MONTREAL - Jakarta's principal stock market index has more than doubled since
President Susilo Bambang Yudhoyono won the July 2009 presidential elections
with a margin that made a run-off unnecessary.
Yudhoyono's comfortable victory came three months after his Democratic Party
coalition won 314 of the 560 seats up for election to the People's
Representative Council, the country's legislature. The stage was set for a
period of political stability that has encouraged investment by local and
overseas companies, including South Korean steel giant POSCO, and consumer
The economy in the second quarter grew 6.2% compared with a year earlier and
expanded at a rate 2.8% faster than in the
previous three months, according to the country's Central Bureau of Statistics.
Yudhoyono has set a 6.6% goal for annual economic growth, and the consensus is
that this will probably reach at least 6.0%.
Exports, capital investment, and the consumer sector all contributed to the
advance. Domestic consumption, though, was the main driver, accounting for over
two-thirds of the country's growth, an atypically high figure for the region.
Domestic automobile and motorcycle sales are a backbone of the consumer
spending statistic, and gains there translate into stock market strength -
local automaker Astra International accounts for no less than 8% of the
capitalization-weighted Jakarta Stock Exchange Composite Index (JCI).
The Indonesian stock market has been one of Asia's stand-outs, with the JCI
powering up from 1,111 last October to 3,141 as of Wednesday's close. This
growth is equivalent to a compounded rise of almost 4.84% per month
consistently for nearly two years. The performance includes a recovery from
2,614 near the end of May to the present level, itself equivalent to a 1.42%
compounded weekly increase over the last three months.
The JCI surpassed its previous (mid-January 2008) all-time high of 2,810 in
early April this year, then fell back, passed it again in early June and has
not looked back since. It has been showing short-term strength for the last
two-and-a-half weeks, and this is continuing. That previous all-time high came
from the basis of a level at 361 in mid-October 2002, itself a record of over
five years of consistent growth of 3.37% compounded monthly.
The JCI has significantly outperformed the country’s other major market index,
the LQ45, which is (as Bloomberg News explains) "a capitalization-weighted
index of the 45 most heavily traded stocks on the Jakarta Stock Exchange",
whereas the JCI is "a modified capitalization-weighted index of all stocks
listed on the regular board of the Indonesia Stock Exchange". For example, over
the past five years, the JCI has vaulted 216%, but the LQ45 is up "only" 174%
during the same period.
Jakarta's stock market capitalization remains relatively small, given the size
of the country. The market cap is only one-third of Taiwan's even though
Indonesia's population is 10 times as large. At the same time, the country has
well-established regional and global political links through membership of
organizations such as the Association of Southeast Asian Nations and the Group
Like many Asian economies, Indonesia's is less financially intermediated by the
international banking institutions that find themselves under continuing, if no
longer immediate, threat. Its investment regulations are still seen as
unfriendly in comparison with many Asian peers, and administrative steps have
been under way for some time to improve the climate for foreign capital.
Endemic red tape, corruption, and poor infrastructure complicate attempts to
realize the potential of the country’s natural resource base.
HSBC economist Wellian Wiranto nevertheless remarked this month that "[F]oreign
direct investment may be contributing more and more to growth, judging from the
gathering interest among international companies seeing Indonesia as a big
market with a large pool of labor force, right where the raw materials are", as
quoted by India's Economic Times. POSCO, South Korea’s largest steelmaker, is
only one of the latest to sign an agreement with an Indonesian firm for a new
industrial plant (a steel mill in West Java with Krakatau Steel).
Relatively low interest rates are spurring consumption, although with annual
inflation reaching a 15-month high of 6.22% in July, up from 5.05% a month
earlier, those rates may be increased. Still, companies are plowing profits
back into investment.
The only cause for worry would be the increasing unemployment rate, although
even this has not worsened as much as feared. About half of the country's total
employment remains in the agricultural sector, although it is not clear what
proportion of those formally counted in agriculture may migrate seasonally to
the cities. The high degree of informal-sector employment is a worry to
economists and reformers, but it does provide a cushion of sorts.
At the same time, the country's export structure has the advantage of being
more oriented toward Asian economies and therefore less dependent upon the
vagaries of the Western consumer resilience. That does not make it immune from
following global markets in the wake of periodic financial-crisis downturns,
but these tend to be transitory waves of market emotion and not based on
fundamental economic realities.
For these and other reasons, it is foreseeable that the Jakarta stock market
will continue its stellar performance, other things being equal, even if it
suffers the occasional inevitable hiccup. In the short term, for example, it is
looking a bit overbought, even if volume has lately been impressive and a
number of short-term technical indicators remain favorable. It is attempting to
confirm its surmounting of a long-term ascending-tops trend line while it is at
the same time at the top of a medium-term ascending-tops trend line.
Dr Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of Technology and The University of
Michigan, has researched and taught at universities in the United States,
Canada, France, Switzerland, and Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian Studies, Carleton University,
Canada, he also consults privately in a variety of fields.