Capital markets in Indonesia are set to gain more depth this year, with a pick-up in listing activities and the approval of a merger of the two national bourses to increase efficiency in trading.
Operators in the Jakarta Stock Exchange (JSX) and in the Surabaya Stock Exchange (SSE) have finally agreed on September 11 to begin the gradual merger starting end of October. The proposal gained the approval of Indonesia's minister of finance, Sri Mulyani Indrawati, last week.
Forming an integral part of the Indonesian Capital Markets Master Plan formulated by the markets regulator BAPEPAM for 2004-2009, the merger has been planned for years.
As the macro-economic environment has improved since the middle of 2006, with rising growth and falling interest rates, Indonesia's stock markets have followed suit. The JSX has risen by 23% to mid September, continuing the growth trend of 55% (year-on-year) set in 2006.
Meanwhile, the markets are gaining some depth. JSX expects a total of 25 listings this year, a significant rise over the 12 IPOs registered in 2006. The stock exchange is also pushing for the introduction of a 5% cut in taxes on companies selling over 15% of their total capital on the public market. Still under review by the government, this move is likely to further boost the offering of shares on the JSX.
"The combination of a pick-up in IPO activity and the rationalisation of the trading system will help boost Indonesia's capital markets in years to come," an industry insider told OBG.
Though the process will start at the end of October, the two bourses will have until the start of February to complete the merger of trading activities. The newly created Indonesian Stock Exchange will be based in the existing facilities of the JSX.
At present, JSX mainly hosts trading in equity stocks while the SSE handles predominantly bond trading. While the current capitalisation of JSX stands at close to Rp1500trn ($164.8bn) and that of SSE reaches about Rp530trn ($58.2bn), the capitalisation of the new bourse will be about Rp2100trn ($230.6bn). The extra Rp70tr ($7.6bn) is expected to come from a rise in share prices and extra listings between now and the end of the year.
"The challenge for us is that there is often low liquidity after new companies list on the bourse," Erry Firmansyah, the president of JSX, told OBG. "The merger will certainly boost shares' trading liquidity."
Integrating the trading of stocks and that of over-the-counter stock and bond trading will increase efficiency while cutting costs. With the advent of electronic trading, it has increasingly appeared anachronistic to maintain the two bourses separate.
"The merger will create synergy," Firmansyah said. "We can focus on our strength in competing with other exchanges rather than compete with each other."
The combination of the two bourses will also help bolster Jakarta's position as an investment hub. Traders expect innovation to be stimulated and new financial products to enter the market.
"In addition to an improvement in the bourse's operations, the merger will give investors a wider range of investment alternatives," Arif Baharudin, director of BAPEPAM's securities transactions department, said on September 12.
The aim is to increase the supply of investment products, bringing new offers such as derivatives and real estate investment trusts to market.
The project is now merely awaiting shareholder approval, set to come on October 30. SSE is owned by 101 brokerage companies, including ABN AMRO, state investment company Danareksa Sekuritas and DBS Vickers. However 30 brokerage firms who own shares of JSX have yet to buy shares of SSE.
Observers do not expect any overwhelming objection to the merger. "It is just a matter of minor details being ironed out, just as in any merger," the same industry insider told OBG.
In addition, the flow of information should be facilitated by the merger. It has been very difficult, traders say, to obtain real-time information on yields or prices on SSE. Given that bonds are traded only on SSE, the expectation is that bond trading will be easier to monitor in the new stock exchange. This will thus not only be a bigger institution, but also a better trading mechanism.
These encouraging developments on Indonesia's capital markets will surely boost investor confidence in what is already a buoyant platform this year. This is good news in terms of transparency, efficiency and investment opportunities.