Indonesia: Foreign investors reduce stock holdings

Like bourses in many other emerging markets, the Indonesia Stock Exchange (IDX) has been on a downward trend since late May, as the US Federal Reserve has made clear that it will scale back its stimulus programme. However, authorities have taken steps to strengthen the market, including propping up the rupiah, and many of the IPOs scheduled for the coming months appear to be on track, suggesting that any difficulties could be short-lived.

As of late June, the Jakarta Composite Index was down more than 13% from a peak on May 20, falling to below 4500. The decline has been attributed to an exit of foreign capital, as global investors have responded not only to plans to wind down the US stimulus programme but also an expectation that growth in China will slow. Other factors include the Indonesian government’s decision to raise the price of subsidised fuel. While this could reduce fuel imports and allow additional public investment in infrastructure and education, the primary short-term effect is expected to be inflation, another concern for investors.

However, a recovery could be quick – the market experienced a similar downturn in September 2011 and came back within two months. Moreover, the central bank has now intervened, raising the overnight deposit facility rate by 25 basis points to 4.25%, a move that should strengthen the rupiah and slow the outflow of foreign capital.

Early and decisive action was welcomed by analysts, and officials said that the central bank was prepared to take further steps, if necessary. “The rise is a preemptive measure from Bank Indonesia to give a signal to the market that we are ready to respond whenever new developments kick in,” Agus Martowardojo, the central bank governor, told reporters on June 12, the day the change was announced.

Even if only temporary, a downturn in the market could have an effect on scheduled initial public offerings (IPOs), which were off to a good start in 2013 prior to the latest turn of events. In late May, Harry Su, head of research at Bahana Securities, a Jakarta financial services firm, wrote in the local press that, between January and July of this year, 25 IPOs either had occurred or were planned, at a total value of Rp15.7trn ($1.54bn), up more than 50% on the Rp10.1trn ($1.03bn) raised in 22 IPOs for full-year 2012. The offerings were expected to attract considerable interest, not least because IPOs have tended to perform well; the average return from the 2012 launches was 137% by the end of May, while the 2013 offerings have already recorded an average return of 47%.

Among the IPOs discussed by Su were those of Bank Muamalat, Saratoga Investama (private equity), Sri Rejeki Isman (textiles) Semen Baturaja (cement), Multipolar Technology (IT) and Electronic City Indonesia (retail). Of these six, only one – Bank Muamalat – has been postponed in the wake of the market downturn, Reuters reported in mid-June.

The longer-term outlook for IPOs is positive, according to Muliaman Hadad, chairman of the Financial Services Authority, the sector’s regulator. “We expect 2014 to be a good year, as economic growth continues and additional listings come to the market. However, we need more investors, as well as additional products to offer. Indonesia must deepen its capital markets to stay competitive with the region and to reduce exposure to fluctuations in capital flows,” he told OBG.

Indeed, a boost in domestic investors – facilitated by growth in the middle class – would make the IDX less vulnerable to the type of capital flight that has taken place in recent weeks. By increasing liquidity and stock market participation – both in terms of broadening the number and range of investors and encouraging more listings – the exchange can become stronger and more competitive and sustainable.