Capital controls likely to dictate JSX this week

JAKARTA (JP): Talks surrounding the government's possible move to impose a capital control on the country's monetary system might dictate the direction of trading on the Jakarta Stock Exchange (JSX) this week.

Securities analysts said investors would just pose a wait-and- see stance until the uncertainty about the capital control issue clears off.

"Investors are afraid of having their money locked up here due to the currency control," said Budi Ruseno of Bhakti Investama.

He said if the government went ahead with the currency control plan, there would be a shock to the market.

The government, in an effort to make the rupiah safe from currency traders and their speculative activities, has recently begun considering an introduction of capital control.

Such a move could mean abandoning floating exchange rates and disallowing the rupiah to be converted in the overseas markets to protect the country's economy against the external risks.

In a stricter scenario, the currency controls could also cover a peg of the local currency perhaps to the U.S. dollar to further guarantee value stability.

Budi however added the shock created by the government imposing the currency control, if it were really introduced, would only be short-term in the market.

Because in the long run the country could benefit from the stable currency, as long as strong domestic resources were there to stimulate economic growth, he added, pointing out that neighboring country Malaysia was a good example.

Malaysia in August 1998 adopted the currency controls by fixing its currency (the ringgit) at 3.8 to the dollar, banning trading of ringgit outside the country and restricting its citizens to carrying only 1,000 ringgit abroad.

Issues related to the government's plan to impose the capital control had already affected the local financial markets late last week especially after International Monetary Fund's new Managing Director Horst Koehler said that adopting the capital control was not "taboo'.

Koehler's statement sent a blow to the local stock market as investors feared that the IMF boss would give a greenlight to the capital control plan. Koehler, now on his Asian trip, is widely expected to discuss the plan during his talk with President Abdurrahman Wahid in Jakarta on Sunday.

Amid the main concerns of investors here over currency controls Budi said he did not dismiss the possible positive sentiments in the market this week, brought about by the International Monetary Fund's (IMF's) approval on Indonesia's next loan disbursement late last week.

The IMF board meeting in Washington, U.S. late last week approved the $372 million loan disbursement to Indonesia to help the country carry out its on-going economic and structural reforms.

While mindful of certain weaknesses, the IMF praised Indonesia for its good economic growth, stable prices, better positioned foreign exchange reserve and lowered poverty rate.

"The IMF loan disbursement is actually a supporting factor for the market," Budi said.

A few other analysts said that complementing the market uncertainty (created by the capital control issue) this week was the 'Soeharto factor'.

They believed there could be continued unrest linked to former president Soeharto's supporters, which would affect market sentiment negatively this week.

"We had bombings in Medan early last week, and fresh religion- related violence in Central Sulawesi last Friday. Are we really not expecting similar incidents to occur again ?" one analyst asked.

"Something happens every time there is progress in Soeharto's overall trial process," the analyst added.

"So we are still facing a bleak market next week," the analyst said over the weekend.

He said there was some hidden scenario behind the actual violence itself, which was to divert public attention from democracy and legal enforcement, including the trial of the country's former strongman Soeharto.

Another analyst from a local securities firm however countered that the recent rally in the U.S. stock markets following signals of the country's slowing economy could be positive enough to just slightly offset the negative factors on JSX.

The U.S. government reported that the country's unemployment rate rose and job creation slowed in May.

"The U.S. market rally, as has normally happened in the recent past, will have a contagious impact on other stock markets around the world including Asia and of course Indonesia," the analyst said.

The JSX Composite Index lost 7.8 percent last week to close at 444.44 points, compared to 482.07 points the previous week.

The daily average transaction value increased to Rp 661.71 billion last week, compared to Rp 361.95 billion the previous week.

The daily average turnover also increased to 751.53 million shares from 453.54 million shares the previous week.

Currency dealers said the direction of the rupiah this week depends on whether the government will impose capital controls, or at least agree to some forms of capital control.

"Market participants are closely watching the government's move on the issue," a dealer said.

"If any forms of capital control were applied here, it is not impossible that the rupiah could be stronger than Rp 8,000 a dollar," he added.

The rupiah closed stronger last week, at Rp 8,385 against the U.S. dollar, compared to Rp 8,495 the previous week, due to the currency control issue. (udi)