The JSX plunges

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.