Political conflict bites into stock market index<\/p>\n
By Bernie K. Moestafa<\/p>\n
JAKARTA (JP): The year 2000 started with high expectations in
\nthe country's stock market following the appointment of
\nIndonesia's first democratically elected president in October
\n1999.<\/p>\n
But only a month after President Abdurrahman Wahid was
\ninaugurated, internal problems within his government started to
\nreverse the capital market trend, with the Jakarta Stock Exchange
\nComposite Index beginning to lose ground from its opening level
\nof 703.5.<\/p>\n
Within months of the administration taking office, the JSX
\nIndex lost more than 100 points to settle at about 600.<\/p>\n
PT Vickers Ballas Indonesia president David Chang said
\nspeculation started to hit the market when there was a rumor that
\nthe President was about to reshuffle his three-month-old Cabinet.<\/p>\n
The index made another steep dive in March and hit 546.46 on
\nthe news of the 2000 state budget.<\/p>\n
Chang said the market was worried over Indonesia's interest
\nrate burden arising from its huge foreign debt of US$149 billion
\nand from banks' recapitalization bonds amounting to Rp 600
\ntrillion (about $63 billion).<\/p>\n
Massive selling again occurred at JSX, when the President
\nunexpectedly fired in late April two economic ministers, both of
\nwhom were members of the country's two leading political parties.<\/p>\n
The President dismissed them on charges of corruption and
\ncollusion, but did so without producing any evidence that would
\nhave justified his action.<\/p>\n
Fear arose that Abdurrahman had set himself up for a brawl
\nwith the two leading parties. Yet he escaped the consequences,
\ndue to Vice President Megawati Soekarnoputri being the chairman
\nof one of the parties.<\/p>\n
The JSX Composite Index then breached the 500-point level in
\nMay, on the emergence of a political scandal called Buloggate.<\/p>\n
The scandal centers around the President's alleged order to
\nhave Rp 35 billion in nonbudgetary funds of the State Logistics
\nAgency (Bulog) disbursed for humanitarian causes in Aceh.<\/p>\n
Within less then three weeks, the index lost over 100 points
\ndropping to 444, from where it made a slow attempt to recover.<\/p>\n
Tension between the President and the House of Representatives
\nin July, however, capped the index's fragile recovery at a level
\nof 500. Positive first half reports on Indonesia's economic
\nperformance failed to raise adequate market sentiment.<\/p>\n
But it was the killing of three United Nations' humanitarian
\nworkers in Attambua, East Nusa Tenggara, and the bombing at the
\nJSX building that left 11 people dead, which sent the composite
\nindex spiraling down to about 420 points in September.<\/p>\n
Chang said market sentiment was further hurt by the police's
\ninability to bring to justice those responsible for the two
\nincidents.<\/p>\n
In the third quarter of this year, he said, unresolved
\nproblems between the President and the House continued to weigh
\nheavily on the composite index.<\/p>\n
He said that fresh calls for independence in Aceh and Irian
\nJaya also made many investors wary over the market's immediate
\nprospects.<\/p>\n
Until December, the JSX composite index maintained its level
\nof 400.<\/p>\n
\"Risk aversion against emerging market assets combined with
\nthe domestic political situation were a deadly combination for
\nIndonesian investment in the fiscal year 2000,\" said Lin Che Wei,
\ndirector for regional research at the Singapore-based SG
\nSecurities Pte Ltd.<\/p>\n
He said the JSX fell from as high as 700 in January to 420 as
\nof November. In the same period the rupiah plunged from a level
\nof 7,000 to the U.S dollar to Rp 9,500.<\/p>\n
\"Foreign investor interest is at an all-time low,\" he added.<\/p>\n
Wei said foreign investment now accounted for only 21 percent
\nof the total transaction value at JSX.<\/p>\n
Sigma Research director Jasso Winarto also attributed a
\nweakening world market to the JSX's poor performance.<\/p>\n
World market indexes fell by an average of 15 percent on the
\nFederal Reserve's move to hike interest rates.<\/p>\n
Indonesia, he said, ranked third in this year's worst
\nperforming markets with a 37.72 percent loss of its value. Seoul
\nmarked the biggest loss with 46.03 percent, followed by Bangkok
\nwhich lost 43.21 percent of its value, he said.<\/p>\n
\"The Feds raised their interest rates for two consecutive
