Stocks and rupiah fare relatively better this year

Stocks and rupiah fare relatively better this year

By Wachyudi Soeriaatmadja

JAKARTA (JP): Indonesia's financial market is ending the year
with clear signs of a recovery despite a relatively poor
performance in the first half of the year.

Both stocks and the rupiah suffered a major setback during the
most part of the first quarter, partly due to investors' rising
concerns that continued antigovernment protests ahead of the June
general elections would further worsen the country's political
and social condition.

However, the general elections took place peacefully and
without the meaningful incidents most people feared. This incited
investors to reenter the capital market and sold their U.S.
dollars to buy rupiah.

The upward direction of the share prices was further
strengthened by the election of popular Muslim cleric Abdurrahman
Wahid as the country's first democratically elected president.

Overall, 1999 was a good one for the stock market and the
rupiah.

The Jakarta Stock Exchange (JSX) Composite Index increased
from a 400-level at the beginning of the year to a 600-level
approaching the year-end.

The rupiah, which fluctuated at a range of between Rp 8,500 to
Rp 9,500 against the U.S. dollar in the early part of the year
started to gain ground to reach the 8,000 level following the
peaceful election.

The Indonesian currency even gained more strength following
the election of the new president, stabilizing at Rp 7,000 at the
year end.

The positive sentiment in the financial market, particularly
in the stock market was not only due to the improvement of
people's confidence in the government and the improvement of the
economic fundamentals, but also because of the favorable progress
of the country's private debt negotiations.

Ample reports on some big listed firms which had proceeded
with their massive debt restructuring plans, in large part was
attributable to the strengthening rupiah.

They included auto giant PT Astra International, conglomerate
PT Bakrie & Brothers and state owned PT Danareksa.

A cheaper dollar had placed a lighter burden on these
companies to service their foreign currency debts.

In addition investors were also motivated by the moderating
inflation rate, the downward movement of interest rates and the
improving gross domestic product. And, indeed, country risk was
further reduced.

Inflation rates continued to fall, mostly to negative levels
for most of the year, due partly to improvements of distribution
systems and the strengthening of the rupiah.

The government estimated the annual inflation rate would fall
to 2 percent in 1999 as compared to 77 percent in 1998.

The central bank benchmark interest rates were also
consistently lowered and thankfully did not negatively affect the
rupiah. Analysts said it was because Indonesia's country risk had
reduced.

The benchmark central bank interest rates on one-month
certificates of deposit (SBI) fell to a few percentage points
above 20 percent. The rate reached a record high of 70 percent in
mid-1998.

Outlook

Analysts estimated the improvement of the country's economic
fundamentals and more importantly the return of public confidence
would further bolster both stock and the rupiah.

They believed issues related to fears of the disintegration
of the country would not pose a real problem to the financial
market.

Goei Siauw Hong, Head of Research at PT Nomura Indonesia, said
disintegration issues in provinces such as Aceh, Irian Jaya and
Riau did not pose any great potential problems as these
separatist movements had not received any international support.

"International recognition is a must for a would-be nation to
form a new independent state," he said.

Without such international support they could not go anywhere
and would still be a part of Indonesia.

On the JSX outlook, Goei said the Composite index would speed
up noticeably in early 2000 as interest rates were low, the
economy had started to recover and Indonesia's risk had been low
since the onset of the country's landmark general elections in
June.

"People should either invest or speculate in the equity market
rather than putting money in low bank deposit interest rate
accounts," Goei said.

A different story to that of the stock market, the rupiah
would not be as good in the early part of next year, or at least
in the first quarter, as a number of indebted companies had to
service their foreign debts, according to a currency dealer with
a local private bank.

"Following the second quarter the rupiah will look better, but
it won't be stronger than the 6,000 level it's been hovering at
throughout the year against the greenback, due to the country's
foreign debt burden," he said.

A number of those corporations under a debt restructuring
agreement would also start repaying their dollar-denominated
principal loans in the later part of the first half, he added.

He also said the government would have to spend an extra
amount of some Rp 40 trillion for the year for coupon interest
payments of the bank recapitalization bonds.

"This will affect the supply side of the rupiah and, hence,
will negatively correct its value against the dollar as well," he
said.

Disagreeing with the above, Goei said the rupiah would still
have room to further strengthen as political risks were much
reduced following the relative success of the country's election.

This in turn had reduced Indonesia's country risk.

"With the reduced country risk, foreign investors will see
Indonesian assets as relatively cheaper," he said.

Thus, there would likely be an inflow of foreign capital next
year, and some of it would go to the equity market. In the
meantime, the rupiah would strengthen on the inflow of the
foreign capital.

The main concern left for JSX trading next year was with the
Year 2000 (Y2K) problem, he said, referring to the common
computer programming practice that uses only two digits for the
year. Computers that are not updated could mistake '00' for
'1900', creating potential problems ranging from billing errors
to power outages.

"But we hope that, at the latest, by February Y2K fear in the
country's stock market will be gone," he said.

Goei was optimistic the Composite Index could reach the 900-
level by the end of 2000.

The shares of companies in the consumer goods, cigarettes
(subject to its possible new tax environment), food,
pharmaceutical and retail sectors would be the first to recover.

"They will outperform the shares of those export-oriented
companies for the next three to six months," he said.

Export-oriented shares were faced with the strengthening of
the rupiah against the dollar, Goei said.

The next group to recover would be durable consumer goods such
as cars and residential property, but office and industrial
property would take longer to recover due to the existing excess
capacity.

The shares of banks, those under the recapitalization program,
would still be relatively expensive because there were dilution
effects from the massive rights issues.

Technology shares would be the high risk high gain shares on
the country's stock markets, since many were talking about these
shares and many would like to speculate on them.