Efforts to bring new investors and listings onto the Indonesian capital markets bode well for future

While 2015 was widely regarded as a rough patch for Indonesia’s capital markets, on a medium- and long-term basis the market has posted significant growth. From 2005 through to the end of 2015, the Jakarta Composite Index (JCI) – the market benchmark for the Indonesia Stock Exchange’s (IDX) – rose around four-fold, or 15% per annum, according to data provided by the exchange. Indeed, over the past decade the MSCI Indonesia has outperformed not only other ASEAN bourses, but emerging markets and MSCI World as well.

In 2015 the JCI lost around 12% of its value after posting growth in excess of 22% in 2014, but the market appeared to have returned to a growth trend in 2016, with the JCI up almost 12% by the end of the first half of the year on the back of strong expansion in the agriculture, consumer goods, mining and industrial segments, in particular. With this performance in mind, most local players are broadly optimistic about the IDX’s future. “All signs point to strong growth in Indonesia’s capital markets in 2016 and 2017,” Heidy Ruswita Sari, the head of the bourse’s economic analysis unit, told OBG in April 2016. “Looking further ahead, the long-term potential for expansion here is enormous.”

Market Regulators

While the outlook is broadly positive, a number of challenges remain. Though the sector’s regulatory framework has improved considerably over the past five years – largely as a result of the establishment in 2011 of a new market regulator, the Financial Services Authority (OJK) – local investors, brokers and other participants alike indicate that additional work is needed in this area. Additionally, participation in the market remains low, with fewer than 500,000 investors registered in Indonesia at the end of the first quarter of 2016. “The sector is underdeveloped here. When companies need to raise money, they tend to look to the banking sector instead of the IDX, for instance,” Irmawati Amran, the head of the bourse’s investor development division, told OBG. “Similarly, most Indonesians do not understand how the capital market works, and many are wary of the whole idea of investment.”

The bourse itself, the OJK, local brokers and other market players are all working to address these and other issues. The IDX recently launched a national programme aimed at educating the population on the basics of investment, in an effort to encourage locals to move their savings into the capital market. “The development of the country’s capital market has ramped up dramatically in the past decade,” Djoko Kurnijanto, director of the international division at the OJK, told OBG. “We consider participation in the IDX, both at the level of individual investors and among private corporates, to be a matter of financial inclusion. As such, we are working with the bourse and other market players to facilitate continued improvements.”

Early Days 

The IDX traces its history back more than a century. In 1912 the colonial Dutch government established the nation’s first stock exchange in Batavia (now Jakarta), to serve the interests of the Dutch East Indies. Just two years later the new bourse was closed due to the beginning of the First World War. In 1925 the colonial leadership re-opened the exchange at Batavia. Over the next 15 years the government also laid the groundwork for two new exchanges in the country, one each at Semarang and Surabaya. In the early 1940s these plans were put on hold and the Batavia bourse was once again shuttered, due to global instability caused by the Second World War. The rise of Indonesia’s independence movement following the war resulted in three decades of instability, during which activity at the main exchange in Jakarta was largely stagnant. The country’s capital markets were not reactivated again until the late 1970s.

In 1977 President Suharto relaunched the Jakarta Stock Exchange (JSX), primarily in an effort to improve local participation in the national economy as a means of improving wealth distribution in Indonesia. Over the following decade listing and trading activity was slow, despite various efforts by the exchange and the government to encourage growth in the sector.

In 1987 and 1988, however, a raft of deregulation legislation introduced by the state made it significantly easier for local companies to carry out initial public offerings (IPOs) and for foreign investors to participate in the market. These new rules led to a considerable upturn in trading and other activities at the exchange.

Substantive Expansion 

Over the course of the following two decades Indonesia’s capital markets sector posted considerable growth, on the back of steady market liberalisation and the nation’s rapidly expanding economy. In 1989 the Surabaya Stock Exchange project was revived, with a new bourse opening its doors for business in the nation’s eastern region. In 1992 the JSX was incorporated as a private entity by the purpose-built vehicle Jakarta Exchange. The Capital Market Supervisory Agency (Bapepam), which had been charged with operating and regulating the exchange since 1977, became the sector regulator.

