Indonesia’s capital markets have been on a steady growth path in recent years, with market capitalisation and trading activity showing strong expansion since 2012, while the number of initial public offerings (IPOs) on the Indonesia Stock Exchange (IDX) reached a 26-year high in 2018. Debt markets have been resilient despite widespread global volatility, which prompted significant outflows from emerging markets that year. Nonetheless, some challenges remain for stakeholders; factors such as a lack of liquidity, potential election shocks and stringent regulatory requirements continue to weigh on domestic companies’ market participation.
The authorities are seeking to encourage more IPOs and boost broader market liquidity, although regulatory challenges and elevated listing fees continue to impede progress, and a planned small and medium-sized enterprise (SME) board has yet to be established. New regulations surrounding cryptocurrency trading could also affect plans to diversify IDX product offerings, even as reforms, including a shift to the T+2 settlement cycle and changes to blue-chip index methodology, help the sector maintain its upwards trajectory in 2019.
Structure & Oversight
Indonesia’s first stock exchange was established in 1912 under Dutch colonial rule. Closures during both world wars saw modern development of the exchange stall until 1977, when the Capital Market and Financial Institutions Supervisory Agency was created, operating under the Ministry of Finance. Semen Cibinong was the first company to list on the revived Jakarta Stock Exchange (JSX) on July 10, 1977, followed by 23 other companies over the subsequent decade.
A period of deregulation and pro-investor reforms during the 1980s revived capital market activities. In June 1988 the Indonesian Parallel Stock Exchange (IPSX), comprising brokers and dealers, began operating under the management of the Securities and Money Trading Organisation. The Surabaya Stock Exchange (SSX) began operations the following year, and in 1992 JSX was privatised. The IPSX merged with the SSX in 1995. In the same year Law No. 8 concerning the capital market was promulgated, establishing modern provisions, rules and regulations regarding trading activity. In 2007 the SSX was absorbed by JSX, which was renamed the IDX.
Indonesian capital markets are overseen by the Financial Services Authority (OJK), which replaced the Capital Market and Financial Institutions Supervisory Agency in 2011. OJK oversees self regulatory organisations (SROs), which includes the IDX, the Indonesian Clearing and Guarantee Corporation (KPEI), and the Indonesian Central Securities Depository (KSEI). The KPEI was founded in August 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. The IDX holds 100% of its Rp15bn ($1.1m) of paid-up capital. The KSEI, meanwhile, was established in December 1997 as the country’s securities depository and settlement institution, officially replacing the Indonesia Securities Clearing Depository in January 1998.
Regulatory reforms are ongoing within SROs, and in July 2018 authorities announced that the IDX would switch from a T+3 transaction settlement cycle to a T+2 cycle beginning in November 2018. The switch is intended to better facilitate transactions between stock exchanges, countries and continents, in addition to bringing the IDX in line with international best practices.
Emerging markets such as Thailand, Malaysia, Singapore, Pakistan, India, Saudi Arabia, Iran, Mexico, Argentina and Peru have all switched to T+2 settlement cycles. The exchange’s straight-through processing system and single investor identification numbers are both designed to be compatible with the new settlement cycle. While there were concerns the exchange would not be prepared in time for the planned launch on November 26, 2018, local media reported that this had gone smoothly, despite lower-than-anticipated foreign transaction volumes.
As of March 2019 there were 22 stock indices active on the IDX, including the Jakarta Composite Index (JCI), which measures the performance of listed stocks. The JCI was developed with a base value of 100 and a base date of August 10, 1982, when 13 stocks were listed on the exchange. Other important indices include the LQ45, IDX30, and KOMPAS100 indices, which measure the performance of the exchange’s top 45, 30 and 100 firms, respectively, using market capitalisation, liquidity and corporate fundamentals as parameters. The IDX High Dividend 20 Index measures the performance of 20-highest performing stocks in terms of distributed cash dividends over the previous three years, while the IDX BUMN20 Index measures the 20 largest state- and municipal-owned enterprise stocks. The IDX also tracks three Islamic finance indices: the Indonesia Sharia Stock Index, the Jakarta Islamic Index and the Jakarta Islamic Index 70.
Various sectoral indices measure stocks in areas such as agriculture, mining, consumer goods and real estate, while the SRI-KEHATI Index measures the performance of stocks of companies that follow its sustainable and responsible investment principles.
