Time for Indonesia to Be Sovereign on the Indonesian Stock Market
In the last three months, Indonesia's benchmark stock index (IHSG) experienced continued selling pressures causing the index to plunge from a high of 5,215 to a low of 4,026. The country's economic slowdown and net selling by foreign investors triggered the rapid decline. Up to the third week of November, net selling of Indonesian stocks amounted to IDR 14.9 trillion (USD $1.3 billion). The looming winding down of the Federal Reserve's USD $85 billion per month bond buying program has brought significant negative market sentiments.
The Federal Reserve's quantitative easing program (QE) greatly affects the flow of foreign funds into Indonesia. Since QE was launched in November 2008, foreign investors have always recorded net purchases in the Indonesian capital markets. However, this situation changed after Ben Bernanke started speculating about an end to the QE program in May 2013, evidenced by the outflow of foreign funds ever since.
Foreign Net Buying Indonesian Stocks:
| Year | Amount in IDR |
| 2008 | 18.6 trillion |
| 2009 | 13.2 trillion |
| 2010 | 20.9 trillion |
| 2011 | 24.3 trillion |
| 2012 | 15.9 trillion |
| 2013 | -14.9 trillion |
Source: First Asia Capital
Something which is rather alarming is the degree of foreign dominance in the Indonesian capital market. Based on data from the Indonesian Central Securities Depository (KSEI), per 1 November 2013, the share of foreign ownership on the IHSG amounted to 57.87 percent, while 43.13 percent was in the hands of local investors. This certainly explains the influence of foreign selling on the general performance of the IHSG index. Currently, the number of domestic investors participating in Indonesia's capital markets is only about 404 thousand, or 0.2 percent of the total Indonesian population. In this context it is logical that the influence of foreign investors is highly dominant. Therefore, it is important to increase the number of domestic investors.
On Thursday 21 November, I participated in the establishing of a new record. First Asia Capital, in cooperation with the University of Muhammadiyah in Yogyakarta, and supported by the Indonesia Stock Exchange (IDX) were behind the opening of a record 1,000 new investment accounts. The record is a remarkable achievement within the 36-year old Indonesian capital market. Before the new record was set, the number of domestic investors numbered 404,695 investors only. With the addition of 1,000 new investors, a tangible first step was taken to increase the number of local investors. I see this as an important step to reduce dependence on foreign investors in order for the Indonesian investors to become sovereign in their own capital market, instead of being mere spectators. The newly added 1,000 investors included many young investors who have huge potential to develop Indonesia's capital markets in the future. Increasing the number of investors and human resources in the capital markets is also an important strategy for Indonesia in order to be prepared to face global competition.
If the amount of local investors increases, the movement of the IHSG can be more stable as fundamental factors can be more decisive. Indonesia's economic growth is also expected to improve with the support from the investment sector. At present, Indonesia's economic expansion is mainly dominated by household and government consumption. Moreover, job creation will be stimulated with the addition of transactions and new investors. Therefore, I regard that what has been achieved by First Asia Capital, the Muhammadiyah University in Yogyakarta and the IDX should be appreciated and continued. Indonesia's middle class, which continues to expand rapidly, is a huge market for investment. If Indonesians do not start to enhance participation in the stock market, foreign domination (including imported volatility) will live on.
David Sutyanto is a research analyst at Jakarta-based First Asia Capital