Surprising surge in Jakarta Stocks

Surprising surge in Jakarta Stocks

Martin R. Jenkins, Consultant, Security Firm, Jakarta

Given the rather gloomy outlook on the economy at the end of
last year, the resurgence of the nation's stock market in the
first three months of 2002 has come as a surprise to many market
observers. The benchmark index on the Jakarta Stock Exchange, the
Jakarta Composite Index (JCI), has gained a remarkable 23 percent
in this period, making it one of the best performing stock
indices in Asia. What then, are the reasons behind the sudden
turnaround in the fortunes of the domestic stock market?

First, there has been renewed interest in the region's stock
markets as a whole. And when regional markets are on the up (the
stock markets in the Philippines and Thailand gained 20 percent
and 23 percent, respectively, in the first three months of 2002,
for instance), the Jakarta stock market is more likely than not
to make gains too. Greater interest in the region has come as
investors come to realize that stock valuations continue to be
very cheap. Many stocks are attractive in absolute terms and also
when compared to stocks on other markets, such as the U.S. and
European markets.

The bullishness in Asia owed much to the realization that
fears of a global economy meltdown following Sept. 11 were
unfounded. Although risks remain, there are propitious signs that
the American economy is already starting to pick up. And as a
significant proportion of the region's exports are destined
toward the U.S., a stronger U.S. economy can only be good news
for Asia.

Second, investors on the Jakarta Stock Exchange have been
cheered by a number of encouraging developments.

The government has shown that it is capable of taking tough
decisions (such as cutting fuel subsidies and divesting its
shares in the nationalized BCA) despite strong opposition from
vested interest groups.

Moreover, the rescheduling of US$5.5 billion of sovereign
loans falling due in 2002 and 2003 is almost certain to be
approved at the upcoming Paris Club meeting later in April, given
that certain preconditions have been met, such as the passing of
a new anti-money laundering bill. Another positive factor for
investors has been the stable rupiah US dollar exchange rate.

Although the government has been criticized for not done
enough to spur recovery, investors are more realistic and
generally accept that the government is not in a position to
provide a fiscal stimulus (through government spending) to revive
the economy given the parlous state of its coffers. They also
realize that a sharp cut in interest rates is out of the question
as it would probably stoke inflationary pressure.

Perhaps most encouragingly, security conditions have taken a
dramatic turn for the better, with warring factions in strife-
torn Maluku and in the Poso district of Central Sulawesi signing
government brokered peace accords. The military now has far
greater leeway to crush Aceh separatist rebels without having to
worry about an international outcry. The U.S. government can
hardly allege that human rights abuses are taking place in Aceh,
while, at the same time, American military forces are helping the
Philippines to put the Abu Sayyaf rebels to the sword.

The improving security is of crucial importance, particularly
for foreign investors; and, in view of this, they would be
willing to accept lower returns than they otherwise would.

Further, the government has at last shown that it is willing
to bite the bullet and get tough with recalcitrant debtors
(former bank owners who had abused Bank Indonesia liquidity
credits), who now face legal proceedings.

Other signs of the government's commitment to enforce the law
include the detainment of suspects in the Bulog II scandal; the
conviction of the BI Governor Sjahril Sabirin in relation to the
Bank Bali scandal; and the detainment of the former chief
commissioner of now defunct Bank Industri, Hashim
Djojohadikusumo.

Only time will tell whether the Jakarta Stock market can
extend its gains over the coming months. But if the market rises
as much as it did in the first three months of the year, there
will be some very happy investors indeed.