Political conflict bites into stock market index
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.