An important development occurred in February 2019 when the IDX revised its methodology for key indices, shifting to a free-float adjusted index in which listed companies’ weighting is determined by the number of free-float shares, or shares available for trading, rather than the total number of shares outstanding. The changes were initially rolled out for the LQ45 and IDX30 blue-chip share indices, with the authorities reporting that these changes will encourage listed companies to increase the number of shares available for public trading, boosting liquidity and trading activity. As of February 2019 the 10 largest listed companies by market capitalisation were Bank Central Asia, Hanjaya Mandala Sampoerna, Bank Rakyat Indonesia, Telekomunikasi Indonesia, Unilever Indonesia, Bank Mandiri, Astra International, Gudang Garam, Bank Negara Indonesia and Charoen Pokphand Indonesia.
Size & Performance
The IDX’s market capitalisation has been on a broadly positive growth path since hitting a low of Rp25.6trn ($1.8bn) in December 1992, rising steadily from just above Rp1000trn ($70.9bn) in 2009 to surpass the Rp3000trn ($212.7bn) threshold at the end of 2010 and the Rp4000trn ($283.6bn) threshold in mid-2012. Market capitalisation reached an all-time high of Rp7345.7trn ($520.9bn) in January 2018, fell to Rp6737.4trn ($477.7bn) in October 2018, before rebounding to exceed its January high, hitting Rp7388trn ($523.9bn) on February 18, 2019. As with IDX market capitalisation, the JCI has recorded broadly positive growth over the previous five years. Indeed, the index rose from the mid-4600s in February 2014 to reach a peak of 5514.8 in March 2015, before sinking to a five-year low of 4207.8 in October 2015. However, it has recovered steadily in the years since, rising to 5438.8 on August 26, 2016, 5791.9 in May 2017 and 6660.6 in January 2018, before moderating to 5694.9 in July 2018.
The index rebounded again later in the year, however, hitting 6163.6 in December, and rising to 6538.6 on February 1, 2019. Between February 21, 2018 and the same date in 2019, the JCI ranged between 5557.6 and 6665.9. Bloomberg reported that, as of March 2019, the JCI’s price-to-earnings ratio was 20.54. There were 624 companies listed on the IDX as of February 2019, a significant increase from 566 in 2017 and 537 in 2016.
More than 800,000 investors were registered with the IDX in November 2018, with domestic investors dominating trading activity. “More than 1.6m investors were registered with the KSEI in November 2018. In terms of asset ownership, 55% are owned by domestic investors and 45% are owned by foreign investors,” Friderica Widyasari Dewi, president director of the KSEI, told OBG. The bourse reported that annual domestic buying rose from 841.8bn shares in 2012 to 1.1trn in 2014, before falling to 233.1bn in 2015. Domestic buying regained momentum in 2016, hitting 1.6trn shares, before soaring to 2.5trn in 2017, with the IDX reporting that domestic buying stood at 1.63trn shares at the end of the third quarter of 2018.
In contrast, net annual foreign investment has trended downwards in recent years, from -2.2bn purchases by volume and Rp15.9trn ($1.1bn) of outflows in 2012 to -22.9bn purchases and Rp22.6trn ($1.6bn) of outflows in 2015, and -37.1bn purchases and Rp39.9trn ($2.8bn) of outflows in 2017. Foreign investment outflows moderated during the first nine months of 2018, however, with -13.4bn of purchases by volume and Rp51.2trn ($3.6bn) of outflows recorded over the period. “There were significant foreign outflows in 2018 due to the currency depreciation and current account deficit, but by November that year the rupiah had stabilised and earnings per share picked up,” Agus Yanuar, president director of Samuel Asset Management, told OBG.
Trading values and volumes on the IDX have increased in recent years, with the bourse reporting that total annual trade volumes rose from 1.05trn in 2012 to 1.34trn in 2013, 1.45trn in 2015 and 1.93trn in 2016. Trade volumes grew to 2.84trn in 2017, although they moderated to 1.86trn as of the third quarter of 2018, according to the IDX Fact Book 2018. Average daily trade volumes rose from 4.28bn in 2012 to 5.50bn in 2013, moderated to 5.48bn in 2014, then surged to 5.94bn, 7.83bn, 11.95bn and 10.43bn in 2015, 2016, 2017, and the first nine months of 2018, respectively. “Corporate finance business lines tend to slow down during volatile periods of capital outflows or election season, while trading and brokerage lines tend to hike because of higher market volatility,” Mardy Sutanto, president director of BCA Sekuritas, told OBG.
