The development of Indonesia’s capital markets has been buoyed by strong investor interest and high, consumption-led economic expansion on the back of a government push to boost annual GDP growth. Ongoing reforms hope to liberalise Indonesia’s financial landscape and provide a legal and regulatory basis for product diversification and deeper institutional investment. As with most emerging markets around the world, the country’s sound economic fundamentals stand to be tested by the global spread of the novel coronavirus, Covid-19, in 2020. Slower regional growth as a result of the pandemic looks likely to strain liquidity and test debtors’ ability to repay, while also possibly acting as a barrier to fundraising. In the medium term, however, the proliferation of digital financial tools will continue to bring new retail players to the market – a move that has encouraged the government to include financial literacy education alongside its reforms in order to increase the participation of Indonesians and deepen the market.
Structure & Oversight
Indonesia’s capital markets and financial institutions are overseen by the Financial Services Authority (OJK), which was established in 2011 to replace the Capital Market and Financial Institutions Supervisory Agency. The OJK oversees the Indonesia Stock Exchange (IDX), the Indonesian Clearing and Guarantee Corporation (KPEI), and the Indonesian Central Securities Depository (KSEI), among others. The Ministry of Finance (MoF) controls policy direction.
Trading activity takes place on the IDX, which primarily trades equities, exchange-traded funds, government and corporate bonds, and derivatives. The KPEI was founded in 1996 and holds the authority to make and implement regulations related to its function as a clearing and guarantee house, including exchange transaction clearing and settlement guarantee services. All of the KPEI’s paid-up capital – which, according to the company’s website, stands at Rp165bn ($11.6m), along with Rp500bn ($35.3m) in authorised capital – is owned by the IDX.
The KSEI is the depository and settlement institution responsible for the provision of central custodian and securities transaction settlement services. The KSEI has adopted several measures designed to assist the government in deepening capital markets. These include the development of single investor identification (SID) for holders of government bonds, the provision of negotiable certificates of deposit custody services, and the transformation of account opening procedures to a demographic and electronic ID system. Those measures, alongside the launch of the KSEI’s S-Invest mutual fund trading platform, helped increase the number of SIDs by 20% between 2016 and 2018 to more than 1m – although this figure remains rather low relative to the 50m-60m people with bank accounts in the country.
As such, the government would like to encourage greater participation among the general population. According to Jemmy Paul Wawointana, president director of Sucor Asset Management, the number of Indonesians invested in capital markets remains low. “As of 2019 only 1.4m Indonesians were invested in mutual funds, and 1.2m in the domestic stock market,” he told OBG.
Echoing similar concerns, Agus Yanuar, the president and CEO of Samuel Asset Management, told OBG that around 80-90% of investors in the country’s capital markets are institutions, such as banks, mutual funds and insurance companies, with high net income from private banks accounting for about 15%. “The OJK estimates that around 70% of the population is not financially literate and thus easily attracted by bogus investments,” he told OBG.
Recognising these challenges, the government has begun a push to boost financial literacy among the general population. “It is important to offer easy access to conservative, moderate and progressive investment options, while providing training to retail clients,” Reza Darm Putranto, head of intermediary and institutional business at Eastspring Investments, told OBG. “They can be introduced to capital protected funds and the short-term money market, followed by index equity funds.”
At the same time, financial technology applications will likely democratise the distribution of investment products beyond traditional channels, bringing new – and mostly young – professional investors into the fold. Asset managers are augmenting their traditional relationships with banks to include more non-bank partners. “The list of non-bank partners is getting longer, and while the value size remains quite small, the number of investors is quite large,” Rinaldi Lukita Handaya, head of investment at Batavia Asset Management, told OBG. Having said that, there remains a cultural stigma against non-bank operators. As such, greater diversification of investment products could be effective in attracting retail investors to the local capital markets. One example is Star Mercato Capitale’s digital app platform tanamduit. The platform, which was launched in September 2017, offers retail investors the option to invest in mutual funds, securities and sukuk (Islamic bonds) in partnership with asset managers. As of October 2019 the platform had 100,000 users, according to Muhammad Hanif, co-founder and director of tanamduit.
Alternative exchanges also play a role in deepening participation in capital markets. The Indonesia Commodity & Derivatives Exchange (ICDX) offers commodity derivatives that are traded online directly on the exchange. Offerings consist of gold, crude oil and foreign currency, as well as palm oil and tin. The ICDX is thus far satisfying demand for commodities derivatives; however, Lamon Rutten, CEO of the ICDX, told OBG that the exchange would benefit from state support so it could continue to carry out new contracts.
