Markets show muted response to Indonesia bombings

Indonesian markets were shaken by the almost simultaneous bomb blasts on Friday morning at the JW Marriott and Ritz-Carlton hotels in central Jakarta, which killed eight people and injured at least 61 others. The bombings ended a period of nearly four years without a major terrorist attack in the country, but during that time tourists and foreign businessmen had become accustomed to having their cars inspected at roadblocks and their bodies and belongings scanned before entering the luxury hotels in the southern district of the capital.

Those measures now seem to have provided only a false sense of security for foreign investors and dealmakers who routinely stay at and arrange meetings at these hotels. However, the initial negative reaction in the markets proved to be short-lived.

Indonesia's economy has benefited in recent years from a more stable political scene and the success of government efforts to tackle both corruption and terrorism. On the other hand, a series of fatal shootings near a large gold and copper mine in Papua, and more prosaically, the introduction of a new mining law this year which might force international operators to divest their holdings, have unsettled the business environment.

But in a note released on Friday shortly after the bomb blasts, Johanna Chua, Citi's head of Asia economic research, argued that although a disruption to the "political calm" had unsettled asset prices and the currency markets, the overall impact on both the markets and the economy is likely to be short-lived.

Hong Kong-based Chua's sanguine reaction was echoed by other analysts from domestic and international banks, who were quoted in the Jakarta press over the weekend.

At one point on Friday, the Jakarta Composite Index of leading Indonesian shares fell more than 2.5% and the rupiah was about 1% weaker. Indonesia credit default swaps also widened 25 basis points and yields on government bonds initially sold off 20bp. By the end of the day though, the stockmarket had recovered most of its losses, the currency was just 0.4% weaker, and both credit spreads and government bonds had retraced back to their Thursday closing levels.

And on the same day, Indonesia went ahead with the sale of ¥35 billion ($374 million) of 10-year samurai bonds, which was the first offering by a sovereign borrower in the samurai market since September 2008. It was also the first Asian sovereign to borrow in Japan since May last year when Thailand, according to Dealogic, issued $524 million worth of samurai bonds.

Indonesia last suffered a high-profile terrorist attack in October 2005 when the second Bali bombing occurred, and there have been six major incidents since October 2002. Chua pointed out that the markets' immediate reaction this time was less severe than after the first Bali bombing in October 2002 and after the explosion at the Marriott hotel in 2003. And looking back at those earlier attacks, the rupiah retraced its losses in little over a month in the first instance, and in just a few days in the second.

That said, the danger is that Friday's bombings mark the beginning of a new terrorist campaign by the al Qaeda-linked Jemaah Islamiyah, a group held responsible for the bombings earlier in the decade and which is widely suspected of being behind the latest explosions. In the wake of the second Bali bombing in October 2005, the number of tourists arriving on the holiday island halved. The pace of economic growth also declined in the quarters following the bombings in 2002 and 2003. But, consumer spending, which makes up nearly two-thirds of the country's GDP, remained resilient following those previous incidents.

President Susilo Bambang Yudhoyono told a news conference on Friday that the "bombings were perpetrated by terrorist groups", but that he could not say whether these groups are the same as those behind previous attacks. More worrying, perhaps, in the wake of his re-election to the presidency on July 8 and in the context of the country's brief democracy, Yudhoyono said the attacks may have been linked to the electoral campaign, during which threats were made against him.

But Citi remains "constructive" about the country's fundamentals, including a benign near-term outlook on inflation, and sees any sharp fall in asset or credit prices as an opportunity for investors. Indonesia's central bank had foreign exchange reserves of $57.6 billion at the end of June, the highest for almost a year, so the currency can expect some support.

On the real economy, Chua said that, "while tourism and general retail and travel-related activities could be affected...we expect the impact to be temporary". She added that the terrorism threat, which is "nothing new" in Indonesia, is "unlikely to dampen overall foreign investment", recently encouraged by the results of the elections.

In the first quarter of this year, Indonesia's economy -- the biggest in Southeast Asia -- grew by 4.4% compared with the same quarter in 2008, while its more export-dependent regional neighbours suffered sharp contractions in GDP. Analysts expect the economy to grow at the same rate for the rest of the year, and possibly higher if President Yudhoyono moves ahead quickly with his plan to improve the country's infrastructure. Meanwhile, inflation should be subdued at around 4.5%.