\nyears to 6.5 percent from 3.75 percent,\" Jasso said.<\/p>\n
He said Asian markets were especially vulnerable due to their
\nhigh dollar exposure.<\/p>\n
Dollar denominated debts of many Asian companies swelled as
\ntheir local currencies weakened against the dollar. Interest
\nrates on their debts also rose in reflection of the Federal
\nReserves' move, he said.<\/p>\n
Many Indonesian companies remain highly indebted, as most have
\nbeen unable to pay their debts since the economic crisis started
\nin 1997.<\/p>\n
Debt restructuring may ease the terms and conditions of their
\npayments, but it cannot prevent these debts from growing when the
\nrupiah continues to depreciate, Jasso said.<\/p>\n
Earlier this month, Morgan Stanley Capital International's
\n(MSCI) announcement to change its rating method dealt another
\nblow to JSX's depressed market.<\/p>\n
The decision to adopt a free-floating method pushed down the
\nweighting index of Indonesian stocks from 1.3 percent to 0.8
\npercent.<\/p>\n
Under the new method, MSCI's indexes would reflect the
\nproportion of shares available for transaction in the stock
\nmarket.<\/p>\n
Indonesia's free-flowing stock proportion was an average of
\nonly 30 percent to 40 percent, meaning that the remaining 60
\npercent to 70 percent of stakes in publicly listed companies were
\nnot available on the stock market, Jasso said.<\/p>\n
Although the changes were due for next year, investors at JSX
\nunloaded blue chips carrying low free-floating rates.<\/p>\n
Despite the unfavorable external conditions, Jasso blamed
\ndomestic problems in Indonesia as the main factor behind the
\nhefty loss of 37.72 percent in JSX's value.<\/p>\n
Of that percentage, he said, 10 percent was the result of
\nexternal factors, while the remaining 27.72 percent could be
\nattributed to continued domestic political bickering and security
\nuncertainties.<\/p>\n
\"I am still pessimistic on the outlook for next year,\" Jasso
\nsaid.<\/p>\n
The economic recovery, he said, hinges on the development of
\nthe political front.<\/p>\n
\"The government's legitimacy is dropping. We have a President
\nwho no one pays attention to, and in the eyes of investors, the
\ngovernment is a joke,\" he said.<\/p>\n
Jasso warned that the JSX would remain off the foreign
\ninvestors' radar screen until Indonesia can clean up its
\nhousehold.<\/p>\n
Chang also expressed concern over unresolved political
\nproblems that were continuing to undermine the market.<\/p>\n
He said an unstable rupiah, as a result of this, made recovery
\nin the real sector difficult.<\/p>\n
Chang estimated that debt-loaded companies, vulnerable to
\nforeign exchange losses, would have to bear another difficult
\nyear.<\/p>\n
Foreign investment was hard to expect, he said, while local
\nbanks would continue to refrain from lending due to a lack of
\nconfidence toward the real sector.<\/p>\n
As banks are unlikely to resume their lending role any time
\nsoon, the real sector is out for flagging growth, he said.<\/p>\n
However, he advised investors to keep a look out for shares of
\nexport-oriented or consumer-related companies.<\/p>\n
Ramayana, Indofood, Indah Kiat, just to name a few, would make
\nfor good investment if economic conditions did not deteriorate,
\nhe said.<\/p>\n
To stimulate the market, Chang suggested the government to
\nprivatize some state companies by floating their shares at JSX.<\/p>\n
Lin Che Wei gave a more optimistic note, saying that the JSX
\ncomposite index would rebound to reach 565 within the next 12
\nmonths.<\/p>\n
\"This will be attributed to an improvement in risk aversion
\ntoward Southeast Asian markets,\" he said.<\/p>\n
Lin Che Wei also said the government would accelerate its
\ninternal restructuring programs, thus helping to raise market
\nconfidence.<\/p>\n
\"But unless we see structural changes in terms of corporations
\nand the government -- it will be quite difficult to be
\nfundamentally bullish about Indonesia,\" he said.<\/p>\n
He called for fresh funds for the banking sector, transparent
\nand fair corporate debt restructuring deals, a firm strategy on
\nasset disposals and revamping state-owned enterprises.<\/p>\n
\"Indonesia has achieved tremendous results in terms of
\nrestructuring over the past three years. But it still has a long
\nway to go,\" Lin Che Wei said.<\/p>",
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