Over the following decade and a half the bourse’s new owners instituted a range of technical upgrades and rolled out a wide variety of new products and services, in an effort to turn the JSX into one of South-east Asia’s most advanced capital markets. In 1995, for instance, the exchange instituted automated trading for the first time. A year later an independent clearing and settlement office was launched, followed in 1997 by the establishment of an independent depository office. In 2000 the JSX introduced scripless trading, meaning the bourse stopped issuing physical certificates for shares of stock and instead relied on a central digital book-entry system. In 2001 the JSX introduced a futures trading product, thereby allowing investors to hedge their portfolios for the first time. In 2004, meanwhile, stock options were introduced to the market, and in 2007 the JSX pioneered exchange-traded funds (ETFs) in Indonesia.

Adjustment Period 

Also in 2007 the bourse at Surabaya was merged into the JSX, and the newly enlarged exchange was renamed the IDX. The consolidation of the two exchanges resulted in a major upturn in capital market activity in Indonesia. Indeed, the new bourse attracted a significant number of new listings and new investors alike. In 2007 the value of shares traded in Indonesia reached $114.6bn, up substantially from $48.8bn the year prior, for instance, and more than four times the 2004 figure of $27.5bn.

Similarly, the value of new listings jumped from $365m in 2006 to $1.98bn in 2007, while average daily turnover increased from $202m to $466m over the same period. During this period rising interest in the IDX among locals and foreigners alike resulted in the JCI posting growth of 55.3% in 2006 and 51.1% in 2007.

Like most other bourses in the ASEAN region and around the world, the IDX saw a rapid decline in the wake of the 2007-08 international economic downturn. Indeed, the JCI dropped off by 50.6% in 2008. Unlike many other markets, however, Indonesia bounced back in dramatic fashion after the crisis, with the JCI growing by 87% in 2009 and 46.1% in 2010, according to exchange data. Since then the IDX has seen intermittent strong performance, with the JCI growing in 2012 and 2014 – by 12.9% and 22.3%, respectively – and falling off in 2013 and 2015, by 0.98% and 12.13%, respectively. This recent volatility can be chalked up to a number of broad factors, including presidential elections in July 2014, a subsequent restructuring of state-owned assets, high interest rates and various macroeconomic pressures (see Economy chapter). “It has been a very challenging few years for Indonesia’s capital market,” Saptono Adi Junarso, the head of privatisation, start-up, small and medium-sized enterprise (SME) and foreign listing at the IDX, told OBG. “Nonetheless, we are hopeful about the coming years. Falling interest rates, the introduction of a number of new regulations and programmes at the bourse and the stable political environment all point towards improved performance.”

Headline Data 

At the end of the first half of 2016 the JCI closed at 5016, up from 4593 at the end of 2015. In 2015 the index bottomed out in the third quarter, at a low of 4120.5, before recovering in the fourth quarter. As of September 2, 2016 the IDX’s overall market capitalisation was $420.8bn, up from $393.3bn three months prior, at the end of June. The stock market has posted solid gains in 2016, and was up 18% year-on year as of August. The solid performance has come on the back of a stable currency and an expected tax amnesty, which could bring billions of dollars back to the country, according to Reuters.

In the years since 2009 the market has been at its largest (in terms of overall capitalisation) at the end of 2012 and at the end of 2014, when the value of listed firms reached $426.78bn and $420.4bn, respectively, according to data from the bourse.

As noted previously, from 2005 through to the end of the first quarter of 2016, the IDX’s performance was among the best in the world. Indeed, during this period the bourse’s composite index, the Indeks Harga Saham Gabungan (IHSG), which tracks all listed stocks, posted growth of 316.76%, well ahead of the US-based NASDAQ and Dow Jones; the UK’s FT100; Japan’s Nikkei 225 and the FTSE Bursa Malaysia, among other global indices. Similarly, the MSCI Indonesia index, which measures the large- and mid-cap segments of the market, accounting for around 85% of the total value of the IDX, exponentially outperformed other MSCI indices. Indeed, from a base year of 2006=100, MSCI Indonesia reached 219.24 at the end of March 2016, as compared to 122.85 by the MSCI World index, 104.87 by MSCI Emerging Markets, and 102.48 by MSCI BRIC, the latter of which measures bourse performance in the so-called BRIC nations, namely Brazil, Russia, India and China.

