State firms brace to go pulic

State firms brace to go pulic

By Fadjar L. Sutandi

JAKARTA (JP): The domestic capital market started the year on
a downturn caused by the crisis in Mexico as foreign investors
compared Indonesia's debt level with that of Mexico without
looking into Indonesia's debt service capability.

After a brief rally in early February, the market dropped back
in March over investor concern that the sharp appreciation of the
Japanese yen would affect the Indonesian economy because nearly
half the nation's foreign debt is in yen.

The market slid and reached its lowest point of the year at
414.209 on April 19. In May, the market rallied as investors
reacted positively to the government's deregulation package in
addition to the anticipation of lower U.S. interest rates. After
a correction in June, the market rallied further and recorded a
high of 519.175 on August 11. It then moved sideways until mid
October.

Anticipation of Telkom's initial public offering (IPO)
weakened the market as investors unloaded their positions in the
secondary market in order to participate in the offering. Amid
weakness in regional markets due to another Mexican currency
crisis as well as Telkom's huge IPO, the company's listing did
not improve market sentiment.

A technical rebound after the market's index reached the 450
level occurred by mid November. The market is expected to close
the year at slightly above 500.

Largest deal

In the primary market, there were 22 additional companies
listed in 1995 on the Jakarta Stock Exchange (JSX), raising a
total of Rp 5.5 trillion (US$2.39 billion), bringing the total
number of listed companies to 239. Telkom, the largest deal in
Asia this year, raised Rp 3.3 trillion globally. In addition,
there were 17 rights issues raising Rp 3.1 trillion. Several of
these rights issues were used to finance acquisitions, such as
Semen Gresik's three-for-one rights issue to acquire Semen Padang
and Semen Tonasa and the four-for-one rights issue by Indosepamas
Anggun to acquire several Salim group companies.

Warrants were attached with the rights issues of Ometraco
Corp. and Bank Bali, and there were several takeover and tender
offer moves this year. Bank Papan Sejahtera, got a new management
as the result of the change in the majority shareholder, as well
as Bhuwanatala, which is currently under a tender offer process.

Economy

The Asian Development Bank expects Indonesian economic growth
to reach 7.9 percent in 1995 and 7.5 percent in 1996. However,
even though the Indonesian economy is overheating, the governor
of Bank Indonesia assures that the government will not use shock
measures to curb its impact.

Much of the economic overheating has been blamed on
over lending to the property sector. Bank Indonesia has cautioned
banks to reduce their exposure to property developers.

The full year 1995 inflation rate is expected to be below 9
percent, lower than the 9.24 percent recorded last year. However,
as the economy is overheating, Indonesian interest rates should
stubbornly stay at a high level despite the anticipation of lower
U.S. interest rates. Currently, the interbank lending rate is at
16 percent compared to 13 percent at the end of 1994.

Separately, Indonesia also faces a widening current account
deficit due to the higher growth rates of imports and an
increasing deficit in the service sector. The current account
deficit is projected to reach US$4.5 billion, which is 2.6
percent of the total gross domestic product. However, this is
still under the acceptable level of four percent.

Market outlook

The Indonesian primary market will remain the focus of
attention as the government continues its privatization program
through the capital market. Several state-owned companies, such
as Jasa Marga, a toll road operator, Krakatau Steel, a steel
producer, PLN, an electricity company, and BNI, a state-owned
bank, are being prepared to go public in 1996.

Separately, the capital market has been preparing itself for
better performance. After installing the Automated Securities
Trading System this year, the JSX is preparing for scripless
trading, remote trading and margin trading in 1996.

All these are expected to make the market more liquid. In
addition, the new capital market law, to be effected in January
1996, will give better protection to investors. The law should
also encourage the development of the domestic fund management
industry as it provides clearer regulations and allows open-ended
mutual funds.

The creation of more professional domestic institutional
parties should encourage more participation of domestic investors
in the stock market. Currently the stock market is dominated by
foreign investors who account for about 70 percent of JSX
transactions. A larger domestic investor base, in turn, will help
stabilize the stock market as its volatility is often created by
large inflows and outflows of foreign funds.

Sectorial comment

As Indonesia is preparing for freer trade, investors should
pick the shares of companies that have a major competitive
advantage over other companies in the Asian region or even
globally. These include companies in the glass and ceramics
industry like Mulia Industrindo and Asahimas Flat Glass, for
which Indonesia has abundant raw materials and low labor costs.

Indonesia's rapid economic growth will also benefit
infrastructure-related companies such as Bukaka Teknik Utama, an
engineering company, United Tractors, a distributor of heavy
equipment, Telkom and Indosat, the domestic and international
telecommunication service providers, and cement companies like
Semen Gresik.

Meanwhile, Indonesia's economic growth will also boost
consumer spending that will benefit cigarette, distribution, food
and beverages, pharmaceutical, photography and retailer
companies. The prospect of a lower interest rate would also be
good for banks, and companies such as Astra International, which
has experienced an increase in its auto sales despite the current
high interest rate.

Investment strategy

Indonesian market performance will depend on several internal
and external factors. As the Indonesian interest rates remain
high, individual domestic investors will continue to be reluctant
to invest in the stock market in a big way. Externally, a lower
U.S interest rate in 1996 may cause another inflow of funds from
overbought U.S markets. In addition, it may also pressure
Indonesian interest rates to come down as well.

The year end has brought an inflow of funds back from the U.S.
market. Favorable economic factors, solid fundamentals and
relatively cheap valuation should push the market even higher.

The writer is research manager at securities company PT Sigma
Batara.