Industry Profie: Capital Market in Indonesia

MARKET INTELLIGENCE REPORT ON

INDONESIA'S CAPITAL MARKET STRUGGLING AMID GLOBAL CRISIS

May 2009

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Backgrounds

The global financial crisis has served a big blow to the world's financial market including the Indonesian capital market. Until now the capital market in Indonesia is still struggling amid the global financial crisis, which has caused a slowdown in the growth of the market, and delay in many plans to launch initial public offering (IPO) under market uncertainty.

Falling share price index was recorded by almost capital market s in the world in October, 2008. The composite share price index (IHSG) of the Indonesian Stock Exchange (BEI) sank to the lowest level forcing it to suspend trading for several days after recording a sharp fall. Suspension began 8 October 2008 when the IHSG dived 10.38% to the level of 1,451.669 points. Trading, however, was resumed on Oct 13, 2008. The suspension was to protect investors and the market. Later the capital market began to grow though thanks only to short term funds.

Optimism began to prevail that the country capital market will regain strength as indicated by plans to launch IPO in 2009. There were 15 companies planning IPO this year including those delaying plans in 2008. Among companies failing to launch IPO in 2008 included PT Prime Petroservices, PT Power Telecom, PT Mitrasurya Cemerlang, PT Wahanaartha Harsaka, PT Garuda Food., PT Bank Tabungan Negara (BTN), PT Krakatau Steel, PT Pembangunan Perumahan, PT Waskita Karya, PT Garuda Indonesia, and state plantation companies PT Perkebunan Nusantara (PTPN) III, IV, and VII.

A number of state companies (BUMN) also plan to launch IPO soon. Investors have indicated strong interest in buying the shares of state companies. The office of the state minister for state enterprises plans to divest shares of 11 BUMNs under privatization program through IPO in a bid to revitalize them. Among the state companies prepared to launch IPO include steel maker PT Krakatau Steel, Plantation Company PT Perkebunan Nusantara (PTPN) VII, and Bank Tabungan Negara (BTN).

The performances of listed companies (issuers) in the first quarter of 2009 were relatively goods improving from the last quarter of 2008. The improvement was thanks mainly to domestic oriented issuers, which remained as the main driving motor for growth amid the global crisis.

In number of issuers and capitalization, the BEI is still lagging far behind a number of other capital markets in Asia. According to data at the World Federation of Exchange per March 2009, BEI had only 396 issuers as against Malaysia's 968 issuers, Singapore's 765 and Thailand's 527 issuers.

With capitalization of US$113 billion, BEI is also behind compared to Singapore's capitalization of US$ 249 billion and Malaysia's capitalization of US$ 197 billion.

With smaller supply (issuers) and demand (investors) BEI, is more vulnerable to external effects.

This report presents details about the performances of capital market and market players including issuers, market capitalization, share transactions, etc.

Structure of Capital market

Capital market is a market for various long term financial instruments that could be traded including bonds, shares, mutual funds, derivative instruments and other instruments. Capital market is a financing facility for companies and other institutions and a facility for investment activities.

Capital market serves as a liaison agent between investors and companies or government institutions through long term financial instrument trade like bonds, shares, etc.

Capital market has an important role in the state economy through its two functions - economic and financial functions. Its economic function is to facilitate contact between investors and issuers needing funds. Its financial function is to provide opportunity to earn return for investors according to the characteristics of investment opted.

Te best known instrument of capital market is share or equity. There are two types of shares traded common stock and preferred stock.

Bonds which constitute documents stating commitment to repay a certain amount of money in the future.. Companies often utilize bonds to raise fund directly from investors by issuing promissory note (fixed income securities). The companies selling bonds will pay not only the debt principal but the coupon periodically. The investors will receive interest payment in fixed amount periodically.

Derivative is form of derivative of main securities in this case share . Derivatives which are more popular in the country are warrant and right. Warrant is a right to buy shares at a fixed price at a fixed time. Warrant , normally is issued by a company as an incentive for investor when issuing shares.

Right to buy shares at a certain price also at a fixed time. Right is given to old shareholders to buy more new shares issued by a company at the secondary offering. Different from warrant , the trading period of right shares is shorter around 1-2 weeks only. The normal prices of warrant and right shares are the market prices minus exercise prices. If the warrant or right sharer prices are higher than the normal prices, there will be premium to be paid.

The capital market players include issuers, Investors, Underwriters, Guarantors, Trustees, Brokers, securities companies, investment companies and the capital market watchdog Bapepam LK.

Issuers are companies which sell shares or bond to the public through capital market, in a bid to raise fresh fund mainly to finance business expansion and strengthen their capital.

The underwriters of the share issues are those preparing contract for the interest the issuers that launch public offer with or without buying the remaining shares unsold to the public.

Development of capital market players

Capital market in Indonesia was first launched in 1977. In the beginning there were two stock markets - Jakarta Stock Exchange (BEJ) and Surabaya Stock Exchange (SSX). Toward the end of 2007, the government merged the two stock exchanges for efficiency into one named Indonesian Stock Exchange (BEI) .

By December 2008, the shareholders of BEI were 125 companies. It had 121 securities companies, including 118 active members and three suspended members. In 2008, BEI bough back 72 shares . It had 110 participants including 59 securities companies, 35 banks and 16 custodian banks. .

Number of Issuers Sluggish in Growth

The number of issuers in Indonesia has grown sluggishly - growing by 4.9% annually on the average in the 2004-2008 periods. In 2007, the number shot up 18.6% to 408 issuers from 344 in the previous year. In 2008, the number even shrank to 396 companies as a result of delisting by a number of companies suffering operating losses.

In the first half of 2008, there were 16 companies listing, six other companies being in the pipeline of the target of 30 new issuers or higher than 22 companies in 2007. However, 13 companies delayed IPO plan in 2008 as the market condition was not favorable. Among those postponing IPO plans included state companies PT Bank Tabungan Negara (BTN), PT Krakatau Steel, PT Pembangunan Perumahan, PT Waskita Karya, PT Garuda Indonesia, and PT Perkebunan Nusantara (PTPN) III, IV, and VII.

In 2008, BEI targeted 30 companies to launch IPO, but the target was later revised down to 25 as a number of companies announced plan to postpone initial public offering (IPO), on declining performance of the financial market. However, in September 2008, the number of companies going public reached 18 companies with IPO value of Rp24.39 trillion. Among the issuers, BEI has a list of 45 most liquid stocks called LQ45.

With issuers of only 396 companies , BEI is relatively small compared with other regional stock exchanges. According to data of World Federation of Exchange per March 2009, Malaysia stock exchange had 968 issuers, Singapore 765 issuers and Thailand 527 issuers.

IPO 2008 valued at Rp24.39 trillion

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