Market Structure 

The IDX consists of a main board and a separate development board, with the latter having more lenient listing and capital requirements. Broadly, the main board is for large, well-established firms that have lengthy track records, while the development board includes medium-sized companies and firms that are in the midst of reorganising their operations or increasing their capital base. For instance, to gain access to the development board, a company has to show 12 consecutive months of operation, as compared to 36 months on the main board. Similarly, the listing application fee for the development board is Rp10m ($730) as compared to Rp15m ($1095) on the main board. Furthermore, while main board firms are required to show Rp100bn ($7.3m) in net tangible assets to list, the bar for the development board is significantly lower, at Rp5bn ($365,000). Lastly, a main board firm is required to have at least 1000 shareholders, while a development board company is required to have a minimum of 500 shareholders. As of early 2016 the IDX’s main and development boards had a roughly similar number of listed firms, around 260 each.

In 2015 the IDX and OJK announced plans to introduce legislation aimed at giving SMEs and start-ups better access to the nation’s capital markets. According to OJK data, at the end of 2015 SMEs were a major component of Indonesia’s economy, accounting for some 60% of GDP and 97% of employment, for instance. Under the new legislation, which had yet to be finalised at time of publication, the bourse is considering establishing a new board specifically designed for SMEs. Though details about this initiative had yet to be hashed out, it would likely entail more lenient listing and capital requirements than the development board, plus close operational and management oversight on the part of the OJK.

Recent Performance 

Measured by market capitalisation, the financial sector and the consumer goods industry accounted for nearly 50% of the IDX’s value as of H1 2016, according to data provided by the exchange. The IDX’s 38 listed consumer goods firms had a market cap of Rp1314trn ($95.9bn) as of the same period, which was equal to 24.4% of the bourse’s overall market cap. Tobacco manufacturers – four of which are listed on the bourse – were the largest component of this segment, with a market cap of Rp591.7trn ($42.9bn) at the end of the third quarter of 2016, followed by the IDX’s six cosmetics and household items manufacturers, at Rp357.5trn ($26.1bn) in total; 14 food and beverages producers, at Rp260.6trn ($19bn); and 11 pharmaceuticals manufacturers, at Rp104.1trn ($7.6bn). The second-largest sector on the IDX at the end of the first half of 2016 was the financial services industry, with a market cap of Rp1260trn ($92.4bn), which was equal to 23.5% of the total value of the exchange. Indonesia’s 43 banks made up the majority of the value of this segment, with capitalisation of 1115trn ($84bn).

Other major contributing sectors to overall IDX capitalisation included the combined infrastructure, utilities and transportation segment, which consists of 53 listed firms worth Rp775.1trn ($55.1bn), or 14% of the total; trade, services and investment, made up of 121 firms worth Rp639.2trn ($46.7bn), or 11.9% of the total; the exchange’s 60 property and real estate firms, which were worth Rp423.4trn ($30.9bn), or around 7.9% of the total; and the miscellaneous industrial sector, which was made up of 42 companies and worth Rp354.9trn ($25.9bn) in total, of 6.3% of overall market cap. This latter segment consists of listed companies involved in a range of manufacturing and assembly activities, including in the areas of machinery and heavy equipment, automotive and components, textiles, cable, electronics, among others.

Investor Base 

Foreign investors are allowed to hold 100% of most listed firms on the IDX. As of the end of July 2016 foreign investors held nearly 64% of the total value of the IDX. This figure has been in flux in recent years, as the IDX – like many other exchanges in South-east Asia – has seen an outflow of foreign capital due in large part to the weakening of the rupiah. Indeed, Indonesia’s currency lost around 11.3% of its value in 2015 against the US dollar, which coincided with foreign capital outflows of around $1.56bn.

