Indonesian stock market performs well this year

Indonesian stock market performs well this year

By David Chang

JAKARTA (JP): The Indonesian stock market was among the most
exciting and best-performing markets in ASEAN in 1996. The
Jakarta Stock Exchange (JSX) composite index, only 514 points at
the end of 1995, climbed 23 percent in just four months to a 630
year high in April this year.

In the first 11 months, the country's stock markets rose 18
percent. This compared favorably to Singapore's and Thailand's
markets which fell 5 percent and 30 percent respectively in the
same period.

The unexpected death of President Soeharto's wife, Ibu Tien,
in late April was partly responsible for the sharp 27-point (4
percent) fall within a week in early May. Besides being
Soeharto's partner for more than 48 years,Ibu Tien was his
closest personal confidante. Being two years younger than
President Soeharto, her sudden departure put the spotlight on his
advancing age and physical well being.

The importance of President Soeharto's health to the financial
market manifested itself again when the stock market plunged 19
points (3 percent) to 575 in two trading days following news on
July 4 that the President was to seek medical attention in
Germany.

The controversial national car issue first surfaced in
February when the minister of trade and industry announced that
PT Timor Putra Nasional, owned by President Soeharto's youngest
son, Hutomo Mandala Putra, was to be exempted from import tariffs
and luxury taxes.

This had an immediate impact on Astra International's
earnings, and serious implications for the government's
disposition toward major foreign investors.

But after serious opposition from local manufacturers, the
government attempted to appease the motor industry by eliminating
the luxury tax on vehicles with 1,600 cc engines which have 60
percent minimum local content.

The luxury tax on commercial vehicles with less than 60
percent local content has been reduced from 35 percent to 25
percent for diesel engine vehicles, and to 20 percent for petrol
engine vehicles. This has narrowed the disparity of treatment
between Timor Putra and other car manufacturers.

The situation deteriorated further when the government
announced that while Timor Putra's plant was being set up, Timor
Putra would be given a one-year period to import fully-built
vehicles from Kia Motors of Korea, free of import duties and
exempt from luxury taxes, provided the Korean-assembled cars had
at least 25 percent Indonesian-made parts purchased through Timor
Putra. This prompted Japan, the U.S. and the European Union to
start proceedings at the World Trade Organization against
Indonesia for discriminatory trade practices.

The stock market dived in mid-June after the leader of the
Indonesian Democratic Party, Megawati Soekarnoputri, was deposed
in a controversial government-backed party congress in Medan.
This culminated in a riot on July 27 after truncheon-wielding
police raided the party's headquarters, occupied by Megawati's
supporters, in Jakarta, resulting in several deaths and hundreds
being sent to hospital or arrested. Unnerved by the riot, the JSX
composite index fell 28 points (5 percent) to 533 in four days.

Just as these political troubles began easing, corporate
issues began to dominate the headlines in the fourth quarter of
1996.

Astra

The Lippo group found there was strong public opposition to
its initial proposal to restructure the equity structure of its
financial companies: Lippo Securities, Lippo Life and Lippo Bank.
As a compromise, the founding shareholders sweetened the terms to
include the permanent waiving of annual management fees paid by
Lippo Bank to the Riady family, and the acquisition price of
Lippo Life by Lippo Securities and of Lippo Bank by Lippo Life
was reduced by a token 3 percent.

This proposal was finally approved by minority shareholders of
the respective companies.

The market was also dominated by news and rumors surrounding
Nusamba's proposed plan to acquire a controlling stake in Astra
International and news about a take-over move by Sampoerna and
his company, H.M. Sampoerna.

Nusamba is an investment company owned by non-profit
foundations linked to President Soeharto's son Sigit
Hardjojudanto and timber tycoon Bob Hasan. As Astra and Sampoerna
have two of the largest market capitalizations on the JSX,
accounting for about 9 percent of total market capitalization,
their price movement had a significant impact on the composite
index and general market sentiment.

H.M. Sampoerna's move to acquire Astra shares dragged down its
own share price to a Rp 9,150 year low in October, 38 percent
down from its peak of Rp 14,650 in January. This was followed by
both Standard and Poor's and Moody's Investor Service putting
H.M. Sampoerna on a credit watch. External pressures ultimately
forced H.M. Sampoerna to dispose of its Astra shares and abandon
its plan for a tender offer for Astra.

