Economic Update

Published 21 May 2015

A visit by President Joko Widodo in April threw a spotlight on the Indonesia Stock Exchange (IDX), with the exchange’s benchmark hitting an all-time peak of 5523.29 in the days before the visit.

Since then, the Jakarta Composite Index (JCI) index has eased, falling 6% from its high in April, due to concerns over slower-than-expected economic growth, a sliding rupiah and rising import costs. But despite the headwinds, the index has risen 8.57% over the past year.

“We have to be confident, (we) must be optimistic that the economy will be better in the future,” Jokowi told reporters, setting a new milestone for the exchange of above 6000 by the end of the year, a target which many analysts see as ambitious.

In an interview with OBG, Ito Warsito, president of the IDX, said the exchange is targeting 20% growth in 2015 in terms of market capitalisation, with an aim to achieve a similar growth rate in subsequent years. By 2020, the goal is to have at least 750 companies listed on the IDX – from its current level of just over 500 companies − with its market cap doubling from Rp5535trn ($457.5bn) to around Rp11,000trn ($909.26bn).  

“If Indonesia wants to become a larger economy in ASEAN, the government must push its capital market industry to grow,” Warsito told OBG, adding that foreigners were investing in the bourse.

While that may be encouraging, the market needs to overcome several hurdles to continue its upward trajectory, be more competitive in the region and encourage more domestic interest.

Luring investors, companies

According to a report in the Jakarta Post in April, the IDX is dwarfed by other regional players. There are currently about 477,000 registered investors on the IDX, representing a mere 0.19% of the population. Neighbouring Malaysia has a significantly more developed bourse with 5m to 6m registered investors, a fifth of the population. As of 2014, Indonesia had 506 companies listed, compared with Malaysia’s 905, Singapore’s 775 and Thailand’s 677.

Demand for initial public offerings (IPO) also remains weak. Three companies have listed so far this year, a far cry from the exchange’s goal to secure 32 IPOs in 2015.

There are some bright spots, however, with property market stocks being star performers in the first few months of the year. Bloomberg reported in early April that property developers on the Jakarta stock exchange, including Alam Sutera and Lippo Cikarang, had the highest average analyst ratings among global peers. The Jakarta Construction, Property & Real Estate Index had gained 25% over the past year, twice as much as the benchmark index.

Improving Indonesia’s infrastructure was a key plank of the president’s election pledge last year to rejuvenate the economy, with property companies expected to be beneficiaries. Most of the companies preparing to issue IPOs this year are in the property sector, including PP Properti, a subsidiary of state-run construction firm Pembangunan and Perumahan; Puradelta Lestari, a firm under Sinar Mas Land; Mega Manunggal Property; and Binakarya Jaya Abadi.

With many of the government’s infrastructure projects yet to start, the construction sector has fared less well than the property sector, experiencing slower-than-expected growth in the first quarter. Negative sentiment amongst investors that the administration’s goals are unrealistic has also hit the broader index.

State-owned enterprises (SOEs) are notably absent from the IDX, and Warsito this month called for more of them to join the bourse. So far, only 20 out of 138 of Indonesia’s public firms are listed. “There should be more SOEs listed in the stock exchange. We understand this might not be a priority at the moment, but it is something that needs to be stimulated and encouraged by the central administration,” Warsito told OBG.

Tax concerns

Some SOEs fear that increased transparency will reverse invisible tax gains. “Still today, there are companies in Indonesia that are reluctant to go public due to the requirement to disclose audited financial information, as this allows for greater scrutiny by the tax authorities,” said Warsito.

Critics say a new regulatory and tax regime needs to be in place with government bodies enforcing accurate and reliable financial reporting. The Ministry of Finance has already drafted a Financial Reporting Law, which would lay the foundations for standard and high-quality reporting mechanisms.