Elsewhere, the Jakarta Futures Exchange (JFX) offers investors the option to trade on an equity proxy index on overseas markets, as well as commodities contracts for key local raw materials – although most of the trade is still speculative rather than hedge-based, Stephanus Lumintang, president director of JFX, told OBG. Contracts with gold and coffee as the underlying asset are the most actively traded, with trading volumes rising by 18% in 2019. Tin was added in the final quarter of the year.
In November 2018 Indonesia followed Thailand to become the second South-east Asian country to implement a two-day transaction settlement (T+2) cycle, shortened from three days. “Implementation of T+2 was a game-changer,” Joshua Tanja, managing director and head of UBS Indonesia Equities and Research, told OBG. “This new settlement cycle has saved brokers a lot of money, as larger trades can be covered with the same equity.”
The year 2019 marked a solid performance on the IDX. Speaking at the reopening of the IDX for the 2020 new year, President Joko Widodo, better known as President Jokowi, noted that longterm fundraising on the IDX in 2019 had reached Rp877trn ($61.8bn) – the highest on record. Market capitalisation stood at Rp7265trn ($512.2bn), up from Rp7023trn ($495.1bn) in 2018. Daily trading value stood at Rp9.1trn ($641.6m), up from Rp8.5trn ($599.3m). Foreign buying outweighed foreign selling by Rp49.2trn ($3.5bn), redressing a Rp50.7trn ($3.6bn) imbalance in the other direction in 2018. The Jakarta Composite Index (JCI), the country’s benchmark stock index, increased by 1.7% in 2019 and closed December 30 at 6299 points.
In 2020 the outlook initially appeared positive overall, catalysed by political stability, investment-driven growth and regulatory reform. However, by February 2020 the market had begun to follow the global trend in turning bearish because of fears about the impact of the Covid-19 virus and the drop in economic activity around the world. As of April 27, 2020 the JCI had decreased by 33% to 4513 points since the start of the year, while market capitalisation at the IDX had fallen more than 13% to $446.9bn. Since January 2020 Bank Indonesia (BI) – the country’s central bank – has injected around $25bn in liquidity into the local market in a move to bolster the economy and offset the short-term effects of Covid-19. Although BI is planning to inject another $7.6bn into the economy in mid-2020, the success of this quantitative easing is not yet clear.
In 2019, 55 companies listed on the IDX, down from 57 the previous year. Funds raised though initial public offerings (IPOs) amounted to Rp14.7trn ($1bn), down from Rp15.7trn ($1.1bn) in 2018. Listings in 2019 were led by small and medium-sized enterprises (SMEs) that raised less than Rp500bn ($35.3m), with only six raising more than that figure. To compare, Thailand hosted 30 IPOs, Malaysia 29 and Singapore 11 in the same year. Toiletries producer Uni-Charm Indonesia was the largest IDX debut, raising Rp1.25trn ($88.1m) in December. The IDX said it was targeting 78 companies to list or issue bonds in 2020, up from 76 in 2019, though Covid-19 could slow progress in this regard.
In January 2020 sharia-compliant travel planner and marketplace Tourindo Guide Indonesia, also called Pigijo, became the first company to list on the IDX Acceleration Board, raising Rp12bn ($846,000). The IDX requires that no more than 10% of a sharia-compliant company’s income originate from non-halal sources. The two-year-old start-up sold 150m shares, taking the total number of listed companies on the bourse to 668. That month, Indonesian coal trader and shipping operator Resources Global Development debuted in Singapore, raising around $2.21m, and joined some 50 companies that are based in Indonesia but listed on overseas bourses.
The government revised listing rules in late 2018 to relax a net tangible asset requirement of Rp5bn ($352,500) that had previously effectively excluded small technology companies. The move was part of a range of measures intended to encourage more listings on the IDX’s development board and highlighted the government’s commitment to opening the public markets for more SMEs – which account for around two-thirds of GDP.
