JAKARTA -- Well, it's not only generating political change, recently Jakarta blast is also expected to have a big impact on the already shaky Indonesian economy and one of the biggest concerns is the effect the security fears will have on foreign investment.

And while there have been some positive signs recently on the domestic front in Indonesia, the rupiah is now at a three month low and foreign companies are being given plenty of reason to look elsewhere in Asia to set up business, as Ben Knight reports.

BEN KNIGHT: Tuesday morning, Indonesian President Megawati Sukarnoputri was meeting with her Cabinet, talking about the budget. That meeting was interrupted by the news of the hotel blast but the economy is an issue the Cabinet will return to with a new urgency when it reconvenes, because this explosion will have a major impact on the Indonesian recovery.

Doctor Greg Barton lectures in politics at Deakin University, but was also an adviser to the former Indonesian president, Abdurrahman Wahid. Dr Barton says despite appearances, the Indonesian economy was already under significant stress.

GREG BARTON: Indonesia has made an unequal recovery from the economic crisis of '97 and up until yesterday's bombing, if you're an optimist you could point to the macro-economic indicators, which suggested that the economy was slowly getting back on course and of course, if you were in a city like Jakarta at the restaurant where the bombing occurred yesterday, you would have seen it packed with people paying high prices for lunch and you would looked out and seen cranes in the skyline and thought, well, things are really taking off.

But, um, that belies the fact that there's been very little foreign investment, particularly in plant and infrastructure manufacturing, and so forth, and therefore, it's hard to see how much the recovery can go until that starts kicking in. Tuesday's bombing of course is going to put a real dint in it.

BEN KNIGHT: Of course, the security issue is not a new one for foreign companies in Indonesia, but while there have been bombs in Jakarta before - in fact, 21 since 1998 - there's never been one like this, and it will affect foreign investment. Why, for example, would you set up a factory in Indonesia, when you could also choose Vietnam or Malaysia?

Richard Chauvel is the Director of the Australia Asia-Pacific Institute at Victoria University. He says foreign businesses are making exactly those sorts of decisions right now, and it's proving to be the difference between the success or failure of the Indonesian economy.

RICHARD CHAUVEL: I think foreign investment has been, or a revival of foreign investment, has been the missing element in Indonesia's economic recovery over the last couple years.

That there has been some indicators that the Indonesian economy is picking up again, although has taken much longer and progress is much slower than other countries in South East Asia which were affected by the '97, '98 financial crisis.

BEN KNIGHT: But there are warnings today that Indonesia faces further unrest and not just from terrorists. Former foreign affairs staffer, Kerry Collison, spent 20 years doing business in Jakarta and has written extensively on Indonesia.

KERRY COLLISON: Anyone who goes to Jakarta right now is quite foolish and it's going to escalate even more because by May next year, when for the first time in Indonesia's history we are going to see the people on the street directly elect the president and vice-president, and I suggest that you'll see streets in Jakarta and Surabaya and other Javanese towns burning this time next year.

BEN KNIGHT: And Dr Greg Barton believes the trend is one Australia should be very concerned about.

GREG BARTON: Well, let me put it in dramatic terms. If you want to think about the worst-case scenario for Indonesia, have a look at Pakistan today and you can see what decades of economic stagnation have done to the social structure and social fabric of the country.

We've seen, unfortunately, the transition to democracy in Pakistan stall and fail. We've seen the military keep on re-entering politics. We've also seen the military use radical Islamist groups to bolster their own support or standing in the community and the net result is a nightmare situation.

Indonesia's far from that, but that is the worst-case scenario. CAPTION Workers start to repair damage after a massive bomb blast while police still investigate the area near the JW Marriott hotel, in Jakarta