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NEWS UPDATES 20 July 2009

Bombs shake, not shatter, market confidence shaken, not shattered

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Indonesia’s healthy economic growth and market resilience will sustain the damaging impact of blasts that ripped through the JW Marriott and the Ritz-Carlton hotels on Friday, the Jakarta Post quoted analysts as saying.

Analyst for Citigroup Global Markets said the market impact would be short-lived in line with the still constructive view on the country’s fundamentals and the benign near-term outlook on inflation.

“Terrorism threats in Indonesia are nothing new, and we think it will be unlikely to dampen overall foreign investment, recently buoyed by post-election optimism. “We don’t expect any major changes to our outlook on inflation and monetary policy,” Chua said in a statement sent to The Jakarta Post.

Inflation is predicted to slow to 4.5 percent this year, supported by an adequate supply and stable rate of the Indonesian rupiah against the US dollar, latest government data reveals.

As inflation slows, the economy is expected to expand 4.3 percent this year. Although the economic impact is likely limited, Chua said tourism and general retail and travel-related activities could be affected by the latest events. “We expect the impact to be temporary.”

Callum Henderson, chief global currency strategist for Standard Chartered Bank in Singapore, said market reaction to the tragic event was “relatively muted” in anticipation that the government would stay on course and that policies would remain unchanged.

“Indonesia remains a fundamentally good story, thanks in large part to the excellent policies of the government in the last few years.

“It will take time to stabilise again, but we remain overweight on the rupiah,” he told Reuters.

Sean Callow, currency strategist for Westpac in Sydney said the blasts would damage foreign investor confidence since the attacks appeared to be aimed at Westerners, “but not shatter it”, so long there was no further violence for some time.

“Bank Indonesia should be able to keep a lid on dollar-rupiah short term, but it will have a lasting negative impact multi-week, multi-month.”

Callow said the central bank operations had solidified his short-term bias towards buying dollar/rupiah on dips, especially when rupiah was still by 18 percent since March.

Tim Condon, head of Asia research for ING in Singapore said Indonesia was vulnerable and the attacks were negative.

“But people know these are impossible to predict and they are part of the economic landscape. It doesn’t totally eclipse all of the other investor positives — the economic fundamentals and the political fundamentals.”

He added the cost of protecting debt in Indonesia, one of the most frequent Asian sovereign issuers in the offshore market, was unchanged at 280/295 basis points.

“I liken it to North Korea risks to South Korean assets. Typically it causes a short spike in selling pressure — the operative word is short.”

CIMB Asset Management chief investment officer Raymont Tang shared a view that Indonesia’s economy likely to show resilience.

“You’ll get a kneejerk reaction but if you look at how the Indonesian market has responded up to now, it’s down 1.3 percent and the currency is down half a percent... I think people are more positive than negative.”



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