The JSX plunges

The 7 percent fall of the Jakarta Stock Exchange (JSX) Composite Index on Monday to a 17-month low, though widely predicted after the bomb blast at the JSX building on Wednesday afternoon, will have a far-reaching impact on the pace of the nascent economic recovery.

As the country's financial and capital markets still sorely lack depth and sophistication, the stock exchange, besides serving as a window on Indonesia's best companies, is one of the main benchmarks for asset-price assessments. Its role as a main source of equity capital for investments becomes even more vital now as most major banks are still too fragile to resume significant corporate lending.

The first to be hit by the steep share-price drop will be the planned initial public offerings of state banks and companies which are badly needed to raise funds to plug the state budget deficit and make the exchange more attractive through new listings of blue chip companies.

As foreign investors have always been the main players in the exchange and portfolio investment is still the only foreign capital flow feasible now until there is significant remedy in the nation's multidimensional crisis, their massive unloading of shares at the JSX on Monday and Tuesday will likely leave the market depressed for some time.

The problem any exchange faces after panic selling is that the market takes some time and requires a host of very positive factors before it can recoup its losses. There will not likely be a repeat of Monday's plummet. The JSX did rebound slightly on Tuesday, up more than 3 percent to put up the index at around 425. But this technical rebound could be only temporary in the absence of new positive factors. But even languishing at the new level means that the market capitalization is now as low as it was during the height of the economic crisis in early 1999. The market value of the 280 companies listed at the JSX is now still less than 26 percent of the precrisis level in June, 1997.

Most analysts now consider the stock prices very cheap, but since the political and security risks are seen as too high, the JSX will most likely not reenter the computer screens of foreign and domestic investors. Market sentiment is so negative now, especially as Indonesia is under strong pressure from the United Nations, the World Bank and the United States to restore order in the western part of Timor island, that investors will simply ignore the significance of the expected economic growth of 3.5 percent to 4 percent this year and 5 percent next year.

Chief economics minister Rizal Ramli, who attended the reopening of trading at the JSX on Monday after two days of closure apparently to lend a psychological boon to the market, tried to reassure investors, saying that the fall would only be temporary as the market was still in shock. But Minister of Finance Prijadi Praptosuhardjo and Minister of Industry and Trade Luhut B. Panjaitan, who accompanied Rizal during the visit, witnessed for themselves how verbal reassurances from the chief economics minister did nothing to prevent panic selling.

What the market expects are concrete measures to maintain security and order, policy consistency and strong law enforcement, without which reasonable risk calculation -- which is what business is all about -- would be rather impossible.

True, many of the multiple woes that have been dogging the country are beyond the jurisdiction of Rizal's economic team to resolve. But fast, strong, consistent measures by the economic team in debt, banking and corporate restructuring and on other major items in the reform agenda, as stipulated in the government's letter of intent to the International Monetary Fund, would provide very positive factors to improve market sentiment and minimize the economic uncertainties of doing business in the country.

The economy cannot afford to wait long for a strong rebound in the JSX because the exchange's performance will affect the outcome of the asset sales by IBRA and the privatization of nationalized banks and state companies, which are crucial in plugging the state budget deficit.