November 11, 2002

TROUBLE IN PARADISE
Bali Bomb Blasts Indonesia

'Our defense to convince people that doing business in Indonesia is safe is finished.'

By Eric Ellis

Room 327 of the Grand Bali Beach Hotel in Sanur has a mystique. The Balinese believe the room is imbued with the spirit of Sukarno, Indonesia's first President, who turned the sod for the hotel 30 years ago, launching the modern tourist industry here. One of Sukarno's signature black velvet peci hats lies on the bed. In a 1993 fire, staffers say, Room 327 was the only one of the hotel's 600-odd rooms to survive unscathed.

Sukarno's daughter, current President Megawati Sukarnoputri, needs more than mysticism to save Indonesia. Terrorists believed to be linked to al Qaeda blew up two clubs in Bali's Kuta Beach Oct. 12, killing 183 people, mostly foreigners. Tourists fled, crippling Bali's most important industry. The bomb could also blow a hole in Indonesia's prospects.

"We're finished," says Aburizal Bakrie, chairman of the Indonesian Chamber of Commerce and Industry in Jakarta. "Our defense to convince people that doing business in Indonesia is safe is finished." On the first trading day after the attack, Jakarta's main share index dropped 10%, and the rupiah fell 5% to its lowest level since April. Western governments urged their travelers to steer clear. Investment bank J.P. Morgan Chase did the equivalent for investors, advising that any exposure to Indonesia was high risk.

The shock is partly because the blasts occurred in Bali, a predominantly Hindu island that has escaped civil violence: If Bali is vulnerable, is anywhere safe? Separatist conflicts in Aceh and Papua provinces, communal strife in Kalimantan and the Moluccas, anti-Chinese riots that struck Sulawesi and Jakarta in the past--all were distant from Bali.

Some believe Bali still is different. Steve Palmer, who runs a $10 million surf accessories chain in Indonesia, is budgeting for a 90% loss of trade for the rest of the year. But he's expecting a comeback. "I reckon it will get back to about 60% in six months," says Palmer, who has lived on Bali for 28 years. "Barring any further outrages, I reckon we'll be almost back to normal" in a year.

Such optimism is not widely shared. Tourism is Indonesia's third-largest industry, after oil and textiles, generating some $5.4 billion last year. Bali accounted for $765 million of that. J.P. Morgan forecasts up to $3 billion in lost tourism revenues as travelers go elsewhere or stay home. ABN Amro has downgraded its forecast of 2003 economic growth from 4.2% to 3.4%. Jakarta's Center for Labor and Development Studies predicts the number officially out of work will jump from 8.4 million to 9.4 million, with 150,000 tourism-related jobs lost on Bali alone.

The blast in Bali has shaken confidence in the country as a whole. There are more Muslims in Indonesia than in any other country (88% of the 232 million population). Islam in Indonesia has generally been gentle and tolerant; it's possible to get a beer anywhere, and other religions are publicly practiced. But the country's reputation for tolerance is looking thin, and investors are restive. Nike confirmed plans to shift the bulk of its shoe production lines from Java to cheaper and, it thinks, safer Vietnam. Exxon, which can't move its $3 billion investment in oil-rich Aceh (on the island of Sumatra, 2,000 miles west of Bali), has stepped up security.

The bombing could also destroy Megawati, says Adrian Vickers, an analyst at Australia's Wollongong University. "On the one hand, she has the U.S. and now Australia baying at her to do something about terror," he says. "On the other, she has this powerful Muslim lobby who are protecting some of the more extremist elements." Megawati has failed to address the nation on the subject and shortly after the blast left the country for a conference in Mexico.

The bombings may even end Bali's immunity from communal strife. Tension between Hindu Balinese and Muslim job seekers from other provinces had never boiled over because all had worried about the impact on tourism. But Bali's Sept. 11 on Oct. 12 could change that for the worse--as well as Indonesia's economic prospects--for a long time to come.