Domestic trades by value have also risen sharply since 2012, with annual domestic buying by value rising from Rp633.3trn ($44.9bn) to Rp892.7trn ($63.3bn) in 2013, Rp1156.1trn ($82bn) in 2016 and Rp1166.6trn ($82.7bn) in 2017 before hitting Rp959.6trn ($68bn) in the first nine months of 2018.
As of March 6, 2019 the average daily trade volume for the year stood at 13.9bn shares, while average daily trade values equated to Rp10.1trn ($716.2m) over the same period. Average trading volumes increased moderately compared to the same date in 2018, which recorded an average of 13.7bn shares. The average trading value also saw a slight increase from 10trn in 2018. Trading volumes stood at 23bn shares on March 6, 2019, while the total value of trades was Rp15.1trn ($1.1bn).
The IDX has targeted an 11.7% increase in total revenue in 2019 to reach Rp1.1trn ($78m), as well as Rp136.6bn ($9.7bn) in profits. However, capital markets expansion faces several challenges. In June 2018 the Association of Indonesian Publicly Listed Companies (AEI) called for the newly appointed IDX board of directors to implement several reforms aimed at boosting liquidity and encouraging IPOs. According to the AEI, listing fees are onerous for many companies, while the number of listed stateowned enterprises remains low, inhibiting broader capital market growth. “What could underpin more state IPOs is the government’s strong infrastructure initiative,” Sutanto added. “The $359bn of financing needed for these projects will force the government to equitise projects and embark on more IPOs.”
The number of IDX-listed companies has risen steadily in recent years, although the exchange remains highly concentrated and IPO values have dropped off since 2015. In November 2018 IDX authorities reported that it had exceeded its target of 35 new listed companies in 2018, with 50 companies listing on the exchange during the first 11 months of the year – the highest number of companies to list in one year since the exchange was privatised. In contrast, 23 companies listed in 2012, 31 in 2013, 24 in 2014, 18 in 2015, 16 in 2016 and 37 in 2017, according to IDX data, against four de-listings in 2012, seven in 2013, one in 2014, three in 2015, eight in 2017 and four during the first nine months of 2018.
The IDX reported that the total annual amount of IPO fundraising fell from Rp12.1trn ($858m) in 2016 to Rp9.6trn ($677.9m) in 2017, even as the total number of IPOs rose from 16 to 37, while the 37 IPOs recorded during the first nine months of 2018 were valued at Rp13trn ($922m) – more than in 2016, but spread across a higher number of offerings.
Upon making its November 2018 announcement, the IDX also reported that an additional 14 companies were expected to list in the coming months, with 35 listings in total expected in 2019. The 2019 target was not raised from the previous year due to anticipated investor uncertainty over the upcoming presidential election. Restrictive regulations also pose a challenge to potential IPOs.
The IDX has undertaken several campaigns aimed at supporting new IPOs, including conducting field visits, and hosting awareness events for businesses and entrepreneurs across the country in an effort to improve public understanding of capital markets as a mechanism to raise funds. The authorities are planning to draft new regulations aimed at encouraging smaller companies and tech start-ups to list, as well as regulations simplifying the listing process for companies involved in minerals and coal mining, plantations, renewable energy, and oil and gas.
IPOs in the banking sector could also offer a new channel for capital markets expansion. In February 2019 local media reported that a number of domestic banks – including Bank Kesejahteraan Ekonomi, Indonesia Construction Bank and Media Nusantara Citra International – planned to launch IPOs, limited share offerings or rights issues that year.
As part of its efforts to boost IDX activity, bourse authorities are also looking to launch a dedicated platform for small businesses, announcing plans to create an SME acceleration board in August 2017. This followed a December 2015 local media report that only seven SMEs had listed on the IDX since 2003. Upon announcing the SME acceleration board, Nicky Hogan, business development director of the IDX, told local media that the bourse was set to amend existing regulations to allow for the establishment of a new board, with any potential SME entrants expected to release 20% of the company’s total shares, regardless of how many float, while the minimum net assets for SME listings would be set at Rp5bn ($355,000). Hogan also reported that the IDX was considering issuing new regulations for liquidity providers to boost SME share trading activity following the establishment of the IDX incubator in March 2017, which supports tech-based start-up companies. As of August 2017 the IDX had identified 24 potential SME listings, although no board had been established as of March 2019. “OJK has been encouraging more SMEs to list on the IDX. This is beneficial for both the government and SMEs, as not only will listed companies be required to report their balance sheets and become more disciplined in regards to managing their taxes, but companies will also have access to more capital from local and foreign investors,” Jemmy Wawointana, president director of Sucor Asset Management, told OBG.
