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Finance | Indonesia’s Capital Market: Growing Beyond Expectations

The Indonesian Stock Exchange (IDX) managed to record an outstanding performance in 2016 despite escalating political tensions over the past year and a low performance in 2015. The Jakarta Composite Index (JCI) recorded the second highest growth in Asia after Thailand, beating major indices such as Kospi in South Korea and Japan’s Nikkei.

Indonesia’s Capital Market: Growing Beyond Expectations
In 2017, the IDX has continued its upward trend and as of early April, the JCI has reached 5.592 points; this indicated a significant improvement in the public’s confidence in Indonesia’s stock market
 

Many expect this growth to continue in 2017 along with the increase in investors’ confidence which has led to increased capital inflow. That being said, some analysts warn of the risk of capital outflow as economic conditions in the United States (US) begin to improve.

Tremendous turnaround

The IDX finished 2015 with a bleak performance (See Indonesian Capital Markets – Local Funds in Prime Position). On the last day of trading, the JCI stood at 4,593, or down by 12.1% compared to that of 2014. This was the biggest decline in the last seven years since 2008 when the index plunged by 49%. 

A similar decline was also experienced by a number of indices in the Asia Pacific region such as the Hang Seng in Hong Kong, the Strait Times Index in Singapore, the SET in Thailand, the PSE in the Philippines and the FTSE BM KLCI in Malaysia. Only three indices in Asia, namely the Shanghai Composite Stock Market Index in China, Nikkei 225 in Japan, and Kospi in South Korea managed to grow.

The reason for this decline was the US Federal Reserve’s policy to increase the Fed fund rate by 25 basis points to 0.25%-0.50%. The policy has enticed global investors to shift some of their money to the US. The net sell-off on the IDX in 2015 reached 22.55 trillion IDR which was a rare event as it only occurred twice in 12 years, in 2005 and 2013 respectively.

Another reason was the high-interest rate offered by the banking industry. Banks still offered high time deposit interest rate with higher returns than the stock market. The decline in the JCI had eroded the market capitalisation value of the IDX by 394 trillion IDR or 7.5% to 4,834 trillion IDR as per 28th December 2015.

During the year, only 16 companies conducted initial public offerings (IPO) and listed their shares on the IDX. This was lower than the previous year of 23 companies. As a result, these IPOs only managed to raise 11.3 trillion IDR in funds.

In 2016, however, the IDX managed to reverse the trend and reached an all-time high by closing the index at 5,296 or up 15.32% than the previous year. This was higher than most other indices in the Asia Pacific, including Kospi, Nikkei and Strait Times. Only Thailand’s SET grew higher in 2016 at 19.8%. This means that the IDX has increased by 193.36% in the last 10 years.

Meanwhile, its average daily transaction value was up 30.03% compared to the previous year and its market capitalisation increased by 18.18% compared to that of 2015. Moreover, the IDX managed to attract funds up to 674.39 trillion IDR and $247.5 million USD throughout 2016. 

Top 10 Companies with Largest Profit Gain in Indonesia (2016)

Source: Databoks Katadata

This consisted of IPOs of 12.11 trillion IDR, rights issues of 61.85 trillion IDR, warrants of 1.14 trillion IDR, corporate bonds and sukuk of 113.29 trillion IDR and $47.5 million USD, Exchange Traded Funds (ETF) of 6.3 billion IDR, Asset-Backed Securities (EBA) of 1.37 trillion IDR, and government securities (SBN) of 484.63 trillion IDR and $200 million USD.

Despite these achievements, there were only 15 new issuers during the year, which was the lowest in the last seven years. A similar decline in IPOs was also experienced by global stock markets which were down by 70%.

Top 10 Companies with Largest Profit Loss in Indonesia (2016)

Source: Databoks Katadata

In 2017, the IDX has continued its upward trend and as of early April, the JCI has reached 5.592 points. This indicated a significant improvement in the public’s confidence in Indonesia’s stock market as it offers good return thanks to the improved performance of most of its issuers in the previous year. The index has increased by 6% from January to March 2017. In fact, the IDX’s market capitalisation value reached a record high of 6,012 trillion IDR or around $450 billion USD in mid-March.

