Indonesia's stock exchange has not been immune to the widespread volatility seen across Asian markets. Nonetheless, with a number of important steps towards expansion and modernisation underway, it looks set to continue with overall stable growth.
On January 28 the Capital Markets Supervision Agency (BAPEPAM) signed a memorandum of understanding to enhance cooperation with the Securities and Exchange Organisation (SEO) of Iran, with a particular focus on the development of sharia-compliant finance in Indonesia. The agreement highlights the sharing of best practices and the study of new investment instruments.
"With this agreement I hope there will be some exchange of training on the development of sharia products," said Fuad Rahmany, the chairman of BAPEPAM.
The two countries have also agreed to explore the potential for dual listings on each other's exchanges. This would allow companies to boost their liquidity and would also promote additional listings on the Indonesian Stock Exchange (IDX).
Although the capitalisation of the IDX, at Rp1982trn ($215bn) in 2007, is over four times that of Iran's, which reached $50bn in the same period, the cooperation agreement should pose benefits to both parties. Iranian companies, who wish to tap into the larger South-east Asian market, should find the Indonesian bourse an attractive option. In addition, 70% of transactions on the IDX are carried out by foreigners, another key selling point.
Meanwhile, the IDX is in the midst of upgrading its existing trading system, having placed an order this month with Sweden's OMX Nordic Exchange for the implementation of a next generation trading platform by the end of 2008.
"The merger of two significant stock exchanges will create an increased demand in terms of trading efficiency, speed and volume," Markus Gerdien, president of OMX's market technology division, said as the deal was announced.
The IDX, the product of the December merger of Indonesia's two stock exchanges, one in Jakarta and one in Surabaya, listed 383 companies at the end of 2007 and has announced its goal of 30 more initial public offerings (IPOs) in 2008. In 2007, Rp17.2trn ($1.9bn) was raised in share offerings, up from Rp3trn ($326m) the previous year.
The government's efforts to promote the development of the country's capital markets have been successful, with a strong showing in 2007. The Jakarta Stock Exchange gained 52% overall last year, making it the third best performing market in the Asia-Pacific region. Market capitalisation grew by a healthy 58.7% in 2007, rising from Rp1249trn ($136bn) at the close of 2006 to Rp1982trn ($215bn) a year later. The average daily transaction value recorded in 2007 was Rp4.3trn ($467m), up 139% from the Rp1.8trn ($196m) achieved in 2006, and officials hope to push these numbers even higher in the coming year.
Nonetheless, further growth is likely to be influenced by developments in the US market. Exchanges throughout the region have proved volatile in the first month of 2008, reacting to interest rate interventions on the part of the Fed, the US central bank.
The IDX plunged on January 21 and 22, in line with neighbouring markets in Asia, taking the Jakarta Composite Index to 2255 - a fall of 18% for the year ending on January 22. Many of the blue-chip stocks that had made significant gains in 2007, including metal and palm oil, led the fall in prices.
However, intervention by the central Bank Indonesia through open market operations, as well as the anticipation of an easing of US monetary policy, coupled to rally the country's stock exchange. The region's stock markets made a brief comeback following an exceptional 75 basis point rate cut by the Fed on January 22.
The Jakarta Composite Index regained some of the lost territory between January 23 and 25, with most blue-chip stocks gaining value. The index reached 2600 again on January 25. Investors on the exchange rallied in anticipation of a further half point rate cut by the Fed to 3%, which came through on January 30. Many expect that the US rate cut will increase investors' appeal for emerging market stocks, which typically yield higher value. The rate cut also boosted equities in Indonesia, since it reduced pressure on the rupiah.
The government has said it expects the IDX to continue the progress it has recorded recently, albeit at a perhaps diminished rate compared to the over 50% growth rates of the last two years.
"We need to maintain the record this year. Our record proves that the country's economic base has been on the right track despite the surging oil prices and the US sub-prime mortgage crisis," President Susilo Bambang Yudhoyono said at the launching of the IDX's new logo on January 2.
With inflationary pressure emanating from high energy and food prices, analysts expect that Indonesia's central bank may keep interest rate cuts on hold in 2008, which should further increase the appeal of the stock exchange as it will maintain the anti-inflationary credentials of the monetary authorities.