Another setback in capital market history

Another setback in capital market history

Hendarsyah Tarmizi
The Jakarta Post
Jakarta

This year shows another setback in the financial market, with
share prices and rupiah suffering another downfall amid fears
over the worsening of the country's economic performance.

The Jakarta Composite Index (JCI), the main price barometer at
the Jakarta Stock Exchange, closed at 377.96 on Wednesday (Dec.
26), or eight percent lower from the 410.20 at the same time last
year.

The drop in the index reflects the general mood of the traders
although some companies performed well during the year.

Capital market analysts described this year's equity trading
as another setback in the capital market.

At the beginning of the year most analysts estimated there
would be a rebound in the market, given the healthy signs of
economic recovery at the time.

However, all the positive scenarios drawn by the capital
market pundits went wrong as the growing conflicts between the
political leaders had, instead, killed the economic recovery
process.

The same thing happened to the rupiah, which had also been
hurt by the standoff between former president Abdurrahman Wahid
and his political opponents. The rivalry among the political
leaders damaged all the signs of the economic recovery recorded
at the end of 2000. This could be clearly seen from the
fluctuation of the share price and the rupiah rate against the
U.S. dollar during the year.

The fixed income-based mutual funds might come as the capital
market winner of this year. These types of funds booked a net
gain of an average of 15 percent as of Dec. 7, while other
investment alternatives were subdued. Bank Negara Indonesia's
U.S. dollar-based Phinisi mutual fund, for example, booked a net
gain of 110 percent.

The mutual funds, which are based on equity trading, and the
combination of equity and fixed income instruments, followed the
general trend in the capital market. They also suffered a
decline.

The change in the country's leadership to Megawati
Soekarnoputri in July had, in fact, brought a new hope in the
financial market.

Investors, who seemed to have been fed up with the prolonged
political conflicts, started to return to the capital market
after there was a firm indication that Megawati would be elected
to replace Gus Dur.

The change in the market sentiment before the appointment of
Megawati incited a buying spree, pushing up the share price index
to above the 450 level, the highest level recorded during the
year.

The rupiah also bounced back against the American greenback as
market players felt more confidence that the change in the
country's leadership would be able to help lift the nation out of
its worst ever economic crisis.

As a result, the rupiah rose to Rp 8,500 against the U.S.
dollar in early August, hitting its highest level since early
2000.

However, the bullish sentiment did not last long. Only a month
after the appointment of the new president, both share prices and
the rupiah started to subside after the market players began to
realize that the country's economy remained at mess.

From the market performance, it is clearly indicated that the
shortlived euphoria in the share and rupiah trading was a result
of technical (sentiment) factors rather than due to the
improvement of economic fundamentals, which instead of improving
got worst due to the political certainty.

Gus Dur's weak government and his inconsistency had been
blamed as the main factor which caused the instability in the
capital and money market. No wonder, that its removal was greeted
by the market players with a buying spree. Unfortunately, the new
President failed to benefit from the good momentum to maintain
the market confidence.

The government's slow response to cope with the economic woes
and inconsistency in the economic policy such as in the
privatization program continue to put the economic fundamentals
under distress.

The slowdown in the global economy, which deteriorated
following the terrorist attacks against the United States in
September, has put the domestic economy in an even worse state.

The country's exports, which are expected to become the prime
mover of the economy, started to lose steam. According to the
Central Bureau of Statistics (BUS), exports plunged to its lowest
monthly level, to US$4.32 billion, in September from August due
to the economic slowdown in key exports markets.

The year-on-year inflation rate in September rose to above 12
percent, far higher than the government's annual target. The high
inflation rate clearly indicated why the central bank failed to
lower the interest rate of its short-term promissory notes
(SBIs).

The interest rate of SBIs, the central bank's main instrument
to reduce the money in circulation, stayed high at 17 percent at
the end of the year as compared to 12 percent at the beginning of
the year.

The high SBI rates did not only bring an extra burden for the
government to pay the interest of the trillions of rupiah bonds
issued to recapitalize the country's banks, but it also impeded
the process of revitalizing business activities.

Banks, which are expected to play a role as the engine of the
economy more effectively, could not bring much help with such
conditions.

Worse still, as the interest rates of savings and time
deposits are much lower than the SBI rates, many banks are
reluctant to channel their funds as loans. They prefer to place
them in the risk-free SBIs.

Some banks could not even solve their own financial problem.

These unfavorable fundamental factors could not, of course, be
changed over night. But signs of seriousness from the government
are certainly needed, at least to keep investors in the market.

The country's fundamental factors have not changed much since
the economic crisis hit the country in late 1997. All seem to
look bleak, but it does not mean that the equity market, rupiah
or the mutual fund have lost their future.

In this kind of market climate, investors don't need to wait
for the sharp increase in the economic growth, or for the drastic
drop in inflation rate to pour their money into the capital
market.

What they need is a sign of hope, and a good promise that
things will be better. But for sure, they will lose all their
trust if we fail to keep the promise, and to transform the hope
into reality.