Some analysts predict that the JCI will still rise due to support from the improved performance of issuers in the energy, banking, and infrastructure sectors. The increase in oil and commodity prices will drive the performance of energy and mining companies. Meanwhile, the government’s policy to boost infrastructure projects throughout the country will benefit construction companies and mutual funds investing in the sector such as Bahana Dana Infrastruktur by Bahana TCW Investment Management (See High Stakes for Indonesia's New Infrastructure Push).

Government securities still attractive

Bank Indonesia (BI) recorded that the capital inflows from January until early April 2017 reached 79.1 trillion IDR, and 78.5% of them or 62.1 trillion IDR went into government securities (SBN). Some 12.3% or 9,7 trillion IDR went into the stock market, 7.2% or 5.7 trillion IDR went into BI Certificate (SBI) and BI Deposit Market (SDBI) and the remaining 1.9% or 1.5 trillion IDR went into corporate bonds.

The government plans to issue four foreign exchange government bonds in 2017. Two of them, namely global US dollar-denominated sovereign bond (SUN) worth $3.5 billion USD or 47 trillion IDR and US dollar global sukuk worth $3 billion USD or around 39.9 trillion IDR, have already been issued. Meanwhile, the remaining two, namely euro-denominated bonds (Eurobond) and yen-denominated bonds (Samurai Bond) will be issued in the first semester of 2017.

Indonesia’s global sukuk experienced an oversubscribe of 3.6 times or $10.84 billion USD and was recorded as the biggest issuance of a global sukuk outside of the Gulf (See The Rise of the Sukuk in Indonesia’s Islamic Finance Industry). The stability of the Rupiah exchange rate at around 13,300 IDR per US dollar and high yields have increased investors’ confidence in investing their money in various local instruments. One interesting fact about the latest sukuk issuance is that the number of US investors have increased while those from the Islamic countries have declined (See Indonesia's Islamic Banking Industry: Bright Prospects Ahead Despite Constraints).

Shariah banking needs more emphasis on product innovation that can better cater to market demand without overstepping any shariah principles.

More IPOs expected

Many observers predict that after a two-year low, the number of companies undertaking IPOs in 2017 will rebound. As of end-March, there were 22 companies from various sectors such as property, transportation, retail and others that have planned to launch an IPO in the first semester of 2017. 

The government itself is preparing nine subsidiaries of state-owned enterprises (SOE) to launch IPOs in 2017. They are, among others, PT Tugu Pratama Indonesia Insurance, a subsidiary of Pertamina, PT Krakatau Daya Listrik, GMF of Garuda Indonesia, PT Wijaya Karya Realty, PT Wijaya Karya Gedung, and PT Jasa Armada Indonesia (JAI), a subsidiary of Pelindo II.  Currently, 20 out of 539 issuers listed on the IDX are SOEs. They account for 26% of total market capitalisation.

The IDX expects to see 30 to 35 IPOs this year driven by the implementation of Tax Amnesty Law, Compulsory Company Registration Law, and the Regulation of Energy Minister No. 9 of 2017 which allows mining companies to divest their shares on the stock exchange.

Improved policy and regulation

The Financial Services Authority (OJK) has prepared and issued a number of policies and programmes to support the growth of the Indonesian stock market in the last few years. These include the planned implementation of an Electronic Trading Platform (ETP) for government securities transaction outside the market, the establishment of a Bond Development Team in cooperation with Bank Indonesia and the Finance Ministry, and the finalisation of the Global Master Repurchase Agreement (GMRA).

In addition, the OJK has also eased rules for IPOs by small and medium enterprises (SMEs) (See Indonesia SMEs: Increased Government Support to Overcome Challenges). This is to facilitate start-ups to be able to list their shares on the stock exchange. Under the current regulation, SMEs must have a minimum of 100 billion IDR in assets before they can enter the stock exchange and they can only raise funds of up to a maximum of 40 billion IDR.

