Broadening the exchange in Indonesia

Developing well in recent years, the number of listed companies on the Indonesian Stock Exchange (IDX) increased by 50% in the decade to 2014, while market capitalisation was up five-fold in that period. In terms of performance, the composite index has risen far more than those of its regional peers and the international benchmarks. It is up 400% over the past decade, while Malaysia’s KLSE Index has only doubled, Singapore’s STI has risen just 50% and the S&P 500 around 75%. Significant reforms have been undertaken since 1997 that have steadily improved market infrastructure.

Still, the capital markets are in need of further development. They are neither broad enough nor deep enough for a country the size of Indonesia, and they are inadequate for a state with its funding needs in the near and medium terms. Stock market capitalisation is less than 50% of GDP, while Thailand, Singapore, Malaysia and the Philippines are above 100%. For the nation to grow as it hopes and plans, the IMF and others believe that it must endeavour to create markets that are larger and more sophisticated.

A Chequered History

Indonesia has had a stock exchange for more than a century. The first was founded in 1912 in what was then Batavia (now Jakarta). For most of the rest of the century, the capital markets struggled. The exchange closed during the First World War and again during the Second World War. It was started up again in 1956, only for trade to dry up when Dutch companies were nationalised. The market became inactive and closed altogether in 1968.

President Suharto relaunched the exchange in 1977 – largely to allow for more participation in the economy and defuse brewing tensions related to the distribution of wealth – but trading remained light until 1982. In that year, reforms were issued that allowed for more initial public offerings (IPOs) and for foreign participation in the stock market. As the price of oil began to drop and the country’s need for foreign capital grew, the authorities became more enthusiastic about making fundamental changes to how the market operated. Reforms continued, the Surabaya Stock Exchange was reopened and the Jakarta Stock Exchange was privatised; by 1996, 250 firms were listed. After the crash of 1997, activity slowed considerably as the country struggled to right its economy and as foreign investors fled the market, but after 2000 progress continued apace. In 2000 scripless trading was brought in and remote trading followed in 2002. The Surabaya Stock Exchange and the Jakarta Stock Exchange were merged into the IDX in 2007, and the Jakarta Automated Trading System (JATS) NextG, provided by NASDAQ OMX Market Technology, was initiated in 2009, replacing the previous system, JATS, introduced in 1995. The new system allows for high volumes of trading in all products and has seen order capacity almost triple.

Middle of the Pack

Still, the capital markets of Indonesia are not particularly large. The capitalisation of the IDX was $397.05bn as of April 2015, according to the World Federation of Stock Exchanges. In terms of the region, the country is in the middle of the pack. It is significantly ahead of the Ho Chi Minh City Stock Exchange ($48.20bn), the Colombo Stock Exchange ($22.87bn), the Philippines Stock Exchange ($277.83bn) and the New Zealand Exchange ($76.14bn). But it is smaller than some of its regional peers, such as Bursa Malaysia ($475.53bn), the Stock Exchange of Thailand ($444.60bn) and the Singapore Exchange ($791.85bn).

With 507 listed firms as of April 2015, it is on the lower end of the regional spectrum, especially given the size of its economy and population. Bursa Malaysia had 892 domestic companies listed and Thailand 619. However, this figure does exceed some regional peers; the Philippines had 260, Ho Chi Minh City 305 and Singapore 482 (but 770 if foreign listings are included).

Indonesia also has one of the smaller domestic bond markets in the region. Total bonds outstanding, including those issued by the government and corporations, totalled $124.6bn as of March 2015, AsianBondsOnline data shows. Vietnam had $42.5bn outstanding and the Philippines $106bn. But the others were larger: Malaysia had $289.8bn, Thailand $286.2bn and Singapore $233.1bn. As a percentage of economy, the bond market is one of the smallest in the region. The size of the local currency bond market is around 15% of GDP, according to AsianBondsOnline. In the Philippines, bonds equate to 37% of GDP, in Vietnam 22%, in Malaysia 103% and in Thailand 76% as of the end of 2014.

Capacity an Issue

Analysts and international financial advisers say that this is a concern for the country. The lack of financial capacity keeps the cost of funding higher than it should be and is another bottleneck in the development of the economy. According to Mukul Raheja, a researcher at Strategic Asia, a more efficient capital markets would help the country finance its infrastructure deficit. Without sufficient depth, money will be too expensive, funding will be too unstable and volatile, and the country will be unable to raise the amounts needed to build all that is required. He adds that more domestic participation in the markets is absolutely necessary, and that the country should be less reliant on flows of foreign money.

