Indonesia’s Economy May Be Unharmed by Bombings, Citigroup Says

July 18 (Bloomberg) -- Indonesia’s economy is resilient enough to withstand yesterday’s bomb attacks on the Ritz Carlton and JW Marriott hotels in Jakarta, economists said.

“Terrorist threats in Indonesia are nothing new,” said Johanna Chua, head of Asian economic research at Citigroup Inc. in Hong Kong. “The economic impact will likely be limited.”

A decade of continuous expansion in Indonesia hasn’t been interrupted by six major terrorist bombings since October 2002 as the assaults have done little to harm consumer spending, which accounts for almost two-thirds of the economy. Fitch Ratings said an “isolated incident” wouldn’t impact the nation’s credit outlook.

“As tragic as it is, this isn’t a macro-policy-changing event,” Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney, said of yesterday’s attacks. “I think it’s got a short-term impact.”

Indonesia’s $433 billion economy, the largest in Southeast Asia, grew 4.4 percent in the first quarter from a year earlier, compared with a 6.2 percent contraction for Malaysia and Thailand’s 7.1 percent slump.

Growth could accelerate to “significantly” more than 7 percent if President Susilo Bambang Yudhoyono fulfils his pledge to fix the nation’s congested roads, neglected ports and ageing power plants, according to Joachim von Amsberg, the World Bank’s representative in Jakarta.

Foreign Reserves

The rupiah declined the most in three weeks and stocks dropped after the bombings in the nation’s capital, which killed eight people and injured at least 53 others. The currency slid as much as 1 percent to 10,223 per dollar and the Jakarta Composite Index of shares slumped as much as 2.7 percent.

The bombings in Jakarta don’t represent a credit risk for Indonesia, said James McCormack, head of Asian sovereign ratings at Fitch Ratings in Hong Kong. The nation had foreign-currency reserves of $57.6 billion at the end of June, near the highest since July 2008.

“Obviously if this episode were repeated then it becomes a national-security concern,” McCormack said in an interview with Bloomberg Television. “But we’re not there yet.”

Indonesia went ahead yesterday with a 35 billion yen ($374 million) sale of 10-year samurai bonds after the bombing. The sale is the first by a nation to tap Japanese investors since Lehman Brothers Holdings Inc. collapsed in September.

“We do not see any major economic shock as a result of these blasts,” said Helmi Arman, an economist at PT Bank Danamon Indonesia in Jakarta. “The country has lived out numerous other terror attacks in the past five years.”

‘Remains Committed’

Accor SA, Europe’s biggest hotelier and operator of 37 hotels in Indonesia, said it will push through with plans to develop 15 locations in the country.

The Paris-based company, which has 11 hotels in Jakarta, “remains committed to Indonesia,” Gerard Guillouet, vice president for Accor operations in Malaysia, Indonesia and Singapore, said in an e-mailed statement.

“Global factors are still in favor of Indonesia,” said Fauzi Ichsan, senior economist at Standard Chartered Plc in Jakarta. The economy is “fundamentally strong,” he said.

Indonesia’s economy slowed in the months following the October 2002 bombing in Bali, which killed 202 people. Growth eased to 4.75 percent in the quarter ended December 2002 from 5.2 percent in the previous three months, as tourism revenue for the year dropped 20 percent to $4.3 billion from 2001.

The pace of expansion also weakened in the wake of the August 2003 assault on the JW Marriott hotel in Jakarta and the second Bali bombing in October 2005, which saw a halving in the number of tourist arrivals on the island.

Political Stability

“While tourism and general retail and travel-related activities could be affected by the latest events, we expect the impact to be temporary,” said Citigroup’s Chua.

Indonesia’s economy has also benefited in recent years from a more stable political environment and the success of government efforts to crack down on extremists. President Yudhoyono earlier this month was re-elected for a second term.

“There has been a lot of progress made in Indonesia on the terrorist front,” said Stephen Vickers, chief executive of Hong Kong-based FTI International Risk Ltd. “They managed to get completely through the elections without any major incidents.”

Economic growth may still weaken if yesterday’s bombing is the start of a new campaign by Jemaah Islamiyah, a Southeast Asian militant group with links to al Qaeda.

“Smaller, nastier, grittier bombings involving smaller numbers of people are quite likely,” said Vickers. “There are likely to be some more low-intensity, low-scale attacks in the coming weeks.”