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.