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Will Bali Terror Attacks Impact Indonesian Economy? - 2002-10-14

Indonesia's stock market index and currency plunged on Monday in the aftermath of the terrorist bomb attack at a popular tourist nightspot in Bali. Analysts say many investors worry that terrorism could undo the country's economic growth.

Indonesia's currency, the rupiah, was sharply weaker against the dollar in opening trade on Monday. The rupiah was down as much as three percent, touching a low of 9,300 to the dollar.

Dealers say the bomb blasts in Indonesia that left at least 190 people dead at a nightclub in Bali sparked heavy selling.

Indonesia's stock market was also hit hard, with the Jakarta Composite Index falling more than 10 percent late in the trading session.

Investors apparently fear Saturday's explosion will drive away foreign investors and cripple the country's tourism industry.

Dealers worried Monday that the rupiah's sharp fall may prompt the Indonesian central bank to raise interest rates.

Arup Raha is the regional economist at investment bank UBS Warburg Asia. "The rupiah has been one of the strongest currencies in the region this year, being up about 11.5 percent versus the U.S. dollar since the end of 2000. This has fed through into lower inflation, which has allowed the central bank to bring interest rates down. However, if the rupiah now weakens, the central bank may have no recourse but to raise interest rates," Mr. Raha said.

Higher interest rates could limit the government's ability to fund economic reforms. And as interest rates rise, businesses find it hard to borrow money needed to expand.

Arup Raha notes a weaker currency also makes servicing Indonesia's large external debt more expensive. "Fifty-five percent of Indonesia's public sector debt, or 98 percent of GDP, is foreign currency denominated. So a weaker rupiah obviously will have a negative effect on the external interest payments, which feeds through into the fiscal accounts," Mr. Raha said.

Tourism makes up almost four percent of Indonesia's GDP, and Bali for 20 years has been a major holiday destination. The industry is bound to suffer, as thousands of tourists rush to leave Bali. Many countries are warning their citizens to avoid visiting Indonesia. The industry employs eight million people, almost nine percent of the labor force.