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.