Australia, however, have not just issued the usual travel advisories after the August 5 bomb, they've given specific warnings about future attacks. Meanwhile, addressing Association of Southeast Asian Nations on its 36th anniversary last week, Indonesian President Megawati Sukarnoputri threw up her hands, saying terrorism was too big a problem for individual nations or even regional groupings to tackle on their own. All sides have covered themselves in advance for the next attack, but investors needn't worry. If the Bali bomb and Jakarta blast were buying opportunities, the next strike should be seen as a convenient restart for late arriving dreamers.
Low impact bomb
Lately dreaming appears to have expanded its realm beyond the usual fund manager suspects and replaced reality in Indonesia's general business and economic communities and the related government agencies. In these cases, you wonder who's fooling whom.
For example, experts in the public and private sectors dismiss the impact of the Jakarta bombing on the country's sputtering recovery. Any effects will be short-lived, they insist, and limited to specific sectors such as tourism. And even tourism officials discount the problem, saying that they registered a 10 percent cancellation rate for Jakarta hotels last week before new bookings resumed this week.
That means Jakarta, the hardly scenic capital best known for rising crime, traffic and pollution, expects visitors to return faster than they did in Bali, the world's favorite island according to Travel + Leisure magazine. Bali is still reeling 10 months after its terrorist attack despite a US$1 billion government stimulus package.
On Friday, President Megawati will announce her government's economic growth target of 5 percent for next year. That's a 25 percent boost over this year's target of 4 percent – there's no guarantee Indonesia will reach that target after 3.4 percent growth in the most recently reported quarter – and far short of the 6 or 7 percent needed to get a substantial portion of the estimated 40 unemployed back to work.
The increased growth in 2004, according to the government's plan, will be driven by greater domestic consumption, higher exports and increased investment. Dream on.
Forecast cloudy
It's hard to imagine how much more Indonesian consumers, with annual per capita incomes under $800, can lift the economy. Current growth has been the product of domestic consumption on the backs of Indonesians who have little choice but to buy food and other essentials at prices climbing two or three times the reported growth rate. Net capital outflows continue, meaning the smart money keeps heading for the exits, taking advantage of the rupiah's rise to get more for local earnings they move offshore.
Curiously, exports fell by nearly a quarter following the Bali bombing. They're rising from that bottom, but the stronger rupiah crimps their potential growth. Energy prices are likely to head lower, and no concrete programs have emerged from constant talk about aiding manufacturing or agricultural exporters. Whatever programs may emerge, they're unlikely to succeed without reforms that reduce the corruption plaguing productivity.
As for reforms, leaving the International Monetary Fund program at the end of this year will eliminate any meaningful pressure for reform, as well as push the government into the commercial market for loans of $2 billion or more in a national election year.
The IMF exit will also cast a shadow on investment, an apparent bright spot this year. Foreign investment approvals have risen by $1.5 billion compared to the first seven months of last year to $4.7 billion. That would seem like a success for what the President Megawati declared "Invest in Indonesia Year". The lack of any identifiable programs in connection with the declaration and a closer look at the numbers tell a different story.
The gains follow a 35 percent drop in 2002, the fifth straight annual decline in foreign investment figure. Moreover, according to Indonesia's Investment Coordinating Board, only 45 percent of the 2003 total qualifies as foreign direct investment that will add jobs or expand the economy; the rest were deals between overseas investors.
Worse, domestic investment continued to plunge, down another 23 percent compared to the first seven months of last year to $1.35 billion. That follows a 57 percent decline in 2002.
Indonesians probably have just as many dreams as anyone else. But they seem to be much more adept than foreigners at preventing those dreams from guiding their wallets. That seems like a bit traditional thinking that the moderns could profit from.