The authorities are planning to draft new regulations aimed at encouraging tech uniand decacorns – firms valued at $1bn and $10bn, respectively – to dual list on the IDX and a leading global exchange. Potential targets include e-commerce platforms Tokopedia and Bukalapak, travel services company Traveloka and digital payment services firm OVO, as well as multi-service platform and digital payment technology group Gojek. “It is very important for unicorns to list here,” Handaya told OBG. “Tokopedia and Gojek will likely aim for a 2021 dual listing in New York and Indonesia.”
In the meantime, more established start-ups are content to tap into private capital. Tokopedia is currently seeking to raise up to $1.5bn from investors including Singaporean sovereign wealth fund Temasek, Chinese e-commerce giant Alibaba and Japan’s SoftBank, to bring its valuation up to $9bn. In January 2019 Gojek tapped existing investors Google, Chinese e-commerce company JD.com and multinational conglomerate Tencent, as well as new contributors Mitsubishi and equity group Provident Capital, for $1bn, which all helped the start-up exceed the decacorn valuation threshold of $10bn. Bukalapak raised $50m in Series D funding, while Traveloka is reportedly seeking funds in lieu of a dual listing. All told, there were at least 110 funding transactions announced by Indonesian start-ups and investors in 2019. Across 60 disclosed investments, total funding raised exceeded $2.95bn.
There is an expectation that state-owned oil and gas giant Pertamina will list at some stage. However, the government is expected to first complete substantial restructuring of its state-owned enterprises (SOEs), by reducing the number of such companies from 140 to 100 over the short to medium term. The government will decide whether to bring newly consolidated companies to market or place them under the purview of a new sovereign wealth fund. Multiple state-owned palm oil companies may also be merged into a single entity. Smaller SOEs reportedly seeking to list include Wijaya Karya Reality and Wijaya Karya Bitumen, units of state construction firm Wijaya Karya.
In early 2020 analysts told OBG that they were expecting an appreciating rupiah-dollar exchange rate to improve EPS on the IDX. “We expect EPS to grow by 10% in 2020, versus 4% last year, and this will be reflected in the index,” Yanuar told OBG. In the medium term, analysts also said they expected telecoms and logistics companies to enjoy a positive performance on the bourse based on consistently growing data revenue and burgeoning e-commerce orders, respectively. Listed companies that benefit from domestic consumption growth – particularly banking and health care – were also expected to offer value. However, in the nearer term, market performance will likely fall short of original expectations as governments and markets around the world deal with the economic effects of Covid-19. Sanitary product manufacturer Softex Indonesia, for example, had announced its intention to list through an IPO in 2020. However, in February the firm disclosed plans to postpone the offering to the third or fourth quarter of the year, or until uncertainty caused by the pandemic had passed.
Acquisitions in Indonesia often take the form of a majority purchase of company shares, as opposed to asset acquisition. This is in part because the sale of listed shares on the IDX is subject to a final tax of 0.1% of gross proceeds, whereas the transfer of titles of land and buildings under an asset purchase subjects the seller to a 2.5% final income tax, in addition to a 5% transfer-of-title tax that is levied on the buyer.
Mergers and acquisitions activity in the digital space has been robust, with notable recent deals including Gojek taking a 4.3% stake in the Blue Bird Taxi app for $30m in February 2020. Meanwhile, in January 2020 Bank Central Asia injected Rp1trn ($70.5m) into its newly acquired subsidiary Bank Royal Indonesia to lift the latter’s capital to a level sufficient to meet the requirements to launch as a digital bank. In November 2019 publicly listed and majority-state-owned cement company Semen Indonesia agreed to take over 6.18m shares, or 80.6% ownership, of building materials company Holcim Indonesia for $917m. The deal consolidates Semen Indonesia as the country’s largest cement player.
While stock market performance in 2019 remained encouraging, a number of companies found themselves in trouble as a result of ill-advised investments in penny stocks. In November 2019 state-owned life insurer Asuransi Jiwasraya folded due to a $2.33bn funding gap, affecting 17,000 buyers of insurance products. This prompted the Audit Board of the Republic of Indonesia to undertake an enquiry of the company’s undertakings. Fellow state-owned insurer Asabri also recorded losses of over $700m as a result of investments in a remarkably similar portfolio, again using penny stocks as a stopgap for underlying assets.
The mutual fund industry encountered similar issues. In January 2020 the IDX identified some 41 stocks as prone to manipulation, which led to increased mutual fund redemption requests and, in turn, the closure of some funds. The IDX’s trading director, Laksono Widodo, told local media that “pump and dump” trading contributed about 8.3% of the IDX’s average daily transaction volume in 2019.
