Kate Linebaugh, Jakarta – As Indonesia's June parliamentary election nears, trading volumes on the Jakarta Stock Exchange are drying up, threatening the country's already shrinking brokerage industry.
With few expecting any substantial spurts of investment in the coming months, analysts say the Indonesian securities industry may see a gradual contraction.
Already the country's more than 190 securities companies have slashed their sales teams, eliminated research departments, and cut back on administrative personnel. But the number of active brokers has fallen by about 15% to 166. Brokers fear this number may shrink further if volumes in Jakarta don't pick up.
According to statistics from the stock exchange, the total volume of shares traded in February was down 74% from a year ago, while the rupiah value was down 78%. Compared to January, volumes fell 14% and value 39%. Average daily turnover has shrunk to 150 billion rupiah (IDR) ($1=IDR9,025) from IDR500 billion - or around $10 million to $15 million a day.
"Most brokers are in hibernation," said Alex Wreksoremboko, head of research at Merrill Lynch. "We shouldn't see any sustainable pick up in activity until the new president is elected." Indonesia is set to hold landmark, multi-party elections in June.
Presidential elections are scheduled for November, after the parliament has been formed based on the results of the June poll. But with 48 political parties allowed to join in June elections – far more than the three government-endorsed political parties in previous elections – most expect increased political and social violence in the run-up to the date.
Violence playing on investors' nerves
Investors are worried that violence similar to the religious conflict which has raged in the riot-torn island of Ambon may break out in other parts of the archipelago, analysts said. More than 200 people have died in Ambon since mid-January.
"The important thing, in my opinion, is the security, and socio-political stability," said Mas Achmad Daniri, a director at the Jakarta Stock Exchange. "I believe after that period [of uncertainty] the market will rebound ... this is the survival period." The economic environment isn't attracting investors either. Gross domestic product is expected to shrink another 3% in 1999 after a 16% contraction last year. Many of Indonesia's 279 listed companies are deeply in debt and likely to post losses for the second consecutive year.
"The fundamental reason for investment is strong earnings growth," said Merrill Lynch's Wreksoremboko. "[In Jakarta] there is no earnings growth and there won't be for many years to come." But lingering political uncertainty and a bleak economic outlook are having a clear effect on the Jakarta exchange. In February, net purchases by foreigners on the market fell 84% from January to a meager IDR174.5 billion – the lowest level since September last year when foreigners were net sellers. Market capitalization meanwhile has shrunk by 14.7% on year to IDR169.221 trillion.
"Nobody in this town has got any business," said Darwin Sutanto, president director at ING Baring Securities. This should result in the consolidation of the nation's brokerage industry: as the pot dries up fewer will be able to make ends meet. "Now it is a holding game – finding out who has got the deepest breath," said ING's Darwin.
The bulk of the country's securities firms are small-scale operations that cater to local punters. With volumes so thin, even the casino-like activity that characterized the exchange last year is declining. These firms, banking on the expected economic turnaround in the second half of the year, will fuel a surge of activity on the exchange, although many market watchers say they don't expect investors to return to the Jakarta market until at least next year.
Despite the dismal situation, the number of active brokers has shrunk by only 15% since the crisis began in 1997, to about 166 active firms.
And Matt Pecot, president director of GK Goh Ometraco in Jakarta, says he doesn't expect to see a wave of consolidation among the local brokerages in the months ahead, though some of the smaller players may go out of business. "I wouldn't expect to see mergers and acquisitions, but the small players will start dropping out," he said. That said, Merrill Lynch's Wreksoremboko said the industry may not shrink as much as it should because the current regulations are lax – a minimal amount of activity every six months is all a brokerage needs to keep its license.
The Capital Market Supervisory Agency has reportedly threatened to revoke the licenses of 18 securities companies, but it's offering the companies an opportunity to meet the criteria to retain their permits.
ING's Darwin reckons the industry will hold out until mid-2000 before another shake-up. "Everyone knows they'll lose money this year," so they will see if investors come back next year, he said.