Indonesia within the Global Financial Market

Samuel Tedjasukmana MSc Finance & Investment 2006
Indonesian financial market is recently hailed as one of the best performers in the world. The long and bitter journey of recovering the economy since its collapse in 19971998 has paid dividends for a better hope for the strong-foundation of Indonesian economy in general, and especially its financial market. In regards, the Jakarta Stock Exchange (JSX) Composite Index, which is the main indicator of financial market performance, has been experiencing substantial growth from year 1999 up until now. The JSX index, after suffering a record low, 398.03 in 1998, bounced back to the level of 676.91 in the end of year 1999. It even hit the record of 716.46 on 21 June 1999. Entering the year 2004, it rose to 1,200.56, and this year, it seems it will be sustained in the level of 1,400-1,500. Within the frame of globalisation, Indonesian financial market is definitely attractive to foreign investors. This is encouraged by sustainable – although some experts think rather too slow – economic reform. The question we should be asking though is how does the reform face the future and what are the threats, including opportunities that Indonesian financial market would offer? Indonesian financial market: 8 years after the crisis Financial ailment was the main reason of Indonesian economic crisis in 19971998. The massive decline of Indonesian Rupiah (IDR) exchange rate to US Dollar (USD) made serious impact to budget deficit and valuation of Indonesia’s foreign debt. In June 1997 IDR was traded 2,450 per USD. But in January 1998, it was depreciated to 10,375, and in July 1998, 15,300. The private sector soon hit by hyperinflation, which was 78% in year 1998, causing increased non-performing loans burden to the banking system. Bank Indonesia, the central bank, decided to increase the interest rate to 70% in order to absorb funds in the market and cut credit expansion to

the private sector. The government closed several banks having the CAR below -25% and established the Indonesian Bank Restructuring Agency to recapitalise those having -25 to 4 percent of CAR. Year 1999 was the pivotal time to restart the economy. Exchange rate was relatively stable during this year, at average of IDR 8,000 per USD, giving good sign on the course of economic recovery ahead. That was particularly good news for the financial market, as annual transactions value at JSX reached IDR 147.91 trillions (approx. £9.25 billions), compared to 1998’s 99.68 trillions (£6.24 billions). From 2000 through 2006, Indonesian economic recovery was largely seen as a good progress in accordance to the economic reform agenda, which as far as the financial market is concerned consists of economic liberalisation, state-owned enterprise divestments, application of floating exchange rate instead of the previous managed floating, and tax reform. Those policies aim at creating a more competitive and efficient market in order to attract new investments, especially foreign, into the country. The newest example is the opening of petrol retail industry, which traditionally monopolised by Pertamina, a state-owned energy enterprise. Royal Dutch/Shell and Malaysian Petronas enter into the Indonesian petrol retail market in the early 2006. A growing financial market: opportunities and threats JSX index current range of 1,300-1,400 is an indication that there is a great wave of foreign funds coming into Indonesia. By the end of 2004, the market capitalisation value reached IDR 679.95 trillions (£42.5 billions), with annual trading value of IDR 247.01 trillions (£15.44 billions). In terms of diversification, the financial market offers wide range of investment instruments. Both primary investment products, e.g. investment funds (mutual funds), OTC stocks trading, etc, and the derivative products, e.g. options, futures, forward contracts are available in JSX, as well as the other stock market, Surabaya Stock Exchange (SSX). Mutual funds seem to be the prima Dona in the retail segment, whilst in corporate, Indonesian companies are the main targets for foreign acquisitions. Investment managers, both domestic and international, play in a very competitive environment. Mutual fund in fixed-income securities is the most preferable

for Indonesian investors to put their money in. The stocks portfolio however, is getting more momentum since the sustainable surge in the Composite Index. Corporate acquisitions are also in the focus. Several state-owned enterprises have been taken over by foreign firms. Singapore’s Temasek Investments bought out the government’s shares in telecom giant Indonesia Satellite (Indosat). Telekom Malaysia expands it business by acquiring the Indonesian third largest mobile networks provider Excelcom, who later on having a strategic partnership with the UK’s Vodafone PLC. There are corporations in other industrial sectors, e.g. banking, petrochemical, agriculture, etc who had also taken over by foreign investors. Nevertheless, the financial market attractiveness carries a latent risk, since foreign investments are mostly financial than real. Besides corporate take-overs, most of the transactions in the Stock Exchange are speculative. That is a sign that international investors prefer short-term capital gains over dividends for their returns. There are tough questions about creating appropriate investment climate to be answered by the government, in order to reduce the volatility of the financial market. To recover investors’ confidence to make new direct-investment in the private sector, in which involves a creation of new jobs, the government should pay attention on human resource qualifications and labour law, bureaucracy that have led to a high-cost economy, inconsistency in giving investment incentives, i.e. tax holiday duration, etc. The appropriate regulations or deregulations in those key factors are crucial to get the foreign investors invest more on growth, rather than short-term profit taking in the capital market, which will reduce its volatility and end an episode of economic bubble in Indonesia. The future of Indonesia’s financial market in global scope thus, is open for growth towards an efficient and more attractive market through continuous economic and investment regulatory reforms. Whilst in the mean time, the world will keep seeing the surging numbers in both JSX and SSX Composite Index.

REFERENCES
Kwik, Kian Gie, Drs – Indonesian senior economist. Kemiskinan dan Ekonomi Balon (Poverty and Bubble Economy), article on Kompas Newspaper, Jakarta, Indonesia: 27 April 2006 Muhammad, Mar’ie – former Indonesian Minister of Finance, Kebijakan Fiskal: Pemikiran Konsep, dan Implementasi (Fiscal Policy: Thoughts, Concepts and Implementations), pp 109-113, Kompas Publishing, Jakarta, Indonesia: 2004 Boediono, Dr – currently the Indonesian Coordinating Minister of Economy. Kebijakan Fiskal: Pemikiran Konsep, dan Implementasi (Fiscal Policy: Thoughts, Concepts and Implementations), pp 43-55, Kompas Publishing, Jakarta, Indonesia: 2004 Dewan Ekonomi Nasional (National Board of Economy), Kerangka Ekonomi Indonesia Baru (The Framework of New Indonesian Economy), Jakarta, Indonesia: 21 April 2000 Indonesian Capital Market Supervising Agency (Bapepam) Annual Reports: 1999, 2000, 2004, Jakarta, Indonesia Fabozzi, Frank J/Modigliani, Franco/Ferri, Michael G. Foundations of Financial Markets and Institutions, 10/e, Prentice-Hall: 1994