Indonesia to keep shining

By Robert M Cutler/Asia Times /August 27,2010.
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 spending.

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 of 20.

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.