Political conflict bites into stock market index

By Bernie K. Moestafa

JAKARTA (JP): The year 2000 started with high expectations in the country's stock market following the appointment of Indonesia's first democratically elected president in October 1999.

But only a month after President Abdurrahman Wahid was inaugurated, internal problems within his government started to reverse the capital market trend, with the Jakarta Stock Exchange Composite Index beginning to lose ground from its opening level of 703.5.

Within months of the administration taking office, the JSX Index lost more than 100 points to settle at about 600.

PT Vickers Ballas Indonesia president David Chang said speculation started to hit the market when there was a rumor that the President was about to reshuffle his three-month-old Cabinet.

The index made another steep dive in March and hit 546.46 on the news of the 2000 state budget.

Chang said the market was worried over Indonesia's interest rate burden arising from its huge foreign debt of US$149 billion and from banks' recapitalization bonds amounting to Rp 600 trillion (about $63 billion).

Massive selling again occurred at JSX, when the President unexpectedly fired in late April two economic ministers, both of whom were members of the country's two leading political parties.

The President dismissed them on charges of corruption and collusion, but did so without producing any evidence that would have justified his action.

Fear arose that Abdurrahman had set himself up for a brawl with the two leading parties. Yet he escaped the consequences, due to Vice President Megawati Soekarnoputri being the chairman of one of the parties.

The JSX Composite Index then breached the 500-point level in May, on the emergence of a political scandal called Buloggate.

The scandal centers around the President's alleged order to have Rp 35 billion in nonbudgetary funds of the State Logistics Agency (Bulog) disbursed for humanitarian causes in Aceh.

Within less then three weeks, the index lost over 100 points dropping to 444, from where it made a slow attempt to recover.

Tension between the President and the House of Representatives in July, however, capped the index's fragile recovery at a level of 500. Positive first half reports on Indonesia's economic performance failed to raise adequate market sentiment.

But it was the killing of three United Nations' humanitarian workers in Attambua, East Nusa Tenggara, and the bombing at the JSX building that left 11 people dead, which sent the composite index spiraling down to about 420 points in September.

Chang said market sentiment was further hurt by the police's inability to bring to justice those responsible for the two incidents.

In the third quarter of this year, he said, unresolved problems between the President and the House continued to weigh heavily on the composite index.

He said that fresh calls for independence in Aceh and Irian Jaya also made many investors wary over the market's immediate prospects.

Until December, the JSX composite index maintained its level of 400.

"Risk aversion against emerging market assets combined with the domestic political situation were a deadly combination for Indonesian investment in the fiscal year 2000," said Lin Che Wei, director for regional research at the Singapore-based SG Securities Pte Ltd.

He said the JSX fell from as high as 700 in January to 420 as of November. In the same period the rupiah plunged from a level of 7,000 to the U.S dollar to Rp 9,500.

"Foreign investor interest is at an all-time low," he added.

Wei said foreign investment now accounted for only 21 percent of the total transaction value at JSX.

Sigma Research director Jasso Winarto also attributed a weakening world market to the JSX's poor performance.

World market indexes fell by an average of 15 percent on the Federal Reserve's move to hike interest rates.

Indonesia, he said, ranked third in this year's worst performing markets with a 37.72 percent loss of its value. Seoul marked the biggest loss with 46.03 percent, followed by Bangkok which lost 43.21 percent of its value, he said.

"The Feds raised their interest rates for two consecutive years to 6.5 percent from 3.75 percent," Jasso said.

He said Asian markets were especially vulnerable due to their high dollar exposure.

Dollar denominated debts of many Asian companies swelled as their local currencies weakened against the dollar. Interest rates on their debts also rose in reflection of the Federal Reserves' move, he said.

Many Indonesian companies remain highly indebted, as most have been unable to pay their debts since the economic crisis started in 1997.

Debt restructuring may ease the terms and conditions of their payments, but it cannot prevent these debts from growing when the rupiah continues to depreciate, Jasso said.

Earlier this month, Morgan Stanley Capital International's (MSCI) announcement to change its rating method dealt another blow to JSX's depressed market.

The decision to adopt a free-floating method pushed down the weighting index of Indonesian stocks from 1.3 percent to 0.8 percent.

Under the new method, MSCI's indexes would reflect the proportion of shares available for transaction in the stock market.

Indonesia's free-flowing stock proportion was an average of only 30 percent to 40 percent, meaning that the remaining 60 percent to 70 percent of stakes in publicly listed companies were not available on the stock market, Jasso said.

Although the changes were due for next year, investors at JSX unloaded blue chips carrying low free-floating rates.

Despite the unfavorable external conditions, Jasso blamed domestic problems in Indonesia as the main factor behind the hefty loss of 37.72 percent in JSX's value.

Of that percentage, he said, 10 percent was the result of external factors, while the remaining 27.72 percent could be attributed to continued domestic political bickering and security uncertainties.

"I am still pessimistic on the outlook for next year," Jasso said.

The economic recovery, he said, hinges on the development of the political front.

"The government's legitimacy is dropping. We have a President who no one pays attention to, and in the eyes of investors, the government is a joke," he said.

Jasso warned that the JSX would remain off the foreign investors' radar screen until Indonesia can clean up its household.

Chang also expressed concern over unresolved political problems that were continuing to undermine the market.

He said an unstable rupiah, as a result of this, made recovery in the real sector difficult.

Chang estimated that debt-loaded companies, vulnerable to foreign exchange losses, would have to bear another difficult year.

Foreign investment was hard to expect, he said, while local banks would continue to refrain from lending due to a lack of confidence toward the real sector.

As banks are unlikely to resume their lending role any time soon, the real sector is out for flagging growth, he said.

However, he advised investors to keep a look out for shares of export-oriented or consumer-related companies.

Ramayana, Indofood, Indah Kiat, just to name a few, would make for good investment if economic conditions did not deteriorate, he said.

To stimulate the market, Chang suggested the government to privatize some state companies by floating their shares at JSX.

Lin Che Wei gave a more optimistic note, saying that the JSX composite index would rebound to reach 565 within the next 12 months.

"This will be attributed to an improvement in risk aversion toward Southeast Asian markets," he said.

Lin Che Wei also said the government would accelerate its internal restructuring programs, thus helping to raise market confidence.

"But unless we see structural changes in terms of corporations and the government -- it will be quite difficult to be fundamentally bullish about Indonesia," he said.

He called for fresh funds for the banking sector, transparent and fair corporate debt restructuring deals, a firm strategy on asset disposals and revamping state-owned enterprises.

"Indonesia has achieved tremendous results in terms of restructuring over the past three years. But it still has a long way to go," Lin Che Wei said.