Why Indonesia’s markets kept calm and carried on

As Indonesia's capital Jakarta was being rocked by its worst terror attack in six years, the country's central bank was meeting less than two miles away from the epicenter.

Rate-setters chose to proceed with their on-going meeting, deciding to cut the benchmark interest rate by 25 basis points to 7.25 percent, in line with analysts' expectations.

The central bank's move, coupled with a reasonably swift recovery in the country's stock market and the currency, underscored the muted reaction of investors to the tragic event.

"We should never belittle the impact of any one event, but it is part of a situation where we're seeing a broad range of uncertainties in the world right now and sadly, this is just one of them," David Howard-Jones, a partner at consultancy Oliver Wyman, told CNBC's Squawk Box. "We've already seen substantial turmoil in the financial markets for a range of other reasons in the last couple of weeks."

Indonesia's financial markets barely blinked.

The Jakarta Composite Index, which was down around 0.2 percent before the attacks, tumbled as much as 1.78 percent in their wake, but quickly recovered in the afternoon session to close down 0.53 percent, making it one of the region's best performers for the day. The index is down around 14 percent since the beginning of 2015.

The rupiah also retraced its initial losses. The dollar fetched as much as 13,960 rupiah after the attacks, but by late afternoon, it was around 13,850 rupiah, similar to levels before the news.

In early trade Friday, a dollar was worth 13,390 rupiah and the Jakarta Composite was up 0.4 percent.

The market shrug-off wasn't just a local phenomenon. In overnight trade, the U.S.-listed Indonesia exchange-traded fund (ETF) , iShares MSCI Indonesia (EIDO), actually ended up 1.32 percent.

One reason for the calm: The longer term impact may be limited.

Indonesia Tourism Revenue, % of GDP (Source: Bloomberg, OCBC)
Indonesia Tourism Revenue, % of GDP (Source: Bloomberg, OCBC)

Unlike nearby Thailand, tourism just doesn't matter that much to Jakarta itself, or even the country as a whole.

"Tourism – a sector that would understandably be most sensitive – makes up just around 1 percent of the economy. The silver lining here too is that Jakarta is never traditionally a tourist magnet, unlike Bali, for instance," Wellian Wiranto, an economist at OCBC Bank, said in a note late Thursday. "Bank Indonesia did what it did, which is to cut rate by 25bps across all three key rates, partly because it knows that such terrorist attacks would have little long-term repercussions for the Indonesian economy."

Wiranto noted that in the wake of the last major terrorist attack in Jakarta -- the 2009 bombings of two luxury hotels -- the effects petered out quickly.

OCBC's figures include direct tourism revenue, without extrapolating secondary effects such as restaurants and retail figures.

The World Travel & Tourism Council estimates that travel and tourism contributed 3.2 percent of Indonesia's gross domestic product (GDP) in 2014, while the total contribution was around 9.3 percent of GDP.

But the attacks may complicate efforts to revive the country's flagging economy and Indonesia's President Joko Widodo's initiative to drive tourism growth. ANZ estimated the attack could shave 0.25 percentage point off Indonesia's economic growth forecast for the first quarter.

"Foreign tourist arrivals had grown by 7.19 percent last year and this pace of growth could be expected to slow in 2016 given today's events," ANZ said in a note on Thursday.

But general ignorance may help keep the tourists coming. A 2013 poll from Australian opinion polling company Newspoll found that around 29 percent of all Australians claim to have visited Indonesia at some point, but only 70 percent knew that popular tourist destination Bali was in Indonesia. In 2013, around 11 percent of foreign tourist arrivals were from Australian residents.

There is, however, another potential reason markets kept their cool: The attacks, for which ISIS claimed responsibility, don't appear to have been carried out by the A-team, with some analysts calling them "amateurish." While apparently timed to coincide with a busy lunch period in a major shopping area, most of the casualties were the attackers themselves.

An Indonesian and a Canadian were killed in the attack and 20 people were wounded, Reuters reported. Five suicide bombers blew themselves up.

That may be because Indonesia's counter-terrorism forces had already moved in response to warnings late last year.

"They actually did a good job of cracking down in December against ISIS ringleaders and crews that were reported to be plotting widespread attacks geared toward Christmas and New Year's," noted Jonah Blank, senior political scientist at researcher Rand, on CNBC's The Rundown. "It's quite possible that the Indonesian (counterterrorism force) Detachment 88 and other units headed off a much, much bigger and more important attack and this is merely the residue."

Outside the financial markets, foreign investment into Indonesia will likely be closely watched, but it may not be affected much.

Lin Neumann, managing director of AmCham Indonesia, told CNBC's SquawkBox that terrorist attacks in the country aren't new and foreign companies operating in Indonesia already factorthe country's security situation into their decisions.

He found the effective police response to Thursday's attack encouraging.

"This is an overwhelmingly moderate progressive Muslim majority country and there is no tolerance here for this kind of activity," Neumann said. "The worst thing that could happen would be for people to conclude that it's a dangerous place for investment. I don't think it is and I think there hasn't been enough of this kind of activity to scare away investors."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1