Indeed, from 2012 through to the end of the third quarter of 2016 the rupiah had lost some 45% of its value against the dollar. However, the rupiah has managed to bounce back since June 2016. The currency was trading at a 14-month high as of August 2016, at close to Rp13,000:$1. According to Indonesia Investments, the rupiah began to strengthen after the House of Representatives passed the government’s proposed tax amnesty programme. The bourse, meanwhile, saw major outflows in 2013 and 2015, though these were more than covered by incoming foreign equity investment in 2012, 2014 and the first quarter of 2016. Indeed, in 2014 alone foreign investors put $3.74bn in new capital into the IDX, in what was widely seen to be a response to the rupiah’s loss of less than 2% of its value during that year.

As IDX data indicates, in the first seven months of 2016 foreign investment was once again on the rise in Indonesia, with foreign ownership of equities at 64% of the total value of the market at the end of July, up from 63.79% at the end of 2015, though still down on the end-2014 figure of 64.49%. Nonetheless, this most recent figure represents a significant upturn on 2012, for instance, when foreign ownership was at just 58.79% of the total.

While foreign investors hold the majority of IDX shares, they account for a minority of shares traded. In the first three months of 2016, Indonesian investors – including both individual and corporate portfolios – accounted for 53.58% of all trading activity on the bourse. This figure is down slightly on 56.79% in 2015 and 59.42% in 2014, for instance. The IDX recently launched a programme aimed at encouraging Indonesians to participate more in the stock market.

Regulation & Oversight

Since it was formed under Act No. 21 of 2011, the OJK has served as the primary regulator for Indonesia’s capital market. In conjunction with Bank Indonesia, the nation’s central bank, the institution also oversees the broader financial services industry, including banks and non-bank financial institutions.

The OJK has a broad mandate, which involves ensuring that financial sector activities in Indonesia are carried out in an “organised, fair, transparent and accountable manner”; that growth and development of the market takes place sustainably and with a high degree of stability; and that the interests of consumers and the society at large are protected. “We have been particularly concerned in recent years with improving access to Indonesia’s capital market,” the OJK’s international division director Kurnijanto, told OBG. “Indeed, in the past three years we have introduced 15 new pieces of legislation aimed at upgrading or streamlining various components of the capital market.”

Indeed, in 2015 alone the OJK issued new rules and regulations related to rights issues, sukuk (Islamic bonds), insurance, venture capital, the use of proceeds, reporting obligations, listed firms’ websites and disclosure requirements for listed firms. In 2014, meanwhile, the regulator put forward more than 20 new pieces of legislation, including rulings that impacted the issuance of mutual funds, securities transaction settlement guarantees, licensing procedures for underwriters and brokerage firms, and practices related to shareholder meetings, among other topics.

In April 2016 the OJK issued Regulation No. 20 on the licensing of securities companies that conduct business activities as underwriters and brokers. The new rules prohibit securities companies from using credit to finance capital injections; limit foreign ownership of a securities company to 85% in the case of a foreign financial services company, or 99% of a foreign securities company that is supervised by the capital market regulatory agency in its home country; and broaden the scope of activities a securities company may carry out in Indonesia, pending permission from the OJK.

Looking Ahead 

The OJK plans to introduce a handful of new regulatory packages in the coming years. Indeed, the regulator is expected to launch a new legislative framework for financial technology (fintech) companies before the end of 2016. The fintech segment has grown rapidly in Indonesia over the past half-decade, with a growing pool of start-ups offering small and medium-sized loans to enterprises with small capital bases and revenues. “We will start consulting with our peers in China, Australia, Singapore and Malaysia,” Muliaman Hadad, chairman of the OJK, told local media in late April 2016. “I want to see their responses and suggestions first. However, we will try our best to finalise it this year.” The regulator is also expected to issue new rules related to Islamic capital markets products and services in the coming years.

The IDX is likewise expected to introduce a range of new rules and initiatives in the coming years. The exchange’s four-part development strategy aims to improve the investment environment at the level of individual investors, brokers, listed companies and the bourse as a whole. In terms of investors, IDX management is working to optimise the investment experience among active investors, and increase investment activity by activating dormant investors and attracting new investors to the market. At the same time, the bourse is in the midst of a long-term strategic project to attract more companies to list on the exchange via IPO, and strengthening the brokerage segment.