The international community agrees that Indonesia could be exposed to serious risks unless it addresses the weaknesses and gaps in the system. “More diversified and deeper capital markets would help intermediate capital inflows without large swings in asset prices, therefore supporting financial stability,” wrote the IMF in its 2013 Article IV consultation.

Sound, Stable & Rising

Despite the concerns, the Indonesian markets are doing well. In the year to April 14, 2015, the benchmark composite index was up 3.7%. That is better than the FTSE Bursa Malaysia KLSE index, which was down 0.11% over that time. Singapore’s STI Index increased 8.6%, while Thailand’s SET Index grew about 9.3%. Over a two-year period, the IDX has generally underperformed regional indexes and far underperformed the international benchmarks. Year 2013 started out strong, with the Jakarta Composite Index rising from around 4300 to 5200 in the first five months. The index then dropped precipitously, falling back below 4000 by August 2013 as concerns about the current account surplus weighed on sentiment and as the possibility increased of the US Federal Reserve ending its easy money policies. The market, however, staged a significant recovery, rising back above 5200 to a new record high towards the end of 2014 and peaking at around the 5500 mark in March 2015 before falling below 5000 again by early June.

In 2014 the Jakarta Composite Index rose 22.3%, according to the Financial Services Authority (OJK), making it one of the best-performing markets in the region. Only the Philippines was up more in 2014 (22.76%). Sentiment has clearly turned. Although the currency remains weak, share prices have stabilised since their fall in 2013. Furthermore, the current account deficit started to ease in early 2014 and it became increasingly apparent that the country was not headed toward crisis. The political situation also began to stabilise, while the fall in global commodity prices resulted in a decrease in inflation and an easing of the fiscal burdens on the government. Indonesia quickly came back into fashion. Even as the rupiah depreciates – hitting a low of Rp13,000 to the dollar in mid-2015 from under Rp10,000 in 2013 – foreign investors are heavy buyers of local stocks. Analysts told March 2015 that the investors are enthusiastic because they are not concerned about the fundamental viability of the currency and that its falls could actually be helping the economy. Overall, the rupiah is fluctuating with market conditions and is following the course of many other regional currencies, and in some ways the drop is seen as putting Indonesia ahead of its regional competitors. The market has been further helped by the increasingly dovish stance of the Federal Reserve. Indonesian authorities have been warning the market players to be cautious about the potential outflow of foreign funds, as the country is so dependent on the participation of outsiders. But so far, the international markets have remained positive about the country’s prospects and the flight of hot money has not happened.

Over the very long term, the Indonesian market – despite its many challenges – has been particularly strong. It dragged along the bottom in the 1990s, and lost more than 50% of its value in the 1997 crash. It also lost more than half its value during the financial crisis of 2008. But the trend since then has been good, and the Indonesian market has been a strong performer regionally and globally.

Between December 1997, when it was 402, and December 2014, when it reached 5227, the Jakarta Composite Index has risen some 1200%. This compares with an approximate doubling of its regional competitors and the stronger large international markets.

Recent Listings

The IPO market in Indonesia has been good, but not as good as hoped. The IDX reported 23 IPOs in 2014 (against a target of 30 for the year). That is down from 30 in 2013, but on par with totals in previous years. The exchange reported 22 IPOs in 2012, 25 in 2011 and 23 in 2010. In 2015 the IDX is looking for a total of 32 listings, according to a February report The Jakarta Globe, including 10 in the first six months of the year. By the end of May, however, the market had seen three launches. Despite the weak numbers, qualitatively the IPO market has been good, characterised by high-quality issuers and a wide variety of sectors represented. Intermedia Capital was listed in April 2014, when it sold 3.9bn shares. The company is a subsidiary of Visi Media Asia, which is controlled by the Bakrie family, and it runs one of the country’s largest free-to-air television stations. Graha Layar Prima, the country’s second-largest cineplex chain, also sold shares in April that year. The company plans to use the proceeds to construct 15 cinemas (on top of its existing 10). It is affiliated with CJ-CGV, a Korean cinema chain operator. Wijaya Karya Beton, a concrete maker controlled by state-owned Wijaya Karya, sold Rp1.2trn ($99.2m) of shares, also in April. The firm will build new plants from the proceeds to boost capacity and take advantage of the infrastructure drive in the country.

