Indonesia Rebounds, but Asia's Comeback Unfinished

Mobs ransack and loot Chinese-owned stores throughout Indonesia; students openly call for Indonesian President Suharto to step down; ahead of next month's presidential elections; and Indonesia's $40 billion bailout agreement with the International Monetary Fund is in danger of falling apart.

But markets in Indonesia and across Asia are learning to take the news in stride.

When reports of fresh rioting surfaced Feb. 12, for example, the Jakarta Composite Index actually jumped 5 percent, bolstered by a day of stability in the country's volatile currency.

The blue-chip index, in fact, is up a whopping 54 percent from a Jan. 9 low.

Market watchers caution investors though not to read too much into the market's gains.

In a worst-case scenario, the nation could break apart in chaos. In a more optimistic case, financial reforms kick in and cash-strapped firms start paying off their debts again.

Though foreign investors are staying out of Jakarta, they are making moves back into other Asian markets. And they are making more of an effort not to group all Asian countries in the same basket.

Several economies have already started rebounding, analysts say.

* South Korea has successfully renegotiated most of its bad debts. And as long as labor unions don't strike, stocks look set to head higher.

* Malaysia's outspoken prime minister Mahathir bin Mohamad hasn't followed through on threats to punish currency traders. And he has cut back on large infrastructure projects that were widely viewed as unnecessary.

* Hong Kong has introduced the most extensive package of tax cuts in its history in a bid to spur its economy.

* Singapore's fate is closely linked to Indonesia's, however, because its banks have lent heavily to Indonesian firms.

Despite the willingness of international investors to take a fresh look at the region's economies, the stock markets are still fairly quiet.

"Investors have to wait and see what happens," says James Osborn of ING Barings, who notes that East Asian countries haven't completely pulled out of Indonesia's shadow.

Daily fluctuations as high as 30 percent in Indonesia's currency, the rupiah, have prodded other countries to keep their own interest rates high.

The prime rate in the Philippines, for example, is about 25 percent. These high interest charges are needed to make the local currencies look attractive.

But they also make it difficult for local companies to borrow money, hurting economic growth.

Mr. Osborn says, however, that at least the contagion effect has been fully discounted by the markets. "If you talk about something for long enough, people learn to live with it."