IDX authorities have identified a target of Rp9trn ($638.2m) in daily stock transactions in 2019. Again, this is lower than what was recorded in 2018 owing to the 2019 presidential elections and their potential impact on investor sentiment. To offset any uncertainty caused by the election, the exchange has announced plans to develop new services and products, including derivative products based on sovereign debt instruments, derivative products for the equity market, single stock futures and a futures index.
Cryptocurrency futures have also been identified as a high-potential channel for new investment and liquidity on the IDX, and in October 2018 new regulations came into effect enabling cryptocurrency trading. The authorities at the Commodity Futures Trading Regulatory Agency (BAPPEBTI) determined that cryptocurrency could be traded as a commodity following a four-month study into digital currencies. The use of cryptocurrency remains illegal in Indonesia, however, after the central bank decided in December 2017 to block the use of Bitcoin and other such currencies. When the new regulations were unveiled in February 2019 media outlets reported dismay among cryptocurrency traders after BAPPEBTI announced that any cryptocurrency company trading on the IDX would be required to hold Rp1trn ($70.9m) in minimum paid-up capital, and to maintain a closing capital balance of at least Rp1.2trn ($85.1m). The requirement for traditional commodities futures companies is Rp2.5bn ($177,000). Oscar Darmawan, CEO of local cryptocurrency exchange Indodax, told international media in February 2019 that minimum capital requirements were higher than the cost of opening a rural bank, which would impede growth and prevent cryptocurrency futures from trading on the IDX.
Indonesia’s government and corporate bond markets have remained resilient despite global emerging market uncertainty brought on by dual currency crises in Turkey and Argentina, as well as a slow-burning Sino-US trade war. According to data from the IDX, the total trading value of rupiah-denominated government bonds rose from Rp1995.9trn ($141.5bn) in 2012 to hit Rp2837.5trn ($201.2bn) in 2014, Rp3400trn ($241.1bn) in 2015 and a high of Rp3842.4trn ($272.5bn) in 2017, before moderating to Rp3747.3trn ($265.7bn) at the end of the third quarter of 2018.
The corporate bond market has shown equally impressive growth, with the IDX reporting the total trading value of rupiah-denominated bonds rose from Rp160.1trn ($11.4bn) in 2012 to hit Rp187.7trn ($13.3bn) in 2015, Rp224.3trn ($15.9bn) in 2017, and a high of Rp325.1trn ($23.1bn) in 2017, before moderating to Rp255.1trn ($18.1bn) at the end of the third quarter of 2018. According to the exchange, 79 bonds and sukuk (Islamic bonds) were issued in 2018, worth a total of Rp97.2trn ($6.9bn). Government bond issuance reached Rp173.8trn ($12.3bn) in the same year, while eight exchange-traded funds issuances worth Rp53.9bn ($3.8bn) and three asset-backed securities issuances worth Rp3.6trn ($255.3m) were also recorded.
Positive trends in the debt market continued into 2019, and in late February international press reported $2bn of inflows into Indonesian government bonds since the beginning of the year, while countries such as India, Thailand and Malaysia were all recording outflows. According to local media, during one week in February alone, total bids for the government’s bi-weekly bond auction hit Rp66.4trn ($4.7bn), the highest level in 13 months, with analysts predicting that the yield on benchmark 10-year government debt will sink to 7.25% in 2019 from 8% in February 2018 as lower oil prices alleviate pressure on the country’s current account deficit and help offset any potential election headwinds. After a long period of depreciation, the rupiah was also one of the strongest performers in South-east Asia during the opening months of 2019, further incentivising investment in government bonds.
Government-issued debt continues to expand in order to fund the state’s extensive infrastructure development programme, with bank loans for infrastructure projects estimated to reach Rp517trn ($36.7bn) in 2019. As a result, demand for financing instruments such as project and securitisation bonds is also increasing. The latter model, in which investors are offered a return on future revenue generated by a project, was used by toll road operator Jasa Marga and stateowned power company Perusahaan Listrik Negara in 2017. Indonesia is also emerging as a major green bond market: in the first 11 months of 2018 it was the largest source of green bonds in ASEAN, receiving 39% of the green bonds issued in the region.
Indonesia’s capital markets have maintained a stable growth trajectory despite a tumultuous year in 2018, bolstered by rising numbers of IPOs and solid macroeconomic fundamentals. While the market remains concentrated and regulatory amendments are needed, reforms to encourage SME listings, companies to float more shares and the implementation of international best practices should help the sector maintain momentum in 2019.