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.