Anxious days for global recovery

By PHILIP THORNTON

The bombing outrage in Indonesia has awakened fears that a global campaign of terror could derail a recovery for the world's economy.

Analysts have started to count the economic cost of the terrorist attacks in Bali amid speculation that the doubtless devastating impact on the Asian nation's economy could ripple across the Pacific, and perhaps even further.

What effects will the bombs have on financial stability and economic growth? Will world markets suffer if Indonesia collapses? And will consumer and business confidence crumble?

In terms of economic activity, the rebound in growth had already started to splutter and this latest shock will do little to boost confidence.

Kenneth Rogoff, the chief economist at the International Monetary Fund, said: "One can think of there being a terror tax on the global economy." He warned of a repeat of the aftermath of the September 11 attacks last year, which triggered a jump in insurance, security and protection costs.

"It's plausible that the economic effects on growth next year in the region will be limited," he added. "But that outcome is of course sensitive to how the security situation evolves, how policy responds and above all what the effects are on business and consumer confidence, domestically and in the rest of the world."

The blasts reverberated on stock markets. Share prices across the region fell sharply after the nightclub bombs, and currencies in Singapore, Thailand, the Philippines and Indonesia slipped.

The strains on Southeast Asia's financial markets prompted flashbacks to 1997 when those Asia nations became the first victims of the financial crisis that came within a whisker of bringing down the entire global economy. But this time there was little sign of any domino effect sweeping the world, where most markets continued to mount a solid recovery with growing optimism that the worst is over for the world economy.

There is wide agreement that the bomb blasts will have a severe impact on the Indonesian economy.

Analysts say tourism and foreign investment will be hit as fun-seekers and profit-hunters seek safer destinations.

Caroline Bain, the senior Asian economist for the Economist Intelligence Unit in London, said: "It takes Bali out of action for a couple of years and could wreck its position as a tourist destination."

The 4 million tourists who arrive every year provide 6 per cent of Indonesia's foreign exchange earnings, of which most comes from Bali.

Tourism revenue fell 18 per cent in dollar terms in 1998, when Indonesia was racked by political infighting.

Foreign direct investment has dried up since the Asia crisis, ethnic and political infighting and the fall of President Suharto in 1998.

Investment by foreigners in Indonesia fell 11 per cent between January and September to $11 billion compared with the same period last year.

Meanwhile, 40 million of the 210 million population are unemployed, inflation is running at 10 per cent and the Government had bet on a solid rise in economic growth to fund budget plans.

The Economist Intelligence Unit had forecast a rise in foreign direct investment next year, bringing in much-needed overseas capital, but Ms Bain said investors would be wary of committing cash "for some time to come".

The country is labouring under a foreign debt burden of about $270 billion - equivalent to its entire annual economic output - making it vulnerable to sudden economic shocks.

Mahathir Mohamad, the Prime Minister of neighbouring Malaysia, warned the outrages would scare foreign investors away from the whole of Southeast Asia.

"It will affect the investment climate because people feel now more insecure," he said.

Ms Bain said that a shortage of foreign cash would increase worries over Indonesia's debts. This in turn could drive the rupiah down further, exacerbating the existing inflation problem and forcing the central bank to put up interest rates.

The rupiah has fallen 3.2 per cent in October, the worst performance among global currencies.

Julian Jessop, a global economist at Standard Chartered Bank, said while the bombs would impact on the local economy, they would be unlikely to trigger a global reaction. "People will still look for places where production costs are cheap and, while it is inappropriate to talk of winners or losers, they are simply more likely to look at countries like China and Vietnam," he said.

Ms Bain said contagion from Indonesia's economic woes was likely to be limited to countries such as Thailand that also depended on tourism.

However, she gave a warning that Indonesia could find itself isolated from the global community if it failed to tackle Islamic terrorism.

"If the Government does not give the right response then it could jeopardise its relationship with the IMF and they could be looking at default."

- INDEPENDENT

Bali messages and latest information on New Zealanders
New Zealand travellers in Bali, and their families around the world, can exchange news via our Bali Messages page. The page also contains lists of New Zealanders in Bali and their condition.

Foreign Affairs advice to New Zealanders

* Travellers should defer travel to Bali

* NZers in Bali should keep a low profile and remain calm

* Foreign Affairs Hotline: 0800 432 111

Feature: Bali bomb blast

Related links