The OJK now allows companies or start-ups with assets of under 50 billion IDR to conduct an IPO. The agency expects to issue the new regulation in the second semester of 2017. Furthermore, to boost the country’s digital industry, the IDX and Bank Mandiri launched the IDX Incubator programme. Under the programme, the stock exchange management will give training as well as provide a workspace and other facilities to around 30 startups. They will learn how to develop ideas, launch products, grow a business, create business plans, establish limited liability companies, prepare financial statements, do accounting, meet investors up to the stage of going public. The IDX is currently preparing a special board for startups and SMEs in partnership with the Indonesian Accountant Association (IAI).

Remain cautiously optimistic

Many predict that the IDX will break more records in 2017 thanks to the capital inflow and repatriated funds from the tax amnesty programme (See Indonesian Government Banking on Tax Amnesty to Plug Tax Shortfall). Some analysts even forecast that the JCI will pass the 6,000 mark at the end of the year. 

However, positive sentiments in the US such as good employment figures and inflation rates, in addition to the increased Fed fund rate in March 2017 will increase the capital outflow (See Indonesia’s Fragility & The Fed). Past behaviour has shown that investors prefer to invest in the US market rather than in emerging markets when presented with such conditions.

According to analysts, investors need to be cautious with the continuous improvement of the JCI. It is because the index has reached the overbought zone and has a high risk of profit taking. That is why the Indonesian government is trying to encourage more local investors to invest in the stock market (See Indonesia’s Private Equity Market; Hard to Get). This is crucial if the IDX wants to be the biggest stock exchange in Southeast Asia by 2020. The IDX has set a target to increase the number of investors in the stock exchange by 5% in 2017. To achieve this, the Indonesian Central Securities Depository (KSEI) partnered with the Ministry of Home Affairs and 100 business players to ease and speed up the opening of an investment account on the stock exchange by allowing investors to use their electronic ID card (See Indonesia’s 5th Economic Policy Package to Impact the Capital Market).

Besides the government, the private sector is also interested in capitalising on the growth of the Indonesian stock market. After all, most Indonesians are still not familiar with the stock market and prefer to invest their money in banks which are considered safer, despite offering lower returns (See Indonesia’s Banking Sector; Under Pressure But Staying Strong).

Currently, the transaction value on the stock exchange is only 45.2% of the GDP. This is low compared to Thailand and Malaysia of 104% and 156%, respectively. Moreover, the number of mutual fund investors in Indonesia is also low at 0.13% of the total population with managed funds of 338.6 trillion IDR or 2.93% of gross domestic products (See Overview of Indonesia's Mutual Fund Industry). To tap this potential market, Bukalapak and Bareksa recently launched an online mutual fund investment platform dubbed as BukaReksa. This is a synergy between e-commerce (See E-commerce Incoming; An Industry on the Rise), Fintech, and mutual funds. 

Furthermore, BI has also encouraged companies to seek alternative funding on the stock market, instead of banks, for their working capital. It is because banks are unable to meet all the financing needs of the private sector. This is particularly important as banks become more selective in disbursing their loans amid current tight liquidity conditions and the rise of non-performing loans in the last few years. Taken together, these elements should combine to contributing to Indonesia’s capital market and see it play a greater role in the country’s economic development (See Indonesia’s Economic Outlook in 2017: Remain Cautiously Optimistic).

Global Business Guide Indonesia - 2017

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Indonesia Finance Snapshot - Capital Markets

Bourse Name: Bursa Efek Indonesia (IDX)
Main Index: Jakarta Composite Index
Market Capitalisation: 5.6 trillion IDR July, 2016)
Annual Performance: 11.97% (2016)
Record High: 5,523.29 (April 2015)
Number of Issuers: 523 (2015)
Top Stocks by Market Capitalisation: HM Sampoerna, BCA, Telkom, Unilever, BRI, Astra International, Bank Mandiri, Gudang Garam, BNI.