Indonesia’s stock exchange showed stunning results for investors over 2010 with the Jakarta Composite Index (JCI) as the best performing index in Asia Pacific, increasing by 44%. While notoriously volatile, the stock exchange saw unprecedented calm over the course of the Euopean debt crises. As emerging markets continued to outperform indexes around the world, investors were quick to move in and the Bank Indonesia had in place sound measures for controlling the hot inflows of cash. The first half of 2011 has seen volatility again return to the market and highlighted some of the challenges that lay ahead in deepening the capital markets to reflect the real economy. Thus far, developments have lagged behind that of real economic growth which is a central issue to be addressed with the upcoming integration of the ASEAN capital markets by 2015.
Behind positive results of the IDX performance for 2010 lays the more pressing issue of the shallowness of Indonesia’s capital markets. With only nine industrial categories and 425 companies listed, the capital markets remain unrepresentative of the economy as a whole and uncompetitive by regional comparison. Market capitalisation to GDP remains low at 36% compared to 81.74% for Malaysia at the end of 2010. The dominant sectors remain in finance, commodities and consumer goods despite such sectors making up less than 30% of GDP. Agriculture and manufacturing are notably unrepresented despite making up 14% and 21% of total GDP respectively (see Agriculture Overview of Indonesia and Overview of the Manufacturing Sector). Some of the largest companies in Indonesia remain unlisted and under family ownership. This should change gradually as existing companies seek more capital for investment and expansion in the near future. The IDX is keen to encourage more companies to come to the fore and offer IPOs. During 2010 there were 23 IPOs raising 30.7 trillion RP, with the majority performing well and bringing satisfactory returns for investors at an average of 28.9% (IDX). The IDX announced in a statement at the beginning of 2011 that it aims to increase the number of listed companies to 500-600 by 2015.
The seemingly relentless momentum with which the JCI rose throughout 2010 created a surge in lower quality stocks and an inevitable market correction. The end of 2010 and the beginning of 2011 witnessed a sharp drop in value of the IDX while recently issued IPOs made headlines for not only poor performance but mismanagement by the underwriters. The floating of Garuda, the national airline carrier and Krakatau Steel, a state owned company at the end of 2010 were both marred by accusations of political intrigue in the timing and pricing, resulting in the initial stock price being grossly undervalued. The weak regulatory system on the conduct of underwriters was further exposed and has reduced confidence in future SOE floatations. Two private sector IPOs at the beginning of 2011 were both oversubscribed by investors but managed to produce negative returns on their debut reinforcing the need for stronger market oversight as well as signalling a return to volatility.
The Indonesian Capital Market Authority BAPEPAM–LK is the solely responsible regulatory body for all matters concerning the stock market and exchanges including issuers and underwriters, being found under the Ministry of Finance. It has come under scrutiny for its failure to meet international standards as prescribed by the IOSCO and its ability to act effectively as an independent entity. This aims to be addressed by the formation of the Financial Services Supervisory Authority, OJK, which would take over from the Central Bank and the Ministry of Finance, however a failure to find an agreement between the two on how such an independent body would function continues to stall the passing of the bill that had an original timetable of completion by the end of 2010.
The integration of the ASEAN capital markets with the Implementation Plan for 2015 gives further pressure for Indonesia to bring its regulatory procedures up to par. BAPEPAM has been preparing for this by upgrading its capital markets data warehousing infrastructure but much more is required in building the supporting IT infrastructure. Regulation and dispute resolution procedures will have to be aligned with that of the other members and so far Indonesia is behind on execution of reforms. The blueprint will enable ASEAN members to move freely among members’ bourses in cross border transactions to raise capital and place investments. Indonesia’s bourse will therefore face stiff competition from regional counterparts when a company decides to perform a rights issue. Therefore, while the Indonesian market remains attractive due to the domestic potential, the exchange must be ready to compete by 2015.
Obtaining investment grade status has been long awaited by investors in Indonesia. In April 2011 Standard and Poor’s upgraded the country’s sovereign credit rating to BB+, the last of the three main rating agencies to bring their rating to just below investment grade. Inflation and the risk of capital flight are the obstacles that stand in the way of the final push to reach investment grade status, despite the sustained GDP growth and mounting foreign exchange reserves. Inflation remains another potential flashpoint that rating agencies are observing. The rise in inflation caused Bank Indonesia to raise its benchmark interest rate to 6.75% in February 2011 as consumer prices were up by 6% on average year on year in the first quarter of 2011, but slowly decreased in the second quarter. Provided that Indonesia manages to keep a handle on its inflation; investment grade status seems well within reach by the end of 2012. This will see greater involvement of both domestic and international investors in the market, opening the way for large scale funding and investment.
Deepening the capital markets will bring immense benefits to the country in terms of providing sources of funding for companies as they undergo expansion plans to take advantage of the booming economy. The potential of Indonesia’s stock exchange is pronounced; low GDP to market capitalisation ratios illustrate that liquidity is in short supply; testament to the remaining room for growth. As the largest economy in the ASEAN, being home to unrivalled natural resources and some 400,000 companies; the exchange has the potential to be the largest in the region in the medium to long term.
Global Business Guide Indonesia - 2012
Bourse Name: Bursa Efek Indonesia (IDX)
Main Index: Jakarta Composite Index
Market Capitalisation: $403 billion USD (2012)
Record High: 4,257 (September 2012)
Number of Issuers: 446 (June 2012)
Top stocks by Market Capitalisation: Astra International, HM Sampoerna, BRI, Bank Mandiri, Bank Central Asia, Unilever.