Later in the year, taxi company Blue Bird raised Rp2.4trn ($198.4m). Due to weak market conditions at the time, the offering was smaller than planned and priced below the original target range. A second tranche was cancelled because of the lower-than-expected pricing. The company had originally planned to raise Rp4.94trn ($408.3m), according to The Jakarta Post. Blue Bird, which was founded in 1972 and now has around 30,000 cars, is thought to control one-third of the total market. It will use the funds to pay down debt and to increase the size of its fleet.

December 2014 also saw a number of listings. Golden Plantation, which owns seven palm oil plantations and is a subsidiary of Tiga Pilar Sejahtera Food, sold 800m shares for a total of Rp230.4bn ($19m). The proceeds are to be used for acquisitions and capital expenditure, with the hope of increasing processing capacity. In the same month shipping firm Soechi Lines sold 1bn new shares in its debut offering raising Rp582.5bn ($48.15m). The listing, which represented 15% of the company’s expanded capital, was smaller than originally planned; the firm had initially targeted a sale of 30% of its capital but reduced the size to ensure a stronger showing.

New listings carried on into early 2015. Bank Yudha Bhakti sold 300m shares in January. The lender is controlled by Gozco Capital and is part owned by the cooperative association of the Indonesian military and the national police. This was followed by a March listing by Mitra Keluarga Karyasehat, which raised Rp4.45trn ($367.8m) in its 261m-share offer. The company, which is owned by Kalbe Farma, is an operator of hospitals, running 11 facilities in Java with plans to open seven more by 2016. The IPO was the largest since Garuda Indonesia’s 2011 IPO, and the second IPO of a hospital operator since Siloam International Hospital’s 2013 listing. In May PP Properti, a subsidiary of state-owned construction firm Pembangunan Perumahan, became the third new listing of the year and the first among state-owned enterprises. The property developer’s sale of 4.9bn shares earned the firm Rp883bn ($73m), 75% of which will be used to expand its landbank.

Market Infrastructure

The stock exchange has a main board and development board, the former with stricter listing requirements. A company must have operated for 36 months and have audited statements for three years to qualify for the main exchange. Its net tangible assets should be Rp100bn ($8.3m). For the development board, a company needs to have been in business for 12 months and have one year of audited financials. Its net tangible assets must be Rp5bn ($413,300). Neither main board nor development board candidates need to have turned a profit (though development board companies must demonstrate that they can become profitable in two years).

Indonesia trades on T+3 for equities and T+2 for fixed income. The central bank offers a real-time gross settlement system – developed in 2000 – and a national clearing system for amounts below Rp100m ($8266). The Indonesia Clearing and Guarantee Corporation handles clearing and guarantee. The Indonesian Central Securities Depository (KSEI) acts as the central custodian and is responsible for settlement (it is rated “A+” by Thomas Murray). While the market can support delivery-versus-payment, the legal framework does not allow for it, according to a 2012 report by the IMF.

In 2013 the IDX extended trading hours by 30 minutes, bringing its opening time from 9.30 to 9.00, and brought the pre-opening ahead by 10 minutes, to 8.45. In part, this was done to bring trading more in line with nearby Asian markets. But it was also done to increase liquidity and attract more investors. The ASEAN Trading Link, a gateway for securities brokers to offer investors easier access to connected exchanges, remains more or less irrelevant to Indonesia. While it was initiated in 2012, only three markets are connected: Malaysia, Singapore and Thailand. The Philippines has plans to join. In May 2014 Deutsche Bank was appointed to undertake custody and settlement for the three active countries. Limited progress has been made in terms of regionalisation. In May 2014 three ASEAN indexes were introduced: the FTSE ASEAN Stars Index, which has component shares from seven participating states; the FTSE ASEAN All-Share Index; and the FTSE ASEAN All Share Ex-Developed Index. These launches bring the number of FTSE ASEAN indexes to five.


