SCENARIOS: Key terrorism risks to economies in Southeast Asia

SINGAPORE, Sept 24 - The killing of Indonesia's most-wanted militant Noordin Mohammad Top has reduced the immediate threat from terrorism in southeast Asia, but analysts say the danger is far from over. A key issue for investors is the extent to which further militant violence could undermine regional markets. The evidence from decades of militant attacks in southeast Asia and beyond is that aside from short-term selling pressure, the damage tends to be limited. Yet terrorism can have a major impact if it fundamentally alters a country's risk profile.

Following is a round-up of key risk scenarios in which militants could significantly damage regional economies.

* ESCALATION AND INTERNATIONALISATION OF THAI INSURGENCY

In the past 5 years, the long-running Muslim insurgency in Thailand has escalated. Counterterrorism expert David Kilcullen notes that in terms of the casualty toll as a proportion of local population, "the level of violence makes southern Thailand's ethnoreligious insurgency one of the most intense in the world, second only to those in Iraq and Afghanistan."

But because violence has been confined to the south, and militants have shown no inclination to strike economic targets in Bangkok or key tourist areas, the market impact has been minimal.

The risk is that this changes. If southern insurgents widen their conflict, or if al Qaeda-linked militants are able to infiltrate and internationalize the conflict, the impact on the economies of Thailand and its neighbors could be severe.

So far, the prospect of this happening appears remote.

"It is certainly reasonable to speculate that at least some outside Islamist entity has attempted to exploit the ongoing unrest in southern Thailand for its own purposes," said RAND counterterrorism Peter Chalk. "That said, there is (as yet) no concrete evidence to suggest that the region has been transformed into a new beachhead for panregional jihadism."

Kilcullen notes that al Qaeda often tries -- and succeeds -- in escalating local conflicts by infiltrating the area, provoking a harsh crackdown from local security forces in cooperation with Western powers, and then exploiting popular discontent.

There are some key signposts for investors to watch for that would indicate the conflict could widen and damage markets.

First, al Qaeda-linked militants could attack targets in Bangkok or tourist areas to try to provoke an escalation.

Second, if the insurgency worsened and Western security forces were given a more prominent role in tackling it, this could turn a local struggle into an international one. Kilcullen says Thai and Western officials are well aware of this risk and there is little prospect that they would fall into the trap.

Third, if the insurgency were to widen the lawless, no-go areas in Thailand's south, this would provide a possible base for transnational militants even if locals gave only tacit support.

And fourth, if a younger generation of southern militants were to become more radicalized, they may choose to change the nature of the conflict. Signs of this would be more extreme rhetoric on Thai militant websites, or adopting tactics such as suicide attacks, which Thai militants have so far shunned.

* MILITANTS ATTACK A MAJOR REGIONAL ECONOMIC HUB

A wide body of research suggests that in the modern globalised economy, small shocks can be quickly absorbed but a major catastrophe in a key financial or trade hub can have magnified consequences that cascade across world markets.

Because of the specialization of most supply chains, an attack that causes major disruption to a city's financial district or to a busy port can cause global knock-on effects.

Analysts say a successful attack in Singapore, particularly on the port or central business district, could have such a global impact. And disrupting a key shipping lane like the Straits of Malacca could also have major consequences -- a large proportion of the fuel supplies for China and Japan comes through Asian shipping lanes that face a persistent piracy problem.

Several planned militant attacks on Singapore have been foiled, and the city-state is well policed. So again, the risk of an attack is low in probability but would be high in impact.

* MILITANTS ASSASSINATE A KEY REGIONAL LEADER Economic terrorism can also be disproportionately effective if it is directed at key people -- particularly national leaders who play an important role in unifying unruly nations.

The assassination of former Lebanese Prime Minister Rafik Hariri in a suicide car bomb attack in 2005 illustrates the damage that can be done. The killing snuffed out a promising economic renaissance in Lebanon and plunged the country into a new cycle of political instability and sectarian tension.

Analysts fear that a great deal of Indonesia's success in recent years has been dependent on the personality and personal popularity of its president, Susilo Bambang Yudhoyono. He has no obvious successor with the power and drive to press on with his market-friendly policies if anything were to happen to him.

Indonesian police say they have foiled at least one attempt by militants to assassinate Yudhoyono with a suicide bomb. If such an attack were ever to succeed, it could drag the country back into the political uncertainty, lawlessness and policy drift it faced 10 years ago, with severe consequences for markets.

(Editing by Bill Tarrant)