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U.S. promises trade boost for Indonesia

Indonesia's President Megawati and U.S. President Bush agreed to step up bilateral cooperation during talks in Washington  

By CNN's Yenni Kwok and reports

JAKARTA, Indonesia (CNN) -- The U.S has promised $400 million to boost trade and investment ties with Indonesia

U.S. President George Bush announced the assistance after meeting Indonesia's President Megawati Sukarnoputri, leader of the world's largest Muslim nation, in Washington Wednesday.

Bush sought Megawati's support for his response to the terrorist attacks in the U.S. last week, and assured her that any action was not directed against Muslims or Arabs, but only against "evil people".

In a joint statement issued after the meeting, Megawati condemned the "barbaric and indiscriminate acts carried out against innocent civilians" and pledged to cooperate with the international community in combating terrorism.

Before the meeting, analysts had warned that the recovery of Indonesia's economy was threatened by the terrorist attacks and the anticipated U.S. retaliation.

$400 million to promote trade and investment

Bush said in the statement that the U.S. Export-Import Bank, the Overseas Private Investment Corporation and the U.S. Trade and Development Agency would devote up to $400 million to promote trade and investment ties, especially in the oil and gas sector.

He also pledged to work with the U.S. Congress to win approval for at least $130 million in bilateral assistance for Indonesia in fiscal year 2002.

One clear sign of Indonesia's economic fragility in recent days has been its currency's slump against the dollar.

In the past week, at a time when other regional currencies have rallied against the greenback, the rupiah has weakened.

Rupiah trading at 9560 to dollar

The rupiah traded in Jakarta Thursday at 9560 to the dollar. That is a fall of 500 rupiah, or about 5 percent, since Friday.

Currency analysts and brokers say there is a huge demand for US dollars to fund imports and pay overseas corporate debts.

Although the Indonesian central bank intervened and spent at least $40 million in the last two days to shore up the rupiah, it has stayed weak.

"The pressure on the rupiah will continue," currency analyst Fairal Anwar told CNN.

Another currency analyst who declined to be named said the terrorist attacks "have changed the (optimistic) trend" which flowed from Megawati's appointment of her economic team.

Indonesia needs foreign investment inflow

Indonesia needs $20 billion of foreign direct investment a year to climb out of its economic slump.

Many economic observers were predicting the United States, the second biggest investor in Indonesia after Japan, would focus on the revival of its own domestic economy.

The statement after the Bush-Megawati meeting has eased some of those concerns.

However, analysts say if the U.S. launches military action against Afghanistan, it will affect not just economic funding to Indonesia but also the overall business sentiment.

"It could reflect as (a war) between Muslims and non-Muslims,˛ Fairal said, adding that investors would think it is risky to invest in Indonesia, the biggest Muslim country in the world.

Didik Rachbini, economist at the Institute for Development, Economy and Finance, said Megawati's U.S. visit was important in showing the moderate face of Indonesian Muslims.

But Megawati still has a difficult task to restore confidence and woo investors.

A report by the United Nations Conference on Trade and Development ranks Indonesia in 134th position, the second lowest after Yemen, among the best destinations for foreign investment.

However, as a major oil producer, Indonesia may gain from any hike in oil prices -- a possibility if the US launches military action.

"If the price of oil increases, it would increase the windfall profits," Didik said.

But Fairal noted that while oil sector revenue would lessen Indonesiašs budget deficit, it might not be enough to prop up the whole economy.

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