Indonesia market outlook: Another better year ahead<\/p>\n
David Chang<\/p>\n
This time last year, I predicted that the stock market in 2004
\nwould be better than in the previous year despite the political
\nconcerns, even after being one of the strongest performers in
\nAsia for 2003. That has proven to be right as the Jakarta Stock
\nExchange composite index has since climbed 36 percent from 692
\npoints at end-2003 to 939 as of Dec. 15, 2004. Investors who have
\nprofited from the bull run this year will no doubt ask themselves
\nwhether it is time to cash out any time soon, with the stock
\nmarket at such unprecedented highs.<\/p>\n
The market has made an ostensibly impressive recovery in 2004
\ndue to a cheap market valuation. I believe that another better
\nyear lies ahead. If the economy and corporate earnings perform as
\nexpected, and the political environment remains stable, then the
\nbull market should continue, albeit at a more controlled pace, at
\nleast for the next 18 months.<\/p>\n
There are various reasons for my current optimism in the
\nmarket. Susilo Bambang Yudhoyono's victory as Indonesia's first
\ndirectly elected president last July, over Megawati Soekarnoputri
\nwas not widely expected, but it did not dampen market sentiment.
\nAlthough Megawati was credited for doing a reasonably good job
\nfor the Indonesian economy during her term, foreign investors
\nwere quick to envisage the positive benefits for the country when
\nSusilo unexpectedly won the people's popular mandate.<\/p>\n
The presidential and general election results had been one of
\nthe most critical factors, which influenced the Indonesian
\nfinancial market in 2004. For many years, political risk has
\nplayed a dominant role in depressing the domestic currency,
\nequity and bond prices, while relatively high interest rates
\nmaintain a severe constraint on corporate earnings growth. As a
\nresult, Indonesia has suffered from the consequences of high
\ninflation and low economic growth.<\/p>\n
However, the economic outlook for Indonesia is expected to
\nturn around over the next few years under the new leadership of
\nSusilo. Indonesia's GDP growth should improve modestly from 4.8
\npercent in 2004 to 5.4 percent in 2005, based on conservative
\nassumptions and supported by robust growth during the second and
\nthird quarters of 2004.<\/p>\n
GDP growth was 5.0 percent in Q3 2004, which is slightly
\nhigher than expectations of 4.6 percent, and the 4.5 percent
\ngrowth in Q2. The growth was mainly boosted by domestic
\nconsumption, which accounted for 73 percent of GDP growth. A
\nstronger rupiah and lower interest rate environment should
\ncontinue to enhance the economy.<\/p>\n
As part of the government's election promise to push growth
\nrate up to 7 percent by 2009, there are ambitious plans for
\ninvestment in infrastructure. In the next five years, the
\ngovernment is expected to raise between Rp 700 trillion (US$75
\nbillion) and Rp 1,000 trillion (US$110 billion), or about one
\nthird of its GDP from local and foreign investors to finance
\ninfrastructure projects to build roads, railways, ports,
\nairports, power plants, telecommunication facilities, gas
\ndistribution, water plants, irrigation facilities, housing and
\nother crucial infrastructure.<\/p>\n
About Rp 200 trillion could be funded by the state budget,
\nanother Rp 200 trillion by local banks but the remainder is
\nexpected to be financed by local and foreign institutional
\ninvestors, including global financial institutions such as the
\nWorld Bank and the Asian Development Bank. More investments
\nopportunities will thus be available for investors and lenders
\nover the next few years.<\/p>\n
Foreign investors have been particularly impressed by Susilo's
\nfocus to reduce government corruption and to improve domestic
\nsecurity. The corruption issue has been particularly awkward for
\nthe government since Transparency International recently ranked
\nIndonesia as among the most-corrupt countries in the world. This
\nwas probably the reason for Susilo's decision to make it
\nmandatory for Cabinet ministers and senior government officials
\nto utter public oaths and sign "political contracts" against
\ncorruption.<\/p>\n
A gradual reduction in institutionalized corruption could
\nensure more efficient allocation of economic resources, and a
\nmore equitable distribution of wealth among the people who have
\nremained one of the poorest (in terms of GDP per capita) in this
\nregion. In the long run, this should provide a more stable social
\nenvironment and stronger economy. The government has since
\ndemonstrated an added zeal in pursuing and prosecuting the
\nperpetrators responsible for the Bali and Kuningan bombings.<\/p>\n
This would help alleviate fears that Indonesia, being the
\nbiggest Muslim country in the world, could become a terrorist
\nrefuge for future attacks against Western interests within the
\nregion. With a significant reduction in risk premium, Indonesian
\nasset values should climb rapidly in the short term.<\/p>\n
Susilo is likely to be judged on his performance during the
\nfirst 100 days of office in Q1 2005, and would be perceived to
\nhave "acted" on the main election pledges to improve the economy,
\nenhance domestic security and reduce corruption. It is therefore
\nunlikely that his political opponents would be able to find major
\nissues which could pose a serious political threat for Susilo
\nduring that period.<\/p>\n
However, the president is expected to face a serious
\nleadership challenge with a significant fuel price increase
\nplanned for next year, when shrewd political opponents could
\nincite ferocious public antagonism against the government which
\nwould ultimately be detrimental to the state budget deficit. With
\nrising unemployment (currently over 9 percent), political
\nopponents could harness the massive dissenting population, still
\nliving in poverty, to protest and weaken the government.<\/p>\n
Due to higher oil prices, the fuel subsidy is estimated to
\nreach Rp 59 trillion in 2004, from Rp 20 trillion in the previous
\nyear. The sudden removal of oil subsidies are likely to cause
\nstrong inflationary and interest rate pressures on the economy.
\nAlthough higher oil prices would increase oil subsidies and hence
\nworsen the budget deficit, the government is hoping that this
\nimpact may be mitigated by increased revenue from the oil and gas
\nindustry.<\/p>\n
The recent deregulation of the oil and gas sector is expected
\nto boost investment in the sector. Investment on oil exploration
\nis expected to more than triple to US$779 million in 2004,
\naccording to the Energy and Mining Resources Ministry. This is
\nnecessary to boost production among major oil companies, due to
\ngradual depletion of oil reserves in the current aging oil
\nfields. The government is expected to sign 46 new oil and gas
\ncontracts worth more than US$4.2 billion.<\/p>\n
The International Monetary Fund (IMF) and other international
\nfinancial institutions are currently upbeat on the Indonesian
\neconomy. During its recent visit, the IMF summed up its view on
\nIndonesia that current GDP growth is "below potential", economic
\nperformance has continued to improve and financial markets have
\nresponded favorably. With a relatively stable political and
\nsocial environment, Indonesia's economic growth fundamentals are
\ncurrently the best that we have seen since the economic crisis in
\n1997.<\/p>\n
The Indonesia market outlook for 2005 is promising, and could
\nshape up to become one of the most exciting emerging markets in
\nthe world.<\/p>\n
The writer is a director in securities company PT Paramitra Alfa
\nSekuritas<\/p>",
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