Stock market resurges

Stock market resurges

Foreign portfolio investors in Indonesia should have been
immensely happy for the past five months, what with the rupiah
appreciating by almost 8 percent and the Jakarta Stock Market
(JSX) composite index resurging to almost 520 from 425 at the
beginning of this year, a gain of 23 percent.

Indonesia's capital market has undeniably been the best
performer in Asia in 2003.

This trend resembles the development in the first semester of
2002, when the bullish market sentiment drove the JSX index to as
high as 545 in June, from as low as 380 in January.

The market bulls in the first half of 2002 rode on the backs
of an increasingly stable macroeconomic and political climate,
the successful strategic sale of Bank Central Asia -- one of
Indonesia's largest banks -- and larger flows of foreign
portfolio capital into Asian stock markets, such as in Thailand
and Korea.

But the JSX index fell to as low as 325 after the terrorist
attack in Bali in mid-October before recovering gradually to
almost 425 at the end of that year, largely due to the new
confidence generated by the successful sale of Bank Niaga to
Malaysian investors and of telecommunications company PT Indosat
to Singapore Temasek Holdings. The bitter reality, though, was
that much of the gain made in the first half had been lost.

There is a similar trend in what has happened over the last
five months. The market has been resurging on the backs of a
steady decline to as low as 10.07 percent in the central bank's
benchmark interest rate, a strengthening rupiah, significant
progress in important reforms such as the strategic sale of
another major bank -- Bank Danamon -- and a faster pace of asset
disposals by the Indonesian Bank Restructuring Agency.

This confidence-building trend, combined with the fact that
most stock valuations are still very low to allow for high gains,
has wooed more foreign portfolio investors to the stock market.
The steady decline in inflation has also allowed the central bank
to further lower its benchmark interest rate, thereby luring more
investors to its stocks and bonds.

The question now is whether this positive development will be
sustainable for the rest of the year as well as next year, or
whether this trend will face downside risks similar to those
experienced in the second half of 2002.

There are several signs that could signal the direction toward
which we may be heading in the next few months.

First, we should be careful about the underlying factors of
the low inflation rate. However welcome the general price
decrease, this trend also reflects a worrisome development in
that a decline on the demand side has contributed greatly to the
lower rate.

Except for cement and automobiles, which continue to enjoy
strong sales, the demand for most consumer items has been
declining, as reflected in the lower sales growth at supermarkets
and department stores. Motorcycle sales, which reflect the
purchasing power of lower-middle and low-income earners that make
up the bulk of consumers, have been on a downward curve as well.

The weakening consumer demand was quite obvious in the
declining economic growth, as private consumption has been the
greatest economic locomotive for the past five years, accounting
for over 70 percent of the gross domestic product.

GDP growth, for example, fell from 4.25 percent (year-on-year
basis) in the third quarter of 2002 to 3.82 percent in the fourth
quarter, and slipped further to 3.44 percent in the first quarter
of 2003.

The 2002 annual reports of most publicly listed companies did
show significant increases in profits, but further analyses
concluded that most of their earnings were derived from lower
costs, due to a stronger rupiah that reduced foreign-exchange
losses and to lower interest.

Businesses need to book significant increases in net sales
revenues in order to net bigger profits this year, especially
because most companies have carried forward all their losses over
the past five years and will again be subject fully to income
tax.

Significant gains cannot be expected from higher business
productivity, due to the persistently low pace of investment:
Witness how most companies that floated bonds over the past year
used their additional capital for restructuring old loans and not
for operational restructuring, let alone expansion.

The market therefore needs more confidence-building
developments to sustain its bullish trend. After all, the capital
market is primarily a mechanism of investor perceptions and
expectations.

A successful initial public offering by Indonesia's biggest
bank, Bank Mandiri, early next month, will be a solid building
block for confidence. Likewise, a credible program to exit the
International Monetary Fund facility and a successful strategic
sales of Bank Lippo and Bank International Indonesia later this
year, will strengthen the positive cycle.

Investors will also be watching out for several new laws on
next year's general elections, scheduled to be enacted within a
few weeks. Election laws based on a unanimous political consensus
will make businesspeople comfortable, as they will be reassured
that political sentiments and competition during the 2004
elections will be well managed.