New Products 

Finally, at the level of the stock exchange as a whole, the IDX management aims to significantly improve monitoring and surveillance techniques, develop new products and services, and continually streamline regulation in order to maintain market stability and growth. “Over the past few years we have set up almost 170 investment galleries across Indonesia, which is a key part of our plan to attract more investors to the stock exchange,” Amran told OBG. “We run basic investment courses at this galleries, in an effort to boost awareness about the benefits of investing vs. saving in the banking system, the latter of which is very popular among Indonesians.”

In addition to attracting new individual investors, the IDX is working to source new listings from a variety of market segments. “Foreign firms represent a major potential growth segment for the bourse,” said the IDX’s Kulsum. “We are working to make it easy for these companies to list locally.” State-owned entities also represent a key potential growth area, though according to the IDX publicly owned firms currently face a variety of hurdles to carrying out a successful IPO. “We are working with the Ministry of State-Owned Enterprises to facilitate a more streamlined listing process,” the bourse’s Junarso told OBG (see analysis).

Product Mix 

While a range of investment products are available on the IDX, basic equities and debt issues account for the majority of trading activity. Indeed, in 2015 the total traded value of ETFs was just Rp15bn ($1.1m), while rights certificates were worth only Rp172bn ($12.6m) and real estate investment trusts were worth Rp124bn ($9.1m). Compare this to the Rp1406.4trn ($102.6bn) in equities trades in the same period, or the Rp3399.9trn ($248.2bn) in government bond trades, for instance. “Introducing new investors, in particular, to mutual funds, ETFs and other relatively low-risk products is a key component of our current strategy,” said Amran. “The culture of Indonesia is such that much of the population is relatively risk averse. As such, we expect to see growth in uptake of these products in the coming years.”

Debt products, and particularly government bonds, are widely considered to be one of the least risky investments in Indonesia, particularly given the recent swings in the equities market. At the end of 2015 there were 91 government bonds listed on the IDX, with an outstanding value of Rp1425trn ($104bn), according to data from the exchange. In the same period the bourse hosted 415 corporate bonds from 103 issuers in total, worth a total of Rp249.8trn ($18.2bn). As the largest issuer of debt in the country, the government regularly taps local and foreign investors alike to finance the state budget and capital expenditure projects. While both sovereign and corporate debt instruments are listed on the IDX, much of the trading activity in the bond market takes places on an over-the-counter basis. As in the equities market, foreign investors constitute a major component of debt investors in Indonesia. As of end-March 2016 foreign investors held around 38.5% of outstanding sovereign debt and around 7.5% of corporate bonds.

Despite the dominance of basic equity and debt trading, more advanced products are also being introduced. For example, in early 2016 Citi Indonesia was appointed custodian for the first global sharia funds in Indonesia, which invest predominantly in offshore sharia-compliant equities.


Indonesia’s capital markets sector faces a variety of challenges. With 529 listed companies and a total market capitalisation of Rp5387trn ($393bn) at the end of the H1 2016, the IDX was one of the smallest bourses among ASEAN countries, according to IDX data, despite Indonesia being the fourth most-populous country in the world and the largest economy in the region. More fundamentally, as this data suggests, awareness about the many benefits of capital markets remains relatively low. As such, improving investor education is at the heart of plans and development strategies put forward by the IDX and OJK.

Given the country’s expanding economy and total population of some 260m people, there is huge potential for growth in the capital markets. Efforts by the IDX and the OJK to encourage new listings from the nation’s stock of unlisted companies have the potential to result in a major increase in market activity. Indeed, according to IDX data, as of mid-2016 Indonesia was home to around 104,000 corporates that were currently receiving loans from the banking sector, plus some 100 state-owned holding companies with 600-plus subsidiaries and around 650,000 SMEs. Thus, facilitating the entry onto the IDX of even a small fraction of these has the potential to generate exponential growth on the country’s capital market in the coming decades.

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The Report: Indonesia 2017

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