Economic Update

Published 22 Jul 2010

Indonesia’s capital markets are enjoying a bumper year as investors move in to make the most of its burgeoning economy and relatively strong outlook. Companies and the government are taking advantage of the upswing to launch initial public offerings and bond issues.

Shares on the Indonesia Stock Exchange (IDX) –the Bursa Efek Indonesia – have risen substantially this year, with the benchmark Jakarta Composite Index posting a 15% rise and hitting a six-week high on June 16, making the IDX the best-performing bourse in South-east Asia in 2010. Foreign investors have been particularly enthusiastic, with net buying totalling $545m, according to international press reports.

There are several reasons for the IDX’s recent success. Perhaps most important is simply that Indonesia’s macroeconomic fundamentals are so sound. Despite the global economic downturn, the economy managed 4% growth in 2009, as the country was relatively isolated from the effects of the crisis that caused so much damage elsewhere. The IMF forecasts growth of 6% and 6.2% in 2010 and 2011, respectively, rates that could potentially be higher if economic reform gathers momentum.

The strength of growth in 2009 is indicative of the country’s firm macroeconomic grounding, which until several years ago had been a cause for concern, particularly in the wake of the 1997-98 Asian financial crisis. An IMF staff visit in June found much to praise, including sound private and public balance sheets (public debt is now less than 30% of GDP), exchange rate flexibility, sound monetary policy and a robust financial system.

Another reason for confidence is Indonesia’s large and growing population of around 240m, which, coupled with rising affluence, will increase demand for goods and services (including financial services) over the coming years, thereby stimulating the private sector.

While long-term fundamentals are excellent, there are also factors behind the IDX’s particularly good performance in recent weeks. One of these, which is perhaps counterintuitive, is the shakiness affecting other global capital markets, due to rising awareness of downside risks to the global economic recovery, including problems affecting Europe after the Greek fiscal crisis, poor US jobs figures and signs of weakness in China. Asian stocks are considered particularly vulnerable due to their economies’ tilt towards exports.

Indonesia is relatively insulated from these jitters, with domestic consumption accounting for 67% of GDP, as Harry Su, the senior vice- president and head of research at Bahana Securities, an Indonesian financial firm, has pointed out. Indonesian stocks, at least those with a concentration on the domestic market such as retailers and banks, are attracting investors put off by other markets, and particularly other regional emerging markets. On the other hand, Su is more sanguine about commodity firm stocks (which tend to be more affected by global markets), despite the relatively strong performance of coal mines and energy companies in mid-June, when they led rises on the back of strong oil prices.

With the market so strong, several firms and organisations are lining up IPOs and bond issues to finance expansion. On July 5, the international press reported that Bank Jabar Banten, a local government lender, would be increasing the stake it offers in an IPO to 25% from 20%, after a four-fold oversubscription, while property company Agung Podomoro Group was preparing an IPO to raise a targeted Bh3trn ($331.5m). Meanwhile, the government confirmed that it would soon be naming three banks to handle $650m worth of sukuks (sharia-compliant bonds) in October, following a successful issue of the same amount in April 2009.

The previous week, Media Nusantara Citra, a telecoms firm, announced that it would be pressing ahead with plans to launch bonds worth $300m-$400m in the fourth quarter of 2010, despite concerns about rising coupon prices due to Europe’s debt problems.

Not all companies are bullish, admittedly. On July 5, Harum Energy, which mines thermal coal (largely used in power generation and for industrial uses), announced that it would be postponing its IPO indefinitely due to the shaky global market situation, perhaps confirming uncertainty about the immediate future for commodity stocks.

Certainly, Indonesia will be affected by the international climate, as it is still a major exporter and increasingly linked to the global economy. But the ongoing rise in investment and a number of capital issues will help boost liquidity on the capital markets and strengthen it in the long term. And activity is a sign of confidence in this vast and increasingly important country.