According to the IDX, 59 securities companies participate in the market. Under 1987 regulations, brokers were required to have Rp25m ($2067) in capital. That was changed in 1990 when a tiered system was established: a broker-dealer or investment manager would need Rp500m ($41,330), an underwriter would need Rp5bn ($413,300) and a foreign securities company would need double those levels. Importantly, the 1990 rules said that banks could no longer directly deal in shares. This resulted in banks forming their own securities companies. The capital levels of these providers have greatly increased in recent years. According to Thomas Murray, an investment manager had to raise its capitalisation from Rp5bn ($413,300) to Rp10bn ($826,600) by the end of 2010, then to Rp20bn ($1.7m) by the end of 2011 and Rp25bn ($2.1m) by the end of 2012. Likewise, a securities company that also acts as an underwriter was required to have capital of Rp60bn ($5m) by the end of 2010 – up from Rp55bn ($4.5m) – and then raise it further to Rp70bn ($5.8m) by end-2011 and Rp75bn ($6.2m) by end-2012. If a securities company acts as a broker dealer, administers client accounts and acts as an investment manager, its minimum capitalisation requirement has increased from Rp35bn ($2.9m) before 2010 to Rp55bn ($4.5m) by 2012, with increments of Rp40bn ($3.3m) and Rp50bn ($4.1m) in the intervening years. At the same time, a number of segments saw their base requirement remain unchanged: underwriters must maintain minimum capital of Rp50bn ($4.1m); a broker-dealer administering client accounts, Rp30bn ($2.5m); and a broker-dealer not administering client accounts, Rp500m ($41,330).

Mutual Funds

The first regulations for mutual funds were issued by ministerial decree in 1990, allowing closed-end funds. In 1995 the government passed the Capital Markets Act permitting open-end funds, and rules followed for structured funds in 1998 and for exchange-traded funds in 2006. As of May 2015 the country had 969 mutual funds managed by 80 investment firms – dominantly foreign and bank-related.

The most recent guidelines, published in 2010, concern collective investment contracts. These stipulate that mutual funds may only buy traded securities, bonds that are rated or government-issued, asset-backed securities that are rated, money market instruments with maturities of less than one year, and domestic commercial paper that is rated and has maturity of less than three years. Funds are prohibited from owning a single Indonesian share that is worth more than 10% of the net asset value of the mutual fund and securities that have not been publicly offered (unless they are rated, money market instruments or paper related to the Indonesian government or an international institution). In 2015 the OJK said that it would consider allowing mutual funds to invest in foreign assets in a bigger proportion than the current maximum limit of 15% of net asset value. The concern is that if the products are not diversified, investors could face losses if the local market slumps.

The KSEI has been discussing the development of an integrated investment management system with the Korea Securities Depository. At present, the various players in the sector, such as investment management companies, custodians and brokers, are connected using a wide range of technologies, and some processes are still manual. The hope is to develop a platform that can integrate the sub-sector. The sense is, according to press reports, that this will increase efficiency and lower costs, which could ultimately help in the expansion of the mutual fund business. The sector has set a target of Rp750trn ($62bn) of assets under management by 2017, up from Rp231.4trn ($19.1bn) at end-2014. The OJK is promoting the sector by lowering minimum investment levels and pushing road shows.

New Regulations

In 2014 the IDX issued new regulations that could have a significant impact on the structure and governance of public companies. According to the Amendment to Regulation I-A on the Listing of Shares, a company must have at least 300m shares held by minority shareholders after listing, and these minority shareholders must own more than 20% of the stock if the company’s equity before the listing was less than Rp500bn ($41.3m), 15% if the equity was more than Rp500bn ($41.3m) and 10% if the equity was more than Rp1trn ($82.7m).

In the case of companies listing on the development board, minority shareholders must hold 150m shares, and the limits are as follows: 20% if equity is less than Rp500bn ($41.3m); 15% for those between Rp500bn ($41.3m) and Rp2trn ($165.3m); and 10% if equity is more than Rp2trn ($165.3m). Existing companies will also have to make sure that their minority shareholders have 50m shares and 7.5% of the company.

The regulations also take aim at corporate governance. Under the new rules, independent commissioners must make up 30% of the board of commissioners and they may serve no more than two terms. The board must have one independent director, also limited to two terms. Under the new rules, listed companies must have a corporate secretary, an audit committee and an internal audit unit, according to Baker & McKenzie.

Foreign Participation, Local Interest

The Indonesian market is open and foreigners can own 100% of most listed companies. Unlisted securities companies can be 85% owned by foreign financial firms and up to 99% owned by foreign securities companies. As of the end of 2014, foreign investors owned 64% of all shares on the market, down from 65% at the end of September 2014, according the KSEI. Foreigners own about 9% of corporate bonds and sukuk(Islamic bonds).

