By couple of weeks ago, Philip Eng, when replying to questions from reporters on whether he was concerned with the sharp fall in the price of Astra International's shares, noted that country risk rather than corporate failings was driving the stock down.
The group managing director of Cycle and Carriage (CCL), who was speaking after being appointed a member of Astra's board of commissioners, might as well have been speaking for Indonesia's entire stock market.
Since the beginning of the year, when the Jakarta Composite Index was trading at about 700 points, the stock market has plunged more than 30 per cent, closing yesterday at 468.36 points.
By far, it has been the worst performing market in the region. But what has been surprising is that the sharp fall came despite encouraging news from the corporate sector. Over the past five months, a growing number of companies have either restructured their debt or are in serious negotiations to do so. Having learned the painful lessons from the excesses of the past, a large number of Indonesia's corporations have also streamlined their operations, shedding non-productive units and cutting down on staff numbers. Better profit margins: Coupled with this, the consumer-led pick-up in gross domestic product (GDP) growth has also led to higher sales bookings and better profit margins, after two very lean years.
As a result, companies such as auto conglomerate Astra, cigarette maker Gudang Garam, telecommunications service provider Indosat, pharmaceuticals producer Temp Scan and chemicals manufacturer Lautan Luas are looking forward to healthy profits in 2000.
So why then are foreign fund managers avoiding Indonesia totally and local investors dumping their stock holdings and moving instead into fixed income securities? For the answer, we must go back to Mr Eng's comments. Indonesia's country risk is just too high and overshadows the work being done and the gains being made at the corporate level.
Even the recent listing of Bank Central Asia, the country's largest private bank and seen to be a must-hold stock in any fund manager's Indonesian portfolio, failed to rouse the index from its deep slumber.
Related to Indonesia's rising country risk is also the growing uncertainty over the rupiah. In line with the stock market, the currency has fallen more than 17 per cent since its peak in October last year, making it the second-worst performing currency this year.
From a high of 6,800 against the US dollar in October, the rupiah has literally collapsed to its current level of around 8,600, with most market players predicting that it could touch 9,000 within the next two months.
The sharp decline in the value of the rupiah is a major concern, not just because it is a barometer for public confidence in the government, but more crucially, because it has a direct impact on corporate earnings. If, for example, the rupiah remains above the 8,000 level for the rest of the year, corporate earnings growth will be crimped to under 10 per cent for 2000, Eva Muis, director of research at Kim Eng Securities Indonesia, has estimated. But if the rupiah can stabilise at the 7,000 level as assumed in the government's budget, corporate earnings growth could exceed 30 per cent as foreign exchange losses are minimised.
With the country's highest legislative body, the People's Consultative Assembly (MPR), due to convene in early August, political uncertainty and thus the rupiah's volatility, will continue to dampen the market over the next three months.
Should investors, therefore, continue to stay away? Or is Indonesia's corporate world now very different from the pre-crisis days – in other words, is it a riskier bet now than it was in the final months of 1997? The answer to both questions is no. Unlike 1997 and 1998 when the economic and political crisis caused the Jakarta Composite Index to fall to its historical low of 256 points, what we have now is an infant democracy trying to sort itself out.
Rather than compare the situation to 1997 or 1998, investors should note how the market behaved in May and June of 1999 when Indonesia held its first democratic elections in over three decades.
Following growing uncertainty prior to the general elections, the stock market registered its highest one-day gain immediately after polling day as the feared social unrest failed to materialise.
Barring a political meltdown come August – a situation that is most unlikely – there is a good likelihood that both the stock market and the rupiah will post strong gains immediately after the MPR session. It may, however, be a bumpy ride between now and August.