1999, a perilous year for the local bourse

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.