Individuals own about 16.5% of all shares (up from about 5% in 2007, according to Nomura Institute of Capital Markets Research). The country has about 1m retail accounts, if mutual funds and other fund investors are included, according to an article in The Financial Times in September 2014, and historically 80% of the country’s financial assets have been held in bank deposits. The main challenge to expanding retail participation is the attractiveness and safety of bank deposits and government bonds. With deposit rates at nearly 10% and the government 10-year bond at above 7%, most savers are content with choosing these options. In September 2014 the banking supervisor said that deposit rates would be capped at 9.50% or 9.75% depending on the size of the institution.

Meanwhile, the IDX is looking to educate small investors and attract them to the market. It started its campaign to broaden the appeal of shares in 2006, and has taken steps recently to bring more people into the market. It reduced the minimum lot size to 100 from 500 in 2014 and has also waived the Rp30,000 ($2.50) real time data access fee for students and teachers. The IDX says it wants to double the number of total retail investors to 2.5m, or around 1% of the population, by 2017. In addition to the high rates being offered for relatively risk-free products, small investors in the country remain cautious due to the experiences of the 1990s, when the market crashed.

Rebuilding confidence is thus key, as the regulators also believe that local participation must be enhanced. “Our primary goal is to increase awareness,” said Triyono, director of international affairs at OJK. “Financial literacy is low, and the ultimate target is to increase inclusiveness. In the capital markets, we are improving not only supply side, but also the demand side.”

Futures Trading

The Jakarta Futures Exchange (JFX) was founded in 1999, started operations in 2000 and was the only such exchange in the country for almost a decade. Competition was introduced in 2009, when the Indonesia Commodity and Derivatives Exchange (ICDX) was authorised to begin the trading of contracts in gold and crude palm oil.

At present, the JFX offers contracts in crude palm oil, gold, cocoa, olein, coffee (robusta and arabica) and coal. It initiated the coal futures contract in 2014 to create more transparent and fair dealing in the commodity. Bidders on the contract have been registered from the UAE, Taiwan, Japan, Singapore, Malaysia and Indonesia. The ICDX trades palm oil – including one contract denominated in dollars – foreign exchange, gold, tin and cocoa. It is also considering a contract in rubber and is working with Thailand and Malaysia to set up a regional rubber exchange.

The Indonesian Derivatives Clearing House, which is state-owned and acts as a central counterparty, has been operational since 2000, while Identrust Security International, also a clearing house, was founded in 2009. The Commodity Futures Trading Regulatory Agency regulates this sub-sector. Derivatives are also traded on the IDX, but at present the equity exchange offers only a limited range of products. The futures exchanges are looking themselves to introduce financial futures.

The government would like the futures exchanges to develop significantly, increasing participation and becoming more relevant to and integrated with the physical and financial markets. Sector players agree. “In order to add depth to Indonesia’s capital markets, it would be a positive step for regulators to introduce derivatives and other supporting instruments to increase liquidity,” Stephanus Turangan, president director of Trimegah Securities, told OBG. To this end, a number of reforms were undertaken in recent years, many in line with G8 recommendations. Futures exchanges can now be 40% foreign-owned and the range of products that can be traded has been expanded. Ultimately, the authorities would like to push more over-the-counter derivatives trade onto exchanges.

Sherman Rana Krishna, the president director of the JFX, told OBG, “To accelerate the growth of futures trading in Indonesia, the exchange would benefit from stronger tax regulation to provide more clarity and transparency for potential investors.”

The exchanges have also become part of the larger trend in which Indonesia is seeking more control over its commodities. In 2013 the authorities made it mandatory for all refined tin to be traded through an exchange before being exported. The hope is that the centralised trading of tin in Indonesia, which controls 40% of the global market in the metal, will result in the creation of a new international benchmark in the commodity, in competition with the London Metal Exchange contract. Exchange executives have said they would like to see the rules being applied to tin in place for rubber, so all of the commodity exported must first pass through a trading floor.


The Indonesian markets have been doing well in terms of performance, the relevant infrastructure is sound and the regulators are taking a proactive role to ensure that trading continues to be healthy, fair and stable. When tested by exogenous shocks, the sector has proven to be resilient.

The challenge now is to increase local participation and expand the market. Doing so will help in terms of infrastructure development and ultimately make the country less exposed to sudden shifts in global sentiment and interest rate policy elsewhere. If the capital markets continue to improve and evolve, and if the authorities are able to get more firms listed and increase the number of shareholders, volatility and risk can be greatly reduced and the markets can play a more significant role in the transformation of the economy.

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The Report: Indonesia 2015

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