The JCSI (Jakarta composite stock index) this year is Asia's third best performer in terms of volume, after Thailand's and Korea's. However, with recent happenings in both Thailand and the Korean peninsula, Indonesia's stock market is poised to lead the show in Asia.
The revised capital control measure that was put up initially by the Bank of Thailand left a bad taste in investors' mouth for months to come. On the other hand, the North Korea's nuclear standoff remains an unrealized yet real threat that pose as disincentive for investors to pour more money into South Korean stocks.
Hopefully, gone is the mental siege that for years had stemmed Indonesia's stock market from growing and developing optimally. The Jakarta Stock Exchange (JSX), the country's main exchange, has grown by almost 50 percent since the end of the first half, from around 1,200 to roughly 1,780 at present. That is the good news.
The better news is such growth has been purely driven by real improvement in the macro and micro economic environment, improved confidence of business and consumers towards the government's economic team, and the public's greater hope for a better future.
The even better news is: The market -- consisting of analysts, observers, players and investors -- finally acknowledges and confide to these real improvements.
Unfortunately, Indonesian stocks are not yet a regular in global investors' radar screen when it comes to emerging markets stocks. At least it is not yet one of the so called BRIC members -- investors' jargon for Brazil, Russia, India and China -- the darling of global capital inflows nowadays.
Whereas considering the similar demographic and dynamics of Indonesian market to the BRIC countries, this needs a further assessment and quick response from the Indonesian authorities in order to attract more global funds.
For a start, all macro economic indicators remain positive, and still improving. Closing this year, GDP is expected to reach 5.6 percent while, year-to-date inflation is 5.32 percent. The inflation figure that is much lower than any economist or analyst ever expected proves that Boediono has lived up to his earned reputation as an inflation tamer. Such achievement has maintained real interest rate highly consistent and competitive, thus safeguarding the rupiah from any sign of instability let alone weakening.
This allows Bank Indonesia to lower interest rate to 9.75 percent, which we expect to get further down to 9 percent at the end of first quarter next year.
This is good news for the banking industry, the manufacturing sector and the consumer goods sector.
In order to win a few more of the tougher-line and hard-won analysts and regional economists, Indonesia must present the right case with the right perspectives. In other words, Indonesia is currently experiencing the right process, has the right offers in terms of potential sectors and soon to have the right incentives.
For a start, Indonesia's moderate GDP growth deserves more than a glance. Although the figure is not too significant compared to the 7-8 percent growth across Asian countries this year, it remains a great achievement since Indonesia faced a much more challenging economic environment from last year to the middle of this year. This was mainly due to the government's decision to raise fuel price by an average of 126 percent in October 2005, thus instantly catapulted inflation to 17 percent and forced Bank Indonesia to double interest rate. Other Asian economies, in the mean time, relatively enjoyed a stable ride over the weakening U.S. and European economies.
On top of that, as global oil price has normalized to around US$56/barrel from over $70 previously, tensions have eased a lot throughout the globe, especially for consumers in the developed markets such as Europe and the U.S. This in turn allows exporters in the emerging markets, who previously feared a major decline for their exports to more than start hoping again. Indonesia is one of the world's major exporters for commodity, mineral and basic staple goods.
Indeed, exporters in Indonesia have taken advantage of the less-than-challenging economic condition at present to generate more sales, increase production, increase capacity and even replace their supply chain in order to make as much of the current momentum.
A recent survey by ABN AMRO Asia of Indonesian businesses, especially the manufacturing sector, showed a very positive consensus: Indonesian companies are planning to expand their businesses not because they want to, but because they need to.
True enough, a closer look into the Indonesian real sector reveals one highly promising yet underestimate fact: Indonesia's capacity utilization rate is at an all time high. Even higher than pre-crisis level.
Moreover, our findings show that while some Indonesian companies have started to expand their operation, increase their production capacity or raise inventory level, domestic private consumption remains strong and still rising. The Central Statistics Agency (BPS) shows that private consumption has increased by 1.66 percent on average per quarter and 2.99 percent on annual basis.
With the higher cash flow in the corporate books, such corporate expansion activities will be either self-funded or bank-rolled. However, with the currently declining interest rate, there should be mutual incentive for both lenders and borrowers to work together.
These corporate roll outs will present a long-awaited moment for the banking industry to start channeling credits profitably with much lower risk. We expect bank lending rate to grow by 20 percent next year from 9-11 percent this year, while GDP will grow to 6.3 percent next year with private consumption, export and investment as the backbone.
For many who have lost interest in relying on macroeconomic indicators, the question remains whether stock market rally will actually bring higher employment and prosperity for majority of Indonesians.
At the moment, the signs are positively say that it will. The current hype in the stock market may actually bridge the long-time divide between better macroeconomic indicators through the recapitalization of the so-called real sector.
In terms of the most prospective sectors mining, property, basic industries and manufacturing have been the main sectors driving the 50 percent growth of the JCSI in the last six months. While at the same time infrastructure, consumer goods and the service sectors have just begun to post an increasingly positive trend. Not to mention the government's real commitment to speed up infrastructure development. As this comes into realization, Indonesia will benefit from higher employment and rising income, which eventually will sustain private consumption even further.
Lastly, the agriculture sector especially those companies that grow palm oil will never get it wrong. More and more technology being developed by both government and private initiative to convert palm oil and other agriculture produce into becoming bio-fuel. As oil price will remain higher than normal, bio-fuel is really the next big thing. Indonesia is currently the world's second largest producer for palm oil after Malaysia.
In terms of landing the right picks, the small and medium businesses (SMB) sector have taken a lot of interest from banks, the government and private investors alike. This is happening for the right reason and will sustain overall growth for a longer term horizon. In the last one week alone, the second layer stocks have grown by 6.1 percent, higher than the 1.77 percent booked by the blue chips.
Minister of Finance Sri Mulyani Indrawati noted recently that the government wants not only higher growth but also high-quality growth.
Investors have welcome yet holding her closely on that statement. Investors are closely monitoring the capacity building and restructuring efforts across state bureaucracies and state-owned enterprises currently taking place. This tops the government's agenda in order to improve the state's ability and capacity to increase public spending.
So far, the result has been slow but really promising. Although at the end of the first half this year the government only spent 12 percent of the total investment spending allocated for 2006, another 12 percent was spent in the third quarter alone. With intense training and restructuring across government bureaucracy, the government expects to what is otherwise allocated for this year combined with next year's budget.
If spending is indeed picking up as planned and needed, private consumption and employment are both expected to rise. In line with increased government spending, banks will have more incentive to also bankroll the key sectors.
Now the government can worry less about the market than they should do about the economy. As mentioned, the areas of tax, investment and labor laws are crucial to be addressed immediately. Security, while has been stable so far, is not to be overlooked.
At the end, the market will close this year looking in hindsight that the Indonesian government has an economic team that is indeed competent, credible and committed to overturn one of the most challenging time in the history of the country's economy. At the moment, perception is gradually won as shown by fundamental bullish in the stock market.
This winning battle can be done faster and better. But time is of the essence here.
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