It may still be too early to analyse reliably the effect of the Bali bombing on Asian economic recovery and consumer prospects. But still there are some early indications...

Today the IMF stated that the attack on Bali was "a terror attack on the global economy", and could be expected to put the South East Asian recovery on hold. Lehman Brothers also lowered their Indonesian economic forecasts.

The terrorist attack on the USA in September last year certainly caused a major crisis in the airline, insurance and tourist industry as just 3 examples of an all-encompassing global economic shock. However Asia was less affected than most.

Tourism is a major contributor to the economies of many developing/low currency and developed countries like Thailand, Malaysia, and Singapore. Tourists from Asia cancelled long haul trips, and opted for domestic locations well away from Western centres, boosting intra-regional tourism. International inbound travelers generally saw Asia as safer and further away from the devastation of 9/11. Thailand, one of Asia's premier tourist destinations, was spared a major depression in comparison to North American and European destinations.

Asian exporting economies certainly suffered from the continuing economic and depressed industrial and consumer markets in the developed world, but it is unknown how much of this was due to the terrorist attack, and how much to unrelated factors such as corporate malevolence. Indeed consumer spending in the US continued to grow immediately after the US attacks.

The US-led War Against Terror focused on the Middle East, Pakistan and Afghanistan - East and South East Asia was of less concern, though leaders of South East Asian countries were acutely aware of the links between al Qaeda and extremist separatist Islamic political groups in their own countries.

Indonesia was always the major concern. A country still relatively unstable following the unrest leading to the fall of the Soeharto dynasty, Indonesia continued to struggle with leadership issues as pressure groups manouvered for political ascendancy. Wahid Abdurrahman and to a lesser extent Megawati were compromise choices while the bigger boys moved behind the scenes for power, distancing themselves from the "dirty" work of fixing up immense structural problems.

Indonesia was devastated by the Asian crisis, leaving public services, including those related to security (e.g. law, policing) badly under funded and mismanaged while the political leadership struggled with widespread poverty, East Timor, and successionist issues in outlying provinces. This left this vast archipelago made up of thousands of islands and inaccessible jungle full of hiding places tailor-made for establishing training grounds for aspiring terrorist amateur armies.

While the Bali event clearly placed the bomb in South East Asia's court, less publicised events including the bombing of the Philippine embassy in Jakarta last year, uncovering of plots to assassinate Megawati and target Western embassies in Singapore this year, the identification of a "military style training camp" in Northern Malaysia 4 years back, Abu Sayyaf activities in the Philippines, and frequent small bombings in Islam Southern Thailand were already causing major concern. Numerous snippets of evidence that extremist local groups like Jemaah Islamiyah were working with al Qaeda and that al Qaeda operatives were meeting clandestinely in several South East Asian countries were also emerging.

Pieces of part of the jigsaw started to fall together that the global terrorist movement was moving to base itself in South East Asia, as the Middle East, Europe and North America started to becoming too hot. With majority Muslim populations in Indonesia, Malaysia, the Philippines and even Southern Thailand, it was not that hard to blend into the crowd. It was also accepted practice that greasing palms of officials in those countries may cause them to look the other way.

As a whole these factors start to suggest that country risk in such places as Indonesia, Malaysia and the Philippines in particular will be perceived to increase. It has been bubbling away for a while, but it took Bali to bring it back into focus.

There is no doubt that Indonesia's tourism industry will be affected for the worse. 1.5 million tourists visit Bali every year, out of five million for Indonesia overall, underscoring that Bali is really Indonesia's only real international tourist brand. Despite magnificent scenery, water and volcanic features, Indonesia's tourism infrastructure is poorly developed, held back by a lack of funds, poor planning, and political squabbling. It is really only Bali that had got it together to the extent that just less than 1 in every 3 tourists to Indonesia visit Bali, and spend most of their money there. Bali also had a near monopoly on high-spending tourists from Europe and East Asia, as well as middle-income spenders from nearby Australia and New Zealand.

Another useful statistic - there are 5.75 million tourism employees in Indonesia. That's more than one for each tourist annually who may stay around 3 to 14 days, emphasizing how valuable incoming foreign exchange is for a low currency value economy. It also accounts for around 2 to 5% of the working population, even though tourism is mainly centred around Bali. These statistics alone are enough to underline the significant effect a downturn in tourism to Bali will have on the Indonesia economy as a whole.

Looking further afield, South East Asia may well just have lost its brand as a "safe" tourist destination - a hard fought for brand attribute, and a competitive advantage after the New York attack. Langkawi, Phuket, Penang and scores of other resorts may suffer some of the fate of far flung resorts in Borneo, which were basically wiped out financially by the Abu Sayyaf hijackings several years back. In an increasingly unsafe world, tourists may opt just to stay home.

The tourism industry is key to the economic prospects of South East Asia. Even Singapore sees their tourism industry as highly significant. To low income countries like Malaysia, the Philippines, Thailand and Indonesia, the majority of tourists may spend in 7 days more than what locals may spend in one year. It's highly valued foreign exchange. The spin off to retail, airline, and many other spin off industries is also significant.

If investors are smart, they will realise that Bali, as shocking as it was, should have been expected an attack against the "good things" that members of the dominant Western benificiaries of the current global financial system have grown to expect. Tourism is one, and places which stand out from the more conservative environments in which they are located offering beer, informality, ugly consumerism and loose women, are most attractive as a target.

Most smart managers were aware of the risk, and it had been factored in. Yet we expect at least very short term retreat from South East Asian markets, with funds most probably diverted into East Asia. But the message from Bali is clear. This is a global terror campaign, just as the global economic system it targets.

Overall we expect some decline in consumer spending, the result of a stunning economic recovery in the past 2 years being waylaid for a while.

The real threat comes from the continuing reaction of the US to its attacks back in September 2001. In places like Indonesia, where provincial Muslims are largely uneducated and reliant on education from imans (religious teachers) an attack on Iraq following the attack on Afghanistan looks for all the world as an attack on Muslims. The same, though to a much lesser extent, applies to Malaysia.

Frankly, the challenge facing Indonesia President Megawati is immense. Already under pressure from fundamentalists Islamist parties and leaders, she must fight terror at home, while forcefully demonstrating that she herself is not anti-Muslim herself. Revolt in Indonesia, as the largest and still the most influential nascent power in ASEAN will effect Singapore, Malaysia and the whole South East Asian region.

All in all, the prognosis at this early stage is for a slowdown in economic growth, as well as industrial and consumer growth in South East Asia for the next few months at least...