SINGAPORE,Sep 1,2003 (Reuters) - The composed reaction of financial markets to increasing political risk in Southeast Asia belies apprehension among officials about the prospects for luring badly needed foreign direct investment.

Usually, it is investors who get the jitters and governments that send out soothing messages whenever the political temperature rises.

But in the wake of a recent failed military mutiny in the Philippines and bombings in Indonesia and India, those roles have been at least partly reversed.

Investors' search for high returns and their confidence in Southeast Asia's economic prospects have largely shielded the region's currencies and stock markets even as uncertainty grows over a spate of elections due in 2004.

Yet officials, already unnerved by the magnetic attraction of China for multinational companies, are running scared.

"Our political environment is beginning to generate risks increasingly unacceptable to investors," Philippine Socio-economic Planning Secretary Romulo Neri said on Thursday.

In Indonesia, a director of the Investment Coordinating Board was quoted by local media as saying this week that more than 100 foreign firms could pull out of the country by the end of 2003.

"They see the investment climate here as no longer attractive," Johnny Situmorang said, citing poor security and Indonesia's legal system among the deterrents.

So who is right? Serene markets or nervous officials?

LEARNING LESSONS

Jason McCay, director of Asian and global emerging markets at British fund managers Martin Currie, said investors across the globe were learning to price in the risk of political violence and keep their eye on the bigger economic picture.

"It's something which simply really depends on the underlying investment case. If it's good and improving, I don't think a bomb will derail it. But if it's poor and deteriorating, something like a terrorist attack can accelerate the derating process," he said.

In the case of Indonesia, the August 5 suicide bombing at the JW Marriott hotel in Jakarta, which killed 12 people, failed to dent confidence in what investors see as significantly improved economic fundamentals.

The snap-back from sell-offs triggered by the September 11, 2001, attacks on New York and Washington or by the October 2002 blasts on the Indonesian island of Bali had also taught foreign investors not to dump stock in a knee-jerk reaction, McCay said.

"Certainly, after the Mumbai bombing people seem to have said, 'This time we're going to learn from our mistakes the last time around and are not going to panic'," McCay said.

The Bombay Stock Exchange Index fell more than three percent after bombs exploded on Monday in India's commercial capital and killed 51 people. But the market made up all the lost ground on Tuesday.

The question remains, though, whether portfolio investors are under-estimating the corrosive impact of political violence on direct investors, whose money is key to boosting sub-par growth rates in countries like the Philippines and Indonesia.

Sonia Pangusion with Lombard Street Research, a London advisory firm, said investors were so flush with cash and hungry for short-term gains that they were overlooking longer-term financial and political risks in Southeast Asia.

"I don't think they care as long as growth in 2003 and 2004 remains reasonably strong and as long as they think the markets are cheap," she said.

FRIGHTENING PROSPECT

Steve Wilford, Southeast Asian analyst for consultants Control Risks in Singapore, said the Mumbai bombings were unlikely to deter investors lured by the potential of India's billion-strong market because they were not aimed at Westerners.

But that is not the case of Indonesia: Bali and the Marriott were targeted because they were frequented by foreigners. "Given that there are only 11,000 Westerners in Indonesia at the moment, that's quite a frightening prospect for anybody who's going to set up a representative office in that country," Wilford said.

Intel Corp's decision this week to expand its Philippine plant shows some experienced investors accept that political wobbles like a day-long mutiny by 300 soldiers in Manila on July 27 are part of the cost of doing business in Southeast Asia.

Still, Wilford said potential investors were turning their backs on the region and existing investors were getting shaky.

In Indonesia, they were nervous about next year's elections and the rise of radical Islamist groups and unhappy about labor laws and corruption they see being spawned by decentralization.

For such firms, terrorism, while undoubtedly rising fast as a genuine risk, can also handily conceal the real reasons for pulling out, Wilford said.

"You might see companies that do pull the plug using terrorism as an excuse to present to the government, particularly if they're retaining exposure in other areas," he said.