Thousands of tourists fled Bali after a car bomb killed nearly 200 people--mostly Western tourists--at a beachside nightclub on Oct. 12. But that was just the beginning. On Oct. 14, the first day of trading after the attack, the Jakarta stock market plunged 10%. The Indonesian rupiah, Thai baht, Singapore dollar, and Philippine peso all slid in value against the U.S. dollar. Despite a vow by Indonesian President Megawati Sukarnoputri to track down the terrorists, investors decided it was panic time. "We knew the market reaction would be bad," says David Chang, president-director of Paramitra Securities in Jakarta, "but it was much worse than we expected."
The markets have recovered a bit since the initial shock. But fears are still growing that the blast in Bali could touch off an economic crisis in Indonesia, a political upheaval in Jakarta, and even a regional investment slump. Southeast Asia was hardly in a robust state to begin with. Although this year the region has experienced a recovery in exports and growth, local policymakers have been increasingly anxious that foreign investors had fixed on China--with its deep pool of cheap, talented labor and huge markets--as the only place to be. The blast could chase more of those investment dollars to the mainland. "The whole of Southeast Asia will feel some negative impact," predicts P.K. Basu, chief economist for Southeast Asia for Credit Suisse First Boston in Singapore.
Even a tough customer like Malaysian Prime Minister Mahathir Mohamad voiced concern on Oct. 14 that terrorist attacks in the region could set back his country's recovery. Singapore authorities are fretting, too. The island state's economy already did much worse than expected in the latest quarter. Spillover from an Indonesia crisis is not what Singapore needs. "As for 2003, all bets are off," Singapore Defense Minister Tony Tan told reporters after the Bali attack.
Nowhere is the connection between politics and economics more important than in Indonesia. Since the fall of Suharto, in 1998, the country has seen net outflows of capital, with foreign and local investors fleeing unstable conditions. The outflows are running an average $8 billion a year. More terror attacks will send even more money packing. "Even some local companies are moving to China," says Hans W. Vriens, managing director of Apco Indonesia, a consultancy. The economy, which is expanding by 3% a year, needs to be growing at almost twice that rate to provide jobs for millions of young people entering the workforce. Now, the probable collapse in the $6 billion tourism industry could shave a full point off Indonesia's growth--and that's not counting any ripple effect from the blast on investment in other parts of the economy.
So the pressure is growing on Megawati, a hesitant leader who, in the first three years of her presidency, has overseen a disastrous decentralization of authority, rising communal violence, and the failure to revive the strong growth Indonesia enjoyed until the Asian crisis of 1997. Since the September 11 attacks last year, her government has ignored dire warnings from the U.S. that the al Qaeda terrorist network was gathering strength in the archipelago. But the Bali massacre leaves Megawati no room to deny that international terrorism is present on Indonesian soil. She has pledged to assist intelligence agencies of foreign governments in bringing the perpetrators to justice. Within two days of the bombing, agents of the FBI, Scotland Yard, and Australian intelligence were working alongside Indonesia's own police in Bali.
It's a show of resolve, all right, but how far can Megawati really go? The governments of Singapore, Malaysia, and the Philippines want her to arrest Abu Bakar Bashir, an Islamic cleric believed to be the spiritual leader of Jemaah Islamiyah, an Indonesian organization that wants to create an Islamic state across several Southeast Asian nations. Malaysia and Singapore have arrested nearly 40 accused Islamic militants since December, 2001, most of whom have admitted to being members of Jemaah Islamiyah. Singaporean authorities suspect some of these militants were behind thwarted attacks on U.S. targets. Yet Bashir emphatically denies that he had anything to do with the Bali killings, and on Oct. 16, Soesilo Bambang Yudhoyono, Indonesia's Coordinating Minister for Defense & Security, told reporters that there isn't enough evidence to arrest Bashir.
Megawati's challenge is to ensure that a competent investigation of the Bali attack is conducted. Investigations into dozens of bombings since Suharto resigned in 1998 have not resulted in the capture of those who planned the attacks. "We have a feeling that the state intelligence agencies are not capable of investigating," says Todong Mulya Lubis, a prominent Indonesian lawyer. The Bush Administration is hoping for cooperation on intelligence, and the U.S. wants to train Indonesian forces in counterterrorism. "We've had some [cooperation] and we are looking for more," says a Bush Administration official. The U.S. Embassy in Jakarta has ordered all but essential diplomats home.
Yet even a moderate tilt to the U.S., accompanied by a crackdown, could pose political problems for Megawati. With a population of 220 million, Indonesia is the world's largest Muslim state, and more than a half-dozen militant groups claim membership in the thousands. Islamic militant organizations enjoy the sympathy of powerful army generals, who would have to be brought into line for a counterterrorism policy to work. One former military intelligence chief, A.C. Manullang, caused a stir by telling reporters on Oct. 14 that the U.S. and Israeli intelligence agencies were responsible for both the attack on the World Trade Center and the Bali bombing (he could not be reached for comment). Rivalry between military factions in Indonesia is intense, with some favoring cooperation with the U.S. and others opposed. "There are so many armies now in Indonesia," says Amin Rianom, a senior Indonesian security official, referring to the divisions.
Megawati could also face opposition from Hamzah Haz, her own vice-president and the ambitious leader of the United Development Party, a conglomeration of Muslim groups that forms the third-largest party in parliament. Haz, 62, is likely to resist any new tough line on Islamic militant groups. In May, he made a much-publicized visit to the cell of Jafar Umar Thalib, leader of the Islamic militant group Laskar Jihad, after his arrest for inciting violence after calling for the assassination of Megawati and her family. Haz is widely seen as Megawati's most likely rival in the next presidential elections in 2004. Haz could not be reached for comment.
In many ways, the Bali attack was also "an attack against Megawati herself," notes Catharin E. Dalpino, a specialist on Southeast Asia for the Brookings Institution in Washington, D.C. Bali is considered the political heartland for Megawati, who is part Balinese. It also was one of the few provinces in Indonesia that had largely escaped communal violence and tension. By stirring instability in Bali, says Dalpino, the perpetrators are sending the message that "it can happen anywhere in Indonesia." That's just what the world is afraid of. By Michael Shari in Jakarta, with Frederik Balfour in Hong Kong and Stan Crock in Washington, D.C.