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.