From January to the end of November, there were only 12
initial public offerings (IPOs) in Indonesia, down from 21 in
1995. In the first 11 months, Rp 2.1 trillion was raised by IPOs,
compared to Rp 5.8 trillion last year. But this drop does not
accurately reflect sentiment because of the huge Telkom IPO issue
in 1995 which raised Rp 9.3 trillion, accounting for 62 percent
of the funds raised by new issues that year.

Like previous privatization issues such as Indosat in 1994 and
Telkom in 1995, the BNI privatization issue in November was the
most successful IPO in Indonesia, if not in Asia, in 1996.

The share price closed 35 percent above its offering price of
Rp 850 on listing day. As we had anticipated, the BNI issue
attracted huge investor attention to the banking sector which had
been underrated over the previous six to 12 months.

Investment strategy

The outlook for the stock market in 1997 appears positive on
the back of strong macroeconomic fundamentals, despite some
concern on the impact of parliamentary elections in May.

The Indonesian economy is expected to continue its strong
growth to 7 percent in 1997, it was just below 7.5 percent in
1996, while inflation should ease slightly to 7.2 percent. The
current account deficit is expected to continue widening to
US$8.1 billion in 1997. But because of robust economic growth,
the deficit as a percentage of GDP should fall to 3.4 percent in
1997 from 3.6 percent in 1995, still tolerable compared to 7.7
percent in Thailand and 3.7 percent in Malaysia.

As Bank Indonesia continues to curb loan growth to between 17
percent to 18 percent for 1997, interest rates should start to
ease. Because of surplus liquidity, several private and state-
owned banks reduced their deposit rates by between 50 and 100
basis points in 1996, and this should be followed by a decline in
lending rates in 1997.

The stock market in general should benefit from lower interest
rate expectations. We recommend putting weight on interest rate
sensitive sectors which include banks, property, building
materials and vehicles.

Investment decisions, and most general business decisions, in
1997 are likely to be influenced by the election of the House of
Representatives (DPR) in May.

We have no doubt that President Soeharto, supported by the
armed forces, will ensure that Golkar wins a landslide or at
least maintains its large majority (it had 68.1 percent of the
vote in 1992). But there are concerns over the President's health
and his physical capacity to complete his five-year term
commencing 1998.

This is likely to heighten the issues of leadership succession
issue and intensifying conflicts for key political positions. The
constitution stipulates that the vice president will assume the
presidency on a caretaker basis if the President is unable to
fulfill his duties.

Golkar does not need a landslide election victory to ensure
President Soeharto's re-election because the government appoints
575 members of the 1,000 member of People's Consultative Assembly
which will elect the president and vice president in March 1998
for a five-year term. If re-elected, President Soeharto will
serve his seventh term.

The market has underrated the banking sector in the last six
to 12 months. But the sector deserves appreciation with predicted
improved profitability in 1997, enhanced by wider net interest
margins from lower deposit rates. This is because the central
bank is likely to maintain its firm grip on monetary policy and
set similar loan growth constraints of between 17 percent and 18
percent for 1997.

Hence, liquidity should remain abundant. We also expect banks
to increase fund raising through rights issues in 1997. A total
Rp 1.6 trillion was raised through rights issues (accounting for
1.3 percent of total issues) by the banking sector in 1996.

Car market

The car market is expected to turn around in 1997 as cars
become more affordable because of cheaper prices and finance. We
expect about 320,000 cars will be sold in 1996, up 17 percent on
1995. Car sales are expected to rise 20 percent in 1997 and 15
percent in 1998.

Two new vehicles will soon enter the auto market. Indomobil
plans to launch affordable family cars (sedan and van) between
1998 and 1999, while conglomerate Bakrie Group is also looking to
introduce its own family car.

In the 1300-1800cc engine class, new competition is expected
to come from Bimantara (Hyundai) and the Timor (KIA Motors).
Increased competition has already dragged down car prices.

The outlook for the property market should improve in 1997
with falling interest rates. High interest rates had a negative
impact on both the property market and property developers'
search for finance.

Hence, property developers' earnings in 1996 were mostly
boosted by extraordinary transactions, which included sales of
land and buildings at below-market prices to joint venture
companies in cooperation with international partners. This helped
property companies meet some of their financing requirements for
development projects.

We expect this trend to continue in 1997 as the government
continues to restrict loans to the property sector. The elections
could have a negative impact on the property market, especially
for spectators, but should have little or no impact on middle to
low-cost residential properties, where the majority are first-
home buyers.

The writer is the director of research at PT Vickers Ballas
Tamara