Jakarta Blast May Deter New Investors

Jakarta's Marriott Hotel, which was the target of a car bomb attack on Tuesday, had been busy recently as investment bankers flocked to Indonesia to arrange deals on the back of an economic recovery.

The blast, which killed at least 14 people and injured nearly 150, now looks set to cut short the recent rise in foreign direct investment as worries increase about security risks in the south-east Asian nation.

But economists believe the attack will have less of an impact on financial markets and the country's economic growth as long as the hotel bombing remains an isolated incident and not the start of a sustained terrorist campaign - a big "if" in the view of some terrorism experts.

The Jakarta bombing occurred as Indonesia was making progress in attracting new investment after the 1997 financial crisis sparked several years of political turmoil.

FDI in the first half of 2003 rose to nearly $4.4bn (€3.8bn, £2.7bn) from $3bn a year ago, although the amount pales in comparison with more than $30bn in investments that flowed to Indonesia annually in the mid-1990s.

A bombing in Bali last October, which killed 202 people, barely affected the sale of state-owned assets to foreign investors by the Indonesian government.

But the latest attack in the heart of the Indonesian capital "will further deter new investors who have been avoiding the country, while it may slow FDI by those already here", said Anton Gunawan, chief economist for Citibank Indonesia in Jakarta. Much will depend on the reaction of Singapore, which has been one of the biggest investors in Indonesia in the past year, with the city-state's state-owned companies investing more than $2bn.

Singapore Telecommunications bought 35 per cent of Telkomsel, Indonesia's biggest mobile operator, for $1bn, while ST Telemedia acquired 42 per cent of Indosat, Telkomsel's main rival, for $650m.

Temasek, the Singapore state holding company, paid nearly $400m for 52 per cent of Danamon, a leading Indonesian bank.

Indonesia is seen as a key market as Singapore's companies expand abroad, while the government believes the investments will help promote political stability in the city-state's huge neighbour.

Continued economic growth might encourage foreign investors to return to Indonesia, with most forecasts estimating that the economy will expand by 3.5-4 per cent this year.

One advantage that Indonesia has is that its resource-based economy is not closely tied to the US economy, unlike other countries in the region. Increased political stability after Megawati Sukarnoputri came to power as president in 2001 has also triggered rising consumer spending.

The improved economic performance has led the government to announce recently that it would end its lending programme with the International Monetary Fund at the end of this year.

Government reforms have built defences against the flight of short-term capital that helped plunge the country into a financial crisis in 1997. Foreign exchange reserves have risen to $33.7bn, while the current account is in surplus.

"There is still a lot of foreign demand out there for Indonesian equities and bonds as long as the macro-economic situation looks healthy," said Paul Schymyck, an economist with consultancy IDEAglobal in Singapore.

Institutional investors in Indonesia have already taken political and security risks into account, following several years of unrest in the provinces and the Bali bombing.

A recent $320m initial public offering by Bank Mandiri, the country's largest bank, drew a strong response, while several companies have succeeded in issuing foreign bonds.

Analysts said the Jakarta stock exchange could remain the region's best-performing bourse this year after the main share index rose 1.2 per cent on Wednesday after falling 3 per cent on Tuesday after the bombing.

The currency, the rupiah, also recovered against the US dollar.