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