Crisis Also Hits Indonesia Economically

HONG KONG — The turmoil and bloodshed seen in Indonesia in recent weeks is not expected to derail the early economic recovery in neighboring East Asia, in part because Indonesia was already so far behind its neighbors.

But the horrific images of murder and pillaging in East Timor beamed around the world could set back for years Jakarta’s efforts to broaden foreign investor confidence and lift the nation’s 170 million people out of poverty, say economists, financial analysts and multinationals operating in Indonesia.

Although economic concerns pale beside the tragedy of lost lives and devastated communities, the crisis underscores the close link between economics and politics.

Economic pressure played a key role in Indonesia’s decision this week to allow in international peacekeepers. And without a minimum level of political stability, companies balk at hiring people, buying equipment and building new factories, steps that help improve the lives of the poor and middle class.

For example, the latest violence vindicates a decision United Airlines made two years ago to not start air service to Indonesia from its Tokyo hub. For Indonesia, when such decisions are multiplied hundreds of times, the price is lost jobs, diminished international prestige and lower economic growth.

“There’s a huge price paid in lost human opportunity, not limited to East Timor but all of Indonesia,” said Cyril Murphy, United’s vice president of international development.

But the good news for the rest of the world is that Indonesia’s newest crisis does not appear to be spreading to its neighbors.

“Although this is a terrible tragedy, we see little chance of economic contagion,” said Ayaz Ebrahim, chief investment officer with Hong Kong-based Indocam Asia. “Investors believe there’s not much knock-on effect for the rest of Asia.”

The East Timor crisis initially created modest ripples across Southeast Asia. Last week, as news of the destruction in the territory spread, currencies in neighboring Thailand and the Philippines fell along with Indonesia’s.

These two economies are arguably Indonesia’s most direct export competitors, sharing a strong dependence on farming and labor-intensive industries.

But the fallout for its neighbors was short-lived, economists say, as investors absorbed the news and moved on.

The market’s growing ability to distinguish and rate risks among developing markets--rather than lumping them together as it has in the past--is one key reason contagion is unlikely, analysts say.

“People recognize Indonesia is a special situation,” said Brian Lippy, managing director of Tokai Asia, a Hong Kong-based hedge fund. “They’re much more informed and savvy about specific political and economic factors than they were even a year ago.”

That includes a recognition that Thailand, Malaysia, Singapore and, to some extent, the Philippines have higher foreign exchange reserves, better growth rates, lower interest rates and more consumer spending than even six months ago.

That contrasts with mid-1997. The chain reaction Thailand set off to spark the Asian crisis occurred in part because other East Asian nations shared many of the same financial problems, such as weak banking systems, poor disclosure and excessive dependence on short-term capital.

As most of these countries have begun to tackle those problems, they have become far less vulnerable to contagion from the weakest link, in this case Indonesia.

Meanwhile, long before Timor became a global household word, investors recognized Indonesia’s political instability and the potential for election-related trouble, military adventurism and continued string-pulling by cronies of former Indonesian President Suharto.

This has given regional trading partners time to assess risks, forge contingency plans and hedge investments, further insulating themselves from fallout.

Still, even military strongmen ignore global economics at their peril.

When Indonesia threatened to ignore the results of the East Timor pro-independence election, the International Monetary Fund quickly balked at a scheduled $450-million loan payment, the European Union threatened trade sanctions and the World Bank expressed its displeasure even as it reviewed a $600-million loan for Indonesia.

Many believe this ultimately turned the tide and prompted Indonesian leaders to agree to an international peacekeeping force.

For Indonesia, it remains to be seen how long-lasting the economic impact of East Timor will be. Indonesia has some things going for it, provided it avoids more bloodshed, allows East Timor independence to go ahead, encourages stability in its political system and starts repairing past damage.

Although that’s a tall order, certain sectors of the economy show signs of bottoming out, foreign reserves are on the upswing and consumer spending has picked up.

Oil and other commodity prices also are rising, which could spur exports.

And higher prices in these sectors could attract some early foreign investors in the “real economy” drawn by the prospect of gaining a stake in a competitive export industry such as paper at a bargain price, said Robert Broadfoot, managing director of Hong Kong-based Political and Economic Risk Consultancy.

All this provides the beginning of a foundation on which planners could build. Such positive developments, combined with an eventual stamp of approval by the IMF, could begin to restore Indonesia’s reputation.

“When people see stability, they’ll come back very quickly,” said Indocam’s Lui.

Its neighbors certainly hope so. Events over the last two years have taught the region not to rule out anything.

Although most neighbors are reasonably confident they’ll share little of Indonesia’s pain, they still recognize that the region is interrelated, leaders say.

“Indonesia is the most populated country in the region. One way or the other, it will affect Southeast Asia,” said Philippines President Joseph Estrada, in an exclusive Times interview. “Still, I’d say this is only temporary.”