In an effort to ameliorate concerns about trading on the IDX, in February 2020 the OJK restricted the sale of products offered by 37 investment managers in 2019, up from 12 in 2018, and revoked 31 business licences. This comes after the OJK dissolved six mutual funds valued at approximately Rp6trn ($423m) in November 2019 upon determining that Minna Padi Aset Manajemen, the funds’ manager, had promised investors guaranteed returns.
A number of steps have been taken to prevent these issues from deterring potential investors going forward. January 2020 saw President Jokowi issue an instruction to the OJK and the IDX to clean up the capital markets, and the government now faces pressure to punish those involved as a deterrent. “The second issue is how the government will repay policyholders,” Yanuar told OBG. “One idea is to sell Jiwasraya to a foreign company that could assume ownership of the assets and then list here. The consequence will be a flight to better fund management and fundamentals.”
Meanwhile, the IDX introduced new suspensions or maintained pre-existing trading suspensions for several issuers over their failure to file financial reports or pay back debt. Persistent failure to meet these obligations would result in those issuers joining the 27 companies that have been delisted since 2013, with gold miner Sigmagold Inti Perkasa the latest removed in November 2019.
At the outset of 2020 the Japan Credit Rating Agency raised Indonesia’s sovereign debt rating from “BBB” with a positive outlook to “BBB+” with a stable outlook. This was based on consistent consumption-led economic growth, a manageable budget deficit and public debt, as well as resilience to external shocks underpinned by a flexible exchange rate, sound monetary policy and robust domestic consumption. Fitch Ratings maintained its rating of “BBB” with a stable outlook, noting Indonesia’s $129bn of foreign exchange reserves at end-2019, and forecast that the current account deficit would remain within 2.7% of GDP in 2020. “The credit ratings upgrade is positive for the market – the 10-year bond yield is very attractive compared with Singapore and Malaysia,” Eastspring Investments’ Putranto told OBG. “Domestic investors are attracted to dividends across retail bonds, capital protected funds and money market funds.”
According to MoF data, total issuances of government bonds stood at Rp2690trn ($189.6bn) at the end of 2019, of which 38.4% was foreign-owned – mostly by overseas central banks – with domestic lenders taking 23.5% and pension funds 9.3%. Foreign inflows to the bond market stood at Rp190.6trn ($13.4bn), with investor appetite stimulated after the central bank cut the benchmark interest rate by 100 basis points to 5% over the four months to November 2019, encouraged by a stable inflation environment. However, yields on long-term sovereign bonds began to rise in the first quarter of 2020 as investors rushed to the perceived safety of government debt amid Covid-19 uncertainty.
Indonesian companies are increasingly seeking to raise funds through dollar-denominated bonds on global markets. Property developer Lippo Karawaci and oil and gas company Medco Energi International launched sales in January 2020, with the former offering five-year notes at a coupon of 8.13% to raise about $325m in a heavily oversubscribed issuance. The following month Pertamina raised $800m through the sale of the country’s first ever 40-year bond, at a yield of around 4.15%.
Meanwhile, Indonesia is one of the first emerging markets to embrace so-called pandemic bonds as the government seeks to protect the economy from the impact of the Covid-19 virus; however, this approach comes with the risk of a rising tax burden. As foreign investors tend to avoid riskier assets, pandemic bonds will likely largely be bought by BI. According to the MoF, the government plans to issue nearly Rp450trn ($31.7bn) worth of such bonds.
Although the economic impact of the global Covid-19 pandemic was felt over every sector in the first half of 2020, local financial services firm Ciptadana Capital expects that GDP growth will pick back up in the fourth quarter of the year, forecasting an increase of 4.1% year-on-year for 2021. Increasing foreign inflows reflect both investor confidence in the country’s economic trajectory and attractive differentials when compared with more highly rated sovereign debt. In 2020 budgetary pressure on state finances will likely increase, and the rupiah will be hard pressed to maintain its appreciating trajectory, which will likely ease the appetite for bonds.
However, appealing valuations on the IDX and pent-up investor demand could stoke a rally in Indonesian equities later in the year – which will likely be influenced by the state of concern over the Covid-19 pandemic. Given the sizeable scale of the task and the necessary level of stakeholder involvement, the government would do well to achieve its targeted financial system reforms before the end of the year.
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