Global Business Guide Indonesia

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Finance | Indonesia’s Capital Markets

The Indonesian Stock Exchange (IDX) witnessed solid growth over the past five years, both in terms of the number of issuers and their combined market capitalization, but it remains highly dependent on global sentiment. Its future performance will hinge on global risk appetite, but also on economic adjustments and fiscal policies at home.

Indonesia’s Capital Markets
Despite ongoing issues pertaining to liquidity and volatility as well as more recent concerns about slowing GDP growth and rising inflation, there can be little doubt that Indonesia continues to hold attractive prospects for long-term investment.

IDX listed 459 companies with a total capitalization of $414 billion (4,126.99 trillion IDR) at the end of 2012, up from 396 listings valued at $108 billion (1,076.49 trillion IDR) four years earlier. The investment grade ratings bestowed on Indonesian sovereign debt by rating agencies Fitch and Moody’s in late 2011 and early 2012 buoyed market sentiment. Reflecting overall healthy earnings and strong economic growth, IDX’s key gauge, the Jakarta Composite Index (JCI), more than tripled in the years 2009 through 2012 and continued to rally in early 2013.

The secondary sale of a 40% stake in Indonesian retailer Matahari Department Store in March underscored confidence in Indonesian consumer stocks (See The Rise of Modern Retail Outlets). The sale fetched more than twice the price Matahari’s few free-float shares had been trading at. The $1.3 billion deal was the biggest IDX had seen since 2008 and suggested the local equity market was gaining depth.

By the middle of the year, however, investors grew uneasy about the state of the global and domestic economy. JCI lost most of its year-to-date gains as foreign funds took money off the table amid valuations that were beginning to look pricey given the weaker macroeconomic context. Volatility rose to levels considered high even by local standards, as Indonesia’s capital markets exposed continued vulnerability to sudden capital outflows.

Though the IDX’s market capitalization has grown from just over a third of the country’s GDP in 2010 to almost half by 2013, Indonesia’s equity market remains small compared to regional peers. IDX President Director Ito Warsito has set a target of boosting the exchange’s capitalization to $750 billion in 2015. This will not be achieved without a considerable number of new entrants. Despite missing its 2012 target of listing 25 companies in 2012 (only 23 listed, including one re-listing, while 4 were de-listed), IDX set its sights on no fewer than 30 IPOs for 2013.

Newcomers in 2012 raised combined proceeds of $1.02 billion (10.14 trillion IDR) from their listing, significantly less than a year earlier. Total funds collected through IPOs, rights issues and warrant conversions came in at $3 billion (29.96 trillion IDR) in 2012, less than half of the 2011 level. In addition, a number of companies scaled down their IPOs for 2013, reflecting some concern among issuers about the timing of their plans to go public.

Private equity firm Saratoga Investama Sedaya cut the size of the stake it offered to investors in late June to around 10% of its enlarged capital from an originally planned 15%. It also lowered the price range and in the end only raised about $151 million, less than half of what it had initially sought. It then saw its share price fall sharply in a disappointing market debut. Meanwhile, the much-anticipated IPO of healthcare provider Siloam International Hospitals was put off to the second half of 2013.

The IDX’s high volatility is attributed to the fact that foreign investors hold a large proportion of Indonesian securities. The impression that the US Federal Reserve was looking to gradually exit monetary stimulus policies prompted a reversal in capital flows in mid-2013, when foreign investors sold Indonesian stocks and bonds to repatriate funds. The prospect of a weakening rupiah and rising inflation due to higher fuel prices did little to improve sentiment.

Expanding the domestic investor base will be vital to reduce the risk of capital flight. The exchange is running information campaigns across the country and IDX managers expressed hope to see the number of retail investors increase almost fivefold in 2013 from the very low base of less than half a million (See Capital Markets; Widening the Local Investor Base). The policy flanks ongoing government efforts to include more Indonesians into the formal banking system, which should also help attract new equity capital.

In a bid aimed at improving liquidity, IDX extended its trading hours at the start of 2013 to accommodate more transactions in a day. IDX managers are also considering stricter IPO requirements to increase liquidity. Among the ideas discussed is an obligation for firms to issue at least 20% of their shares to the public (as opposed to 10%), with at least 15% allocated to the free-float market.

The regulatory framework of the Indonesian capital markets has undergone profound changes. The Financial Services Authority (OJK) replaced the Capital Market Supervisory Agency (Bapepam) in 2013 to become the new regulator and supervisor of the Indonesian capital markets. Come 2014, the OJK will also take charge of the banking sector, deposing in this capacity Bank Indonesia and thereby creating a unified structure for securities oversight.

The expectation is that the OJK will instill greater trust in corporate governance and asset protection and hence draw in more investment, following some complaints that Bapepam was at times soft on enforcement. Its legal basis, Law Number 21 of 2011, grants the OJK a greater degree of autonomy than Bapepam enjoyed under the Ministry of Finance. Some criticism has been leveled at the House of Representatives’ (DPR) selection of commissioners to the OJK board, all of whom have a professional background with BI or government institutions. It is too early to assess the OJK’s competence and independence, but investors should welcome the drive for more stringent oversight, and markets by all accounts have accepted calmly the transfer of authority.

Despite ongoing issues pertaining to liquidity and volatility as well as more recent concerns about slowing GDP growth and rising inflation, there can be little doubt that Indonesia continues to hold attractive prospects for long-term investment. The mixture of global and domestic factors that has prompted some companies to reduce or reconsider their equity issues is largely of a temporary nature.

In fact, the challenges encountered in 2013 may help generate the political momentum for some overdue restructuring. The reduction of fuel subsidies, for example, while sparking higher inflation at first, should in the long run improve the state budget and the allocation of resources, thereby setting the stage for sustainable development (See Indonesia Economic Outlook 2014). Similarly, Bank Indonesia’s interest rate hikes, while perhaps initially dampening the investment mood, are expected to provide greater financial stability and confidence in the Indonesian capital markets.

Uncertainty about the country’s political leadership following general elections in 2014 could lead to some restraint on IPOs. It is fair to assume, however, that a potential temporary slowdown would be largely compensated for once companies catch up with their plans after the polls.

Greater depth of both the equity and bond market is vital as Jakarta competes with bourses in the ASEAN region to attract foreign capital and improve businesses’ funding options at a time when the country requires ambitious plans for investment in transportation and energy infrastructure. Substantial growth potential still remains to be unlocked, meaning the mid to longer-term outlook for Indonesia’s capital markets remains bright.

Global Business Guide Indonesia - 2013

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