Confidence 'hit' by Jakarta bomb

Hopes of a turnaround in foreign investment in Indonesia could be dashed by the bomb which killed 14 people and devastated a hotel in central Jakarta on Tuesday.

Investment in businesses in Indonesia has been sliding for a number of years.

But many observers believe the decline has as much to do with fears about corruption, the rule of law and labour problems as it does with security concerns.

Until the bombing, the investment situation may have been on the cusp of a revival, Economist Intelligence Unit Caroline Bain told BBC News Online.

Recent developments, including the resumption of a stalled privatisation process with the sale of Bank Mandiri earlier this year, had stirred hopes of an improvement.

"I was optimistic that next year might have restored investment inflows once the elections were out of the way," Ms Bain said.

"Now, though, I don't see that happening."

Looking forward

Experts in Jakarta agree that the picture has been less than encouraging.

The deadly bombing of a holiday resort in Bali in October - by the group suspected of carrying out Tuesday's attack - did little to encourage confidence in security.

But the effects were mainly concentrated in the tourist trade, and in Bali itself rather than in the rest of Indonesia, one Jakarta-based observer told BBC News Online.

And with a number of suspects now on trial, investors may reserve judgement about the implications the latest attack.

"It all depends on whether there is a repeat performance," the expert said, noting warnings from Australia of intelligence that further attacks in Jakarta may be planned.

Hot money'

In the meantime, international credit rating agency Standard & Poor's said it was keeping its ratings on the government's debts, saying it had factored the risk into its decision.

The Indonesian stock market continues to outperform many of its neighbours, rising 30% in the past four months - and the currency, the rupiah, has also scored gains this year.

One day after Tuesday's attack, the rupiah had fallen just 0.3%, albeit after a sharp slide early in the day's trading, while the Jakarta Stock Exchange actually registered a gain of 5.9 points, or 1.2%, to 494.4.

Inflation is still low, and some gyration is expected by investors given the huge upheaval of the Asian currency crisis which ravaged Indonesia's economy in 1997-8.

According to Ms Bain, the market's strong performance is attracting speculative investment, although long-term investment is hard to come by.

"The macroeconomic picture is good, and that's encouraging investors who are looking for a good return where many other places are falling short," she said.