1999, a perilous year for the local bourse
By Aloysius Unditu
JAKARTA (JP): The country's financial market has gone through its worst doldrums year in decades with both the rupiah and local stock prices losing much of their value.
Nevertheless, both the rupiah and stock prices have rebounded to some extent, shaking off some of the worst damage.
The rupiah bounced back to 8,000 against the U.S. dollar from a historic low of 17,000 in January, 1998 and 15,250 in July, 1998. But it is still 68 percent lower than its pre-crisis level of 2,450.
The Jakarta Stock Exchange (JSX) Composite Index, the main gauge of local stock performance, now rests slightly over 400 points, up from its worst standing in five years of 251.83 points recorded in September.
Looking ahead, analysts still paint vague pictures for 1999, with investor confidence remaining low due to various social and political uncertainties looming in 1999.
On the economic fronts, all indicators say that the economic crisis will not end fairly soon. Growth will remain negative in 1999, inflation and interest rates will stay fairly high and domestic demand weak.
And predicting the level of the rupiah should prove to be a tricky issue. But most analysts agree that the rupiah would stay at the current level at least until March, the end of the 1998/1999 fiscal year, until such time as multibillion dollars worth of official offshore funds flow in.
After March, the fate of the rupiah will remain uncertain as the government has yet to get any commitment from any offshore donors to finance the 1999/2000 budget deficit.
The level of the rupiah would determine the fate of the economy and that of corporations, especially those with significant offshore debts.
The rupiah's sharp depreciation against the American dollar has badly affected earnings of the country's listed firms. The foreign exchange loss serves as the primary source of the problem for most debt-ridden companies.
The sudden fall in the rupiah in earlier 1998 had caused local companies with unhedged offshore debts to join in a massive dollar-buying spree, which consequently forced the rupiah to sink even further against the dollar.
In response to such frantic dollar-buying, Bank Indonesia, the central bank, raised benchmark interest rates for one-month promissory notes (SBI) to 40 percent in March and eventually to 70 percent in late August to arrest the currency's fall.
As the benchmark rose, deposit rates at commercial banks soared even higher.
Vicious circle
Following the rates increase, the vicious circle began. Companies could not service their debts, and thus, non-performing loans soared; banks would not lend money as most corporations could not afford it. Then, banks went bust.
Most corporations themselves technically went bankrupt as their foreign debt ballooned in terms of rupiah due to the depreciation of the currency.
The fundamentals of most listed firms were no longer a meaningful guide for most investors as almost 90 percent of the total 289 listed firms in the local bourse were on the brink of bankruptcy.
Stocks of resource-based companies in mining and telecommunications could be excluded as their performance remained good due to their dollar-denominated earnings.
Yet, in a high interest rate situation, investing in stocks was not a choice for most investors. They would rather put their money in a risk-free, fixed-income instrument like the SBIs which also offer higher yields.
As a result of that, most share prices in the local market declined further. Many of them were traded under their par value, with some of them valued at Rp 50 per share, a price which was cheaper than a single clove cigarette.
Worse still, most foreign fund managers continued to discard all their portfolio investment here and fled the country following the bloody May riots which eventually forced the authoritarian former president Soeharto to resign and hand over the presidency to then Vice President B.J. Habibie.
Even under Habibie's administration, foreign investors remained concerned over his ability to introduce clear-cut political and economic reform agenda in bringing the country out of its worst crisis in decades.
Habibie's new administration has since been rocked by a persistent wave of antigovernment protests.
Despite this being so, the financial market has improved in the last three months.
The rupiah has stabilized at around 8,000 against the dollar since October, shrugging off various outbreaks of political and social unrest which occurred during the period.
A chief economist at Danareksa Sekuritas, Rino Agung Effendi, however, warned that the rupiah's stability could be unsustainable as it was gained through intervention.
Although the government has repeatedly denied that it intervened in the market recently, its movement of dollar offshore loans into rupiah in the currency market to finance its budget had just the same effects as intervention.
Similarly trading volume and transaction value in the Jakarta Stock Exchange (JSX) have been improving during the past three months.
Despite the deepening crisis, total trading volume in the local stock market rose 18.9 percent to 91 billion shares changing hands in 1998 compared to 77 billion shares in 1997.
Total transaction value, however, declined 16.67 percent to Rp 100 trillion against Rp 120 trillion.
Average daily trading volume rose 17.8 percent to 367 million shares traded last year, compared to 311 million shares in 1997. But daily transaction value slid 17.3 percent to Rp 404 billion from Rp 489 billion.
The amount of total funds raised through the local hammered bourse declined by 47.9 percent to Rp 10.2 trillion as of Dec. 23, 1998 against Rp 19.6 trillion in 1997.
Meanwhile, total market capitalization rose 9.9 percent to Rp 176 trillion in 1998 compared to Rp 160 trillion in the previous year.
"That shows that our market is not that badly affected by the crisis," JSX president Cyrill D. Noerhadi said.
Financial analysts said that the recovery of the country's economy and financial market will significantly depend on three factors: the rupiah's fate, the recovery of investor confidence and political stability.
Stock market analyst Hasan Zein Mahmud, also a former JSX president, said political stability at home would remain the key factor in assessing the prospects of the country's financial market next year.
He said failure on the part of President B.J. Habibie's administration to put on the general election both on time and peacefully would only perpetuate the current crisis.
"A successful and fair general election will encourage investors to consider investing in Indonesia, but if the process fails, everybody will still be in the dark," Hasan said.
The Indonesian government is scheduled to hold a general election on June 7 in 1999 to elect members of the House of Representatives.
Following the election, the People's Consultative Assembly, the country's highest legislative body whose members include House members and appointees, would convene to elect a new president and vice president.
"If the two political agendas proceed peacefully, we can expect foreign investors to return. Otherwise we do not know where we are heading," a research director at BNI Securities, Adrian Rusmana, said.