Indonesian Economy and Stock Market– Ready to Emerge Once Again
    Category: Outlook 2017 By : Teguh Hidayat Read : 1755 Date : Tuesday, November 08, 2016 - 14:05:48

    This year of 2016 is a pretty good year so far the Indonesian stock market, which, when this column was written, the Jakarta Composite Index (JCI) has gained more than 18% for the year to date. However, the stock market has not been going anywhere since 2013. The rise of JCI always stopped at no higher than 5,500—whenever JCI touched this level, it then went down. In 2015, precisely in April, JCI had scored an all-time high at 5,524, but soon began to fall, and eventually dropped 12% for the whole year, the worst since the market crash of 2008.

    However, starting in 2017, the JCI will rally once again. As we know, the Indonesian economy began to grow rapidly in the early decades of the 2000s because of the commodity boom, in this case coal and crude palm oil (CPO). The boom reached its peak in 2011, where the nation’s economic growth touched a record 6.9% year on year. Since that year, however, commodity prices including coal and CPO slowly but surely began to fall, and continued to fall. In 2011, the coal price benchmark was $110 per tonne, while the price of CPO on the Bursa Malaysia was RM 4,000 per tonne.

    Four years later, in 2015, the coal price was as low as $51 per tonne, while the CPO was RM 1,900 per tonne. Following the decline in