Heritage hangs over birth of Indonesian bourse
By Bill Guerin

JAKARTA – Southeast Asia's biggest economy has a brand new bourse, a long-awaited merger of two pre-existing financial markets aimed at attracting more foreign capital through a one-stop shopping platform for both equity and bond investors. But will it succeed in attracting the new foreign investment many say is necessary to sustain Indonesia’s recent strong economic performance?

The new bourse, a financial fusion of the Jakarta Stock Exchange (JSX), until now Indonesia’s main bourse, and the Surabaya Stock Exchange (SSX), the country’s main bond and over-the-counter exchange, will be known locally as Bursa Efek Indonesia (BEI). The exchange commenced trading last week with a total capitalization of US$268 billion and 377 listed companies, but also launches at a time when trading practices, issuer compliance and overall supervision are being called into question by many investors.

Indonesia’s economy is growing strongly, with gross domestic product up 6.5% year on year in the third quarter, the fastest quarterly growth rate recorded in the country over the last decade. Yet for the BEI to lure in new capital, it will need to widen and deepen substantially to meet the liquidity requirements of major institutional investors, including the Western hedge funds now looking for investment safe havens outside of the United States and Europe.

One way forward would be through more initial public offerings (IPOs), which according to BEI officials are apparently in the pipeline. BEI president director Erry Firmansyah told reporters last week, coinciding with the new bourse’s launch, that around 30 companies planned to list on the BEI in 2008 and that another 54 companies have indicated their intention to issue new bonds.

IPOs on the JSX have been sparse in recent years, with only 91 companies floated on the bourse over the five-year period spanning 2001 to 2006. Those numbers have remained flat in 2007, with only eight new listings through the first seven months of this year. Investors have aggressively snapped up the slim new pickings, however.

The June IPO of PT Media Nusantara Citra (MNC), owner of the country's biggest TV station RCTI, was seven times oversubscribed. Likewise, majority state-owned toll road operator PT Jasa Marga floated a 30% share of its total equity on the former JSX in November and the offering was 4.7 times oversubscribed.

PT Jaya Konstruksi Manggala Pratama Tbk, a construction subsidy of the Ciputra Group, was the first company to list on the new exchange through an IPO of just over 10% of its total equity at Rp 615 per share. The company said 95% of these shares were allocated to institutional investors, of which 55% of them were foreign. On the first day of trading, the company’s shares prices soared by 59% to close at Rp 980.

Meanwhile, Indonesia’s third largest listed coal producer by market value, Thailand coal miner Banpu PCL's local unit, PT Indo Tambangraya Megah, will go public next week on the new bourse at an offer price of Rp 14,000 rupiah ($1.50) a share. The 20% equity stake listing is expected to generate substantial foreign investor interest as a commodity play and if fully subscribed would bring in Rp 3.16 trillion in new capital and value the local unit at nearly $1.7 billion.

Indonesia has benefited from the recent surge in global commodity prices, with PT Bumi Resources, the country's biggest coal producer, seeing its shares rise some 300% so far this year. Yet Indonesian stocks are still widely viewed as volatile investments, with the still sharp memories of the collapse of several heavily leveraged listed companies in the wake of the 1997-98 Asian financial crisis.

Those risks were symbolically seared into the minds of many foreign punters by the September 2000 car bomb that detonated in the basement of the Jakarta bourse that killed 15 and triggered a wave of security fears that continue to weigh against broad investor sentiment. In 2001, the year of former president Aburrahman Wahid's impeachment and the terrorist attacks on the US, the net outflow of capital from the predominantly Muslim country hit $9 billion.

Sentiment remained bearish in the wake the October 2002 Bali bombings, which killed 202 people, mostly foreign tourists, followed by the 2003 bombing of Jakarta’s JW Marriott hotel, then a popular resting place for Western businesspeople. Foreign investor sentiment only started to revive with the 2004 election of President Susilo Bambang Yudhoyono’s pro-business administration. Total stock market capitalization jumped from Rp 680 trillion at the end of 2004 to Rp 801 trillion a year later, after his government signaled its intention to implement pro-market reforms.

Led by a robust economic recovery and declining interest rates, the Jakarta bourse last year lagged only China’s Shanghai and Shenzhen as the best performing capital market in the Asia-Pacific region. The Jakarta Composite Stock Index (JCSI) was also Asia's third best performing index in terms of volume, trailing only Thailand and South Korea.

Market hurdles
Indonesian market officials now hope that the merged BEI will generate even more investor interest and push the market index higher. But there are still several hurdles in place, several analysts say.

Kahlil Rowter, president director of Indonesian credit ratings agency PT Pefindo, believes that the merger by itself will not be enough to substantially increase the currently depressed number of new corporate stock and bond issuances. He told Asia Times Online that more important than the merger is to leverage the fanfare surrounding its launch to push urgently needed financial reforms.

For one, Rowter notes, poor trading practices remain a primary concern and market players still need to be ensured that rules and regulations will be rigorously enforced by the new exchange and the Capital Market and Financial Institutions Supervisory Agency (Bapepam-LK), the market regulator.

Others note that both the JSX and SSX were owned by a handful of the country's largest brokerages, which they contend has historically carried conflict of interest risks. This year the regulatory authorities have launched at least two investigations into suspect trading transactions. That includes the controversial divestment through a Rp 2 trillion public offering of a 5.1% stake in majority state-owned gas distribution company PT Perusahaan Gas Negara (PGN) in December 2006.

The funds generated were substantially less than the offering’s Rp 3.2 trillion target and the lackluster sale came against strong allegations by certain market watchers of insider trading and market manipulation. PGN's shares plummeted by more than 23% in a single day's trading this year on January 12 following a belated announcement by the company of a delay in the construction of a major gas pipeline. Following an investigation by Bapepam – LK into the transactions and the activities of twelve local and foreign brokers, Rp5 billion in fines were imposed on four of the company's directors and a commissioner for failing to publicly disclose the information about the delay.

Despite such hiccups, analysts say the stock market still has plenty of upside as an alternative capital raising avenue for Indonesian corporations, particularly given the current maturity mismatch dilemma faced by most Indonesian banks, where most of the funds available for loans are held in short-term investments such as time deposits, making it risky for them to lend to longer-term corporate projects.

For that capital raising potential to be realized, however, there is a dire need for improvements. In a lengthy report released this February by the World Bank entitled "Unlocking Indonesia’s Domestic Financial Resources – The Role of Non Bank Financial Institutions", the multilateral lending agency argued that Indonesia still needs to treat corporate restructuring as an ongoing process and consistently enforce existing securities laws to help corporations reach standards commensurate with international norms.

Rowter similarly calls for more IPO enticements, saying that besides tax benefits, such as those given by other neighboring countries, market regulators should also include a method for shelf registration - where an issuer submits pertinent information to the regulators and has received a go-ahead, but the actual issuance is held until the market achieves a certain momentum - and a longer validity period for audited financial statements to improve market conditions.

While the government has already promised tax incentives for companies that list on the new exchange, many local companies remain reluctant to go public because of the strict disclosure, transparency and good corporate governance requirements. Yet the failure to galvanize new corporate issues will likely leave the new exchange firmly in the grip of the handful of companies that accounted for more than half of the old market’s capitalization and trading volume. And as the World Bank notes in its report, a market is ultimately only as good as the corporations listed on it.

Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at softsell@prima.net.id.
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