Indonesia’s stock market has been booming with the Bursa Efek Indonesia (IDX) being heralded as the best performer in the Asia Pacific region for 2010, gaining 44% over the course of the year. Yet, trading still remains dominated by international investors who accounted for 67% of all investments on the bourse at the end of 2010 (Indonesia Central Securities Depository, KSEI). Daily trade is mainly conducted by domestic investors but with approximately 350,000 (KSEI) or less than 1% of the population participating in the market; widening the domestic investor base remains a priority. The risk of capital flight of foreign investors poses a significant threat over 2011 as emerging markets struggle to control inflation and uncertainty continues to plague the markets with the continuing Euro debt crisis. It is also a thorny political issue to contend with. The IDX and relevant government bodies are therefore taking steps to create a more inclusive environment for investors in order to finance state infrastructure projects and benefit the country as a whole.
Total Assets of Stocks and Corporate Bonds (trillion RP)
Source: KSEI, December 2010
Indonesia’s Government Debt Management Office faces the challenge of strengthening Indonesian participation in government debt and reducing dependence on foreign investors. This has led to the number of government bond issuances soar over the past few years and greater domestic purchase of debt. This is set to continue over 2011 as the government announced plans to issue global bonds worth $22.1 billion USD or 1.8% of GDP, to meet the budget deficit for the year. Bank Indonesia announced at the beginning of 2011 that is may offer dollar denominated conventional and shariah compliant bonds to mitigate risk against capital outflows. Allocations of shares solely for local investors may also be stepped up in future state bond offerings and IPOs undertaken by SOEs in an effort to encourage local investors to be part of their national economic development.
Indonesia’s bond market remains dominated by government bonds and has been spurred by the issuing of new products such as government retail bonds in 2006 and shariah bonds or sukuk since 2008 (see Indonesia’s Islamic Banking Sector). Sales of sukuk bonds rose by 56% to 26.2 trillion Rupiah in 2010 (Bank Indonesia). These products are attractive to a broad scope of the market as they require a low minimum investment of around $550 USD as well as meeting the low risk appetite of the individual investor as they are government backed. The government is also planning on using a more diverse range of assets as the basis for further sukuk offerings in the future. These include financing for the construction of highway projects known as Istisna sukuk whereby a purchase order for the underlying asset is delivered at a future date. The government is preparing legislation to be passed as of mid 2011 to enable the issuing of new shariah compliant financial instruments. These types of issuing are considered to be more high risk than more traditional Al-ijara sukuk so the response of the market will remain to be seen in terms of impacting domestic participation.
In May 2011, the IDX unveiled the new Indonesian Shariah Stock Index (ISSI) to act as reference for investors in a further effort to woo both domestic and Middle Eastern investors. The existing Jakarta Islamic Index was established in 2000 but lists only 30 companies. The ISSI is made up of 214 stocks currently listed on the IDX that are considered to be shariah compliant and make up 43% of the total in terms of market capitalisation of the exchange. These measures have been taken to reassure existing and potential investors that their investments comply with Islamic law and are halal. Such measures will surely have a positive impact in bringing more ethically minded investors from both Indonesia and the Middle East in light of continuing political instability in Middle Eastern markets.
The rapid rise of online trading over the past 3 years has seen the number of participants in Indonesia’s stock market rise, particularly outside of Jakarta. In 2008, online trading made up a marginal amount of trade volumes at less than 4%. Yet at the end of 2010, 40 of the total 119 members of the exchange are using online trading platforms with the top 3 companies accounting for over 8% of daily trade volumes; a figure that will undoubtedly increase over 2011. Improved access and faster internet services have made online trading more appealing, particularly to the country’s youth, as well as the increased affordability of handheld devices such as Blackberry. New online trading platforms and compatible software on these devices has given Indonesians the tools to take advantage of their booming stock market and strengthening currency. Online trading has deepened the investor base by allowing retail investors into the market who do not have access to brokers, which is often the case in cities outside Jakarta. The downside of this trend is its contribution to market volatility as online investors tend to be short term in their thinking focusing on quick returns by holding positions for no longer than a few days or hours.
The IDX has also undertaken campaigns to educate the population on the potential benefits of capital market participation such as the setting up of ‘IDX Corners’ in university campuses. Trading companies have also joined in on the action through marketing campaigns and stock trading competitions. This is proving popular among younger investors, yet memories of investment scandals in the past maintain caution among the older generation. The Capital Market and Financial Institutions Supervisory Agency (BAPEPAM–LK) and KSEI are strengthening their oversight authority as well as utilising technology to give investors greater access to their accounts in real time. At the beginning of 2011, BAPEPAM-LK issued new regulations to separate security companies’ accounts with that of its clients, allowing individual investors to control their own investment accounts. Such accounts can be set up through four nominated banks with the measure to be fully effective by February 2012. This, on top of the introduction of the KSEI Akses card in 2010 for online investment monitoring is a further effort to boost confidence in the capital markets by providing additional protection to investors.
The increasing innovation in capital market products and methods of access from both the public and private sector will continue to bring more local investors into the fold. Islamic compliant products and particularly government issued bonds are attractive to existing investors and newcomers to the market by appealing to the desire to support their national growth, while investing ethically. Deepening the capital markets through greater domestic participation will also be instrumental in keeping a handle on foreign investor volatility as the country edges towards investment grade. Future plans by the government to grant greater share allocations in global bond offerings to local investors may achieve the desired effect, but potentially at the risk of creating a less friendly environment for foreign investors.
Global Business Guide Indonesia - 2012
Bourse Name: Bursa Efek Indonesia (IDX)
Main Index: Jakarta Composite Index
Market Capitalisation: 5.6 trillion IDR July, 2016)
Annual Performance: 11.97% (2016)
Record High: 5,523.29 (April 2015)
Number of Issuers: 523 (2015)
Top Stocks by Market Capitalisation: HM Sampoerna, BCA, Telkom, Unilever, BRI, Astra International, Bank Mandiri, Gudang Garam, BNI.
Opportunities in Indonesia’s Banking Industry
Indonesia’s Islamic Banking Sector
The Prospects for Indonesia’s Insurance Industry
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