Jakarta blast crushes all hopes of a timeous end to Indonesia's investment drought
September 12, 2004
With Indonesia's presidential election in its final lap, an end to the country's investment drought was finally in sight. And then, crushing all hopes, a car bomb went off in Jakarta on Thursday.
The blast killed nine people and injured 182 outside the Australian embassy and is suspected by the police to have been the handiwork of a terrorist group.
For Indonesia's $208 billion (R1.38 trillion) economy, which grew 4.3 percent in the second quarter - the slowest among 12 major Asian nations - the timing could not have been worse.
The election process, which has put investors in a wait-and-watch mode, is in its sixth month.
A recovery in investments could have begun with a new government and its commitment to improve the investment climate.
In the first half of the year, local investors obtained approval for projects worth 16 trillion rupiah (R11.5 billion). That's a third lower than the approvals in just the first month of 1997, the last year of General Suharto's three decades of dictatorship.
Foreigners too are staying out before the September 20 run-off election between former security minister Susilo Bambang Yudhoyono and incumbent President Megawati Soekarnoputri.
First-half foreign direct investment projects totalled $3 billion, a third lower than last year.
There is concern that economic uncertainty may not go away if Yudhoyono wins. It isn't that his credentials are in doubt. The career soldier may have more success in dealing with terror and corruption and in revamping the legal system, where Megawati's track record has been patchy.
Still, to get anything done, Yudhoyono, who polled more votes than Megawati in the first round, will have to build a coalition in the newly elected legislature, where his Democratic Party has 56 members, as opposed to 109 from Megawati's Indonesian Democratic Party of Struggle, and 127 from the Golkar Party, which has endorsed Megawati for president.
Under constitutional changes, presidential powers will be shared with parliament. Bills, once approved, will be passed into law within 30 days, with or without the president's endorsement.
The bombing occurred amid a slide in investor confidence. But co-ordinating minister for economic affairs Dorodjatun Kuntjoro-Jakti said: "Growth will recover as we have seen from the previous bombings." Right now, it's hard to share his optimism.
After all, the recovery from the Bali bomb attack of 2002 was not automatic - monetary policy played a role. Bank Indonesia cut its overnight intervention rate by a half a percentage point.
After the Mariott hotel in Jakarta was bombed last August, the rate was again cut by half a percentage point. After four reductions this year, it is at 7 percent.
Can it be pared again to help the economy cope? Probably not.
It may not even be possible for Bank Indonesia to keep rates from rising this year. The clue lies in the rupiah's 9.5 percent decline against the dollar so far this year.
In April, the last time the bank cut the rate, the rupiah was almost 8 percent stronger than now.
As the rupiah depreciates, prices of imports rise, as does the cost of servicing overseas debt, which makes up three-fifths of Indonesia's gross domestic product.
The central bank's view is that the rupiah may strengthen after the elections. But that may not happen after the latest attack.
"I expect the bombing to affect investors' confidence," said APS Asset Management's Ho Kok Hua.
Consumer spending by its 235 million people is the only engine supporting the economy. That also faces a risk from inflation, which slowed for the first month in six in August, and may speed up again from 6.7 percent if the currency does not stabilise.
"We do not rule out the possibility to increase interest rates," the bank said this week.
It is almost certain southeast Asia's biggest economy will end 2004 as the laggard. But will it fare better in 2005? The answer was a tentative yes, before the bombing showed how difficult it may be to regain investor trust. - Bloomberg
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