Bill Guerin, Jakarta – "Oh my, we were just starting to recover and we have been thrown on the floor again," Indonesian President Megawati Sukarnoputri was quoted as saying over the weekend in response to the bombing last week outside the Australian Embassy.
Thursday's blast, which killed nine and injured at least 180 in Jakarta's "Golden Triangle" business and financial district, is a major blow to a president who has only days left to sell herself to Indonesians as having brought stability back to the nation since taking over in July 2001. The explosion shows the threat to security and stability persists.
"But thank god, the trust of the economic community has not been eroded," Megawati said on Sunday. Despite widespread pessimism about the economy following the 1997-98 financial crisis, Megawati's administration has put the economy on a modest growth path of 3-4% a year, despite of a string of geopolitical terror shocks (the September 11, 2001, attacks in the US, the October 2002 Bali blasts, the JW Marriott Hotel blast in Jakarta last August, and now the latest tragedy).
On the face of it, she could be right. Despite last week's bombing, and amid fears that more will come, Indonesian stocks quickly rallied. Both capital and currency markets bounced back to regain some ground. The Jakarta Stock Exchange's main index rose 1.9% to hit a new four-month high of 797.775 points at close on Friday. The rupiah dipped against the dollar but closed relatively strong at 9,283.
Similarly, after last year's Marriott bombing that killed 12 people, stocks rose 10% in less than a month. Dealers said on Friday that the risk of Islamic terrorist attacks had already been factored in, and the bomb had not scared the markets, mainly because of a bargain-hunting drive and a resilience toward shocks.
This business-as-usual response to the attack shows the extent to which Indonesian shares are back in favor with international investors and also suggests that portfolio investors understand they will have simply to live with new risks.
Yet, Southeast Asia's biggest economy, forced to rely largely on domestic consumption and exports in the last three years, is under siege again. Economic growth, driven by domestic spending, was only 4.1% in 2003, though this was the highest since the financial meltdown in the late 1990s. In the first half of this year, the economy grew 4.66% from the same period last year but slowed in the second quarter to 4.3% year-on-year, as private consumption slowed.
The government predicts growth to accelerate next year to 5.4% and a statement issued on Friday by Coordinating Minister for Economic Affairs Dorodjatun Kuntjoro-Jakti said it is critical to maintain the momentum of economic recovery. To maximize economic recovery and sustain growth, solidarity between government and business is a must, Kuntjoro-Jakti added.
The new government will need to work very hard to seek this solidarity from a business community that has consistently complained of the ultra-slow pace of getting things done due to bureaucratic sloth, inconsistency in deregulation packages, inaccuracy stemming from a widespread lack of computerization and, of course, corruption, as manifested by substantial "under the table" added costs.
Businessmen are frightened off by labor disputes that can result in the closure of a plant and the ease with which they can lose court actions. The expected higher insurance premiums ahead will put yet another burden on businesses.
Analysts, though, say the blast won't drive existing foreign investors out of the country since most of them have come to expect violence after a string of bombings across the country in recent years. "I think foreign investors understand the security risk in Indonesia," Bob Broadfoot, managing director of Political Economic Risk Consultancy in Hong Kong, was quoted as saying.
Attracting new foreign direct investment to lift the economy in order to significantly reduce the country's high unemployment rate is, however, another matter altogether. Such investment was already at depressingly low levels before the explosion – only US$3 billion in the first half of 2004, a third lower than the same period last year.
Foreign investors, as predicted, stayed on the sidelines for most of this election year, nervous about political uncertainties. Megawati is locked in a fight for the presidency with Susilo Bambang Yudhoyono, the outcome of which will be determined on September 20. Yudhoyono, Megawati's security minister until he resigned in March, gets points for leading the anti-terror fight after the Bali blasts, but the president scores on experience and the incumbency factor.
Both would do well to heed a World Bank warning that investment will remain in the doldrums unless clear signs are given that various issues detrimental to the business climate are being addressed. Andrew Steer, World Bank country director in Indonesia, said in a recent seminar on growth and investment that investors have already realized that the complexity of the problems in Indonesia is too deep to be resolved overnight, but what they wanted to see were signs of a clear path toward improvement. "Investors don't yet have confidence that this country is moving clearly in a certain direction," Steer said.
The unfavorable investment atmosphere in Indonesia, due in large part to its weak legal system and corruption, has made the country less competitive in terms of investment when compared with other countries. Yet, former regional chief of the International Monetary Fund (IMF), Hubert Neiss, argues: "Corruption is not an absolute obstacle to investment, as long as there are clear signs that something will be done to fix it."
The blast will have badly spooked foreign investors, who could bring badly needed management skills to protect their investments, as has happened in the banking sector, and whose money could kick-start moribund industries and revive the industrial sector.
Tourism is also likely to be hit bad. The Indonesian Tour and Travel Association (ARSITA) said on Saturday that the tourism industry would need at least six months to recover. The Australian media have already predicted that Bali, just beginning to get back to normal after the 2002 blast in which 202 people were killed, would be struck off holiday-makers' lists. Tourism, along with export textile products, is one of the nation's main sources of revenue from the non-oil and gas sector.
Kuntjoro-Jakti called it all a temporary disturbance. "Growth will recover as we have seen from the previous bombings," he said, adding, "I am not saying it will be business as usual, but we have the record and procedures to handle this. Let's hope we can use that momentum to recover again."
He also reminded his fellow cabinet colleagues that the ability of the government and law enforcement apparatus to move swiftly and decisively in bringing perpetrators to justice will hopefully accelerate the recovery of business and improve the market's confidence in the economy.
Yet, the latest blast points to fundamental weaknesses in intelligence in the national security system and a tendency among the authorities to play down the terrorist threat. Less than 24 hours before the blasts, Hari Sabarno, interim coordinating minister for security and minister for home affairs, said a US advisory issued on September 7, warning that extremist groups might be planning attacks against American and other Western interests in Indonesia was "exaggerated".
On the positive side, the blast has had little effect on the sentiments of the five short-listed bidders for a 51% stake in the lucrative Bank Permata. Government plans to delay selling assets in state-owned companies because of the blast – a move which could lead to a larger 2004 budget deficit – appear to have changed. Sales likely to be affected by any delay include Bank Negara Indonesia (BNI) in October and airline PT Merpati Nusantara in November.
"We may delay the plan if the market is unfavorable after the bombing," State Enterprise Minister Laksamana Sukardi said on Thursday. But Mohammad Syahrial, chairman of the government's Asset Management Company (PPA), told the press a day after the blast that bidders had already asked the government to increase the sell-off to 71% of its shares. A 30% stake in Bank Negara Indonesia will also be up for grabs later in the year.
The government has also announced it will go ahead with its forthcoming series of bond issues, one for Rp2 trillion ($215.05 million) and another for Rp3 trillion, on September 28. The hope is that police can swiftly solve the embassy blast, as they did in the case of the Bali bombing, giving the new government that takes over in October the breathing space to strive to improve the investment climate.