Noel Fung, Jakarta – Uncertainty over the economic policies of the new cabinet and the fact that many of its ministers lack a track record is set to damp investor interest in Jakarta stocks in the short term, and wipe out the euphoria over the country's dawning democracy, analysts said Tuesday.

Compounding foreign investor wariness is concern over Indonesia's Y2K compliance, which is deterring large institutional investors from entering the Jakarta stock market before the end of the year.

Newly-elected President Abdurrahman Wahid unveiled a market-friendly cabinet Tuesday with widely anticipated political compromises.

While there are a few faces from the old regime, the new cabinet prides itself on being clean and untainted by questionable practices of the past. It includes four ministers who served under either former presidents Suharto or B.J. Habibie, and at least five members of the Golkar Party.

Most analysts aren't convinced that the new cabinet is sufficient to drive the stock market up and lure back foreign investors, most of whom have been sidelined by political uncertainties earlier in the year.

"Until we see some clear sense of economic policies and certainty that there won't be renewed unrest in other parts of the country, foreign investors are likely to take a wait-and-see attitude," said Jardine Fleming head of research Qaisar Hasan.

Clouding investors' minds is the cabinet's palpable lack of experience – in particular, those ministers who will handle financial matters and the economy.

The appointment of Kwik Kian Gie as senior economics minister is hailed by analysts as a sensible one. An economist by training, Kwik knows the financial markets well, and has pledged to stick to Indonesia's program with the International Monetary Fund.

Finance Minister Bambang Sudibyo, a professor from the Gadjah Mada University in Yogyakarta, is almost unknown in the financial markets.

"But these new people don't have the track record" to instill confidence in the market, said Goei Siauw Hong, head of research at PT Nomura Indonesia.

The JSX Composite Index could head for 650 to 700 points by year-end "depending on what the ministers will do," Goei said. But the climb to the 700-point level hinges largely on whether there will be inflows of foreign portfolio funds.

Fearful of the political instability, foreign investors have remained on the sidelines since the June parliamentary election, refusing to brave the volatile Jakarta market.

Languishing in subdued activity, the market was jolted last week by the election of popular Megawati Sukarnoputri to the vice-presidency. The brief rally last week lifted the index by more than 10% to more than 600 points.

However, the rally stemmed more from frenzied buying by local investors anticipating an inflow of foreign funds, dealers said.

When that didn't materialize, the gains proved unsustainable and the index quickly retreated to below 600-level Monday, reflecting the absence of long-term institutional investors.

Their absence was made more noticeable Tuesday after the announcement of the cabinet. Though the names were well-received, the market fell on the news, ending down 0.5% after the cabinet announcement.

However, even the year-end target of 700 points could be a strenuous climb for the index, given foreign investors' concerns over Indonesia's Y2K compliance.

"Foreigners are still very cautious; because of the Y2K problem, they probably won't be back until the first quarter of next year," said Goei.

Some institutional investors will refrain from investing in Indonesia one month before and one month after the end of the year, said a British brokerage.

In the run-up to the year 2000, there have been concerns that the Y2K or millennium bug could cause noncompliant computers to malfunction if they misinterpret the final 00 digits in the date field, leading these computers to read the year 2000 as 1900. As a result, some computers or machines may fail on New Year's Day or after, disrupting everything from power plant operations to banking systems.

Indonesia was named in a recent American intelligence report as one of the few countries in the world most prone to Y2K-related problems.

But looking beyond the millennium, Hasan from Jardine Fleming forecasts that the index could reach 700 to 750 points by the middle of next year, "assuming that banking recapitalization and reform stays on track."

That's because Jakarta stocks have lagged other Asian markets in terms of valuation, leaving more room for an increase.

Based on earnings before interest, tax and amortization, the Jakarta stock market is trading at a 10% to 20% discount to other Asian markets, such as the Philippines and Thailand, Hasan said.

Local brokerages admit that foreign investors tend to be more risk averse and are slower to return to the market than their local counterparts, although some expect this to change eventually.

"Those investors who view political stability as the primary consideration in investing should return soon because the Gus Dur and Megawati combination will provide stability for the country," said David Chang, head of research at Trimegah Securities. Gus Dur is Wahid's nickname.