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Blasts set to shake Indonesia's economy

A new wave of bombings on Indonesia's Bail resort island will shake investor confidence at least temporarily, weakening the country's currency and stock market starting today, analysts said.

But the effect on other Asian markets was expected to be limited.

The blasts could hurt Indonesia's tourist industry -- an important foreign exchange source -- withdrawing a key prop for the currency.

Indonesia's investors were already on edge about possible public unrest due to the government's move on Saturday to more than double fuel prices.

"Markets are already nervous that the fuel price hike will trigger social unrest, and on top of that you have these bombs on Bali, which ... could create a lot of uncertainty," said Jakarta-based Standard Chartered economist Fauzi Ichsan.

Indonesia's economy is expected to grow at an average annual pace of 6.6 percent over the next five years, said Planning Minister Sri Mulyani Indrawati.

"We are still looking at average growth of 6.6 percent over the next five years, reaching 7.2 percent in 2009," Sri Mulyani said today at the World Islamic Economic Forum in Petaling Jaya, Malaysia.

Growth in Southeast Asia's largest economy slowed for the second straight quarter to 5.5 percent in the three months to June 30 as rising fuel prices and higher interest rates curbed consumer spending.

Saturday's bombing on the Indonesian resort island of Bali, which killed at least 25 people, and the growing threat of a bird flu epidemic may crimp growth further.

"In Bali, tourism is going to take another deep hit," said Bruce Gale, a political risk analyst at Hill & Associates Ltd. in Singapore. "The Indonesia economy will not be hit to the same extent as it was after the first Bali bombing. The first one was completely unexpected, and this one, although a bit of a surprise, was not totally unexpected."

Bali, a mountainous island east of Java known for its terraced rice paddies and temples, is one of the nation's biggest tourist attractions.

Standard and Poor's estimates that tourism accounts for about 5 percent of Indonesia's US$258 billion economy and employs 8 million people.

Indonesia's tourism industry was also hurt by Asia's 2003 outbreak of SARS and a recent bird outbreak of bird flu.

Still, analysts said the latest blasts' impact on tourism and markets could be temporary.

After the bombings three years ago, Indonesia's stock index fell about 20 percent in two weeks -- but regained its pre-bombing level within three months.

The US dollar jumped to 9,400 rupiah from about 9,000 after the 2002 attacks, but in three months it was lower than before the bombings.

However, the rupiah has only recently partly recovered from August, when soaring oil prices pushed the dollar to a more-than-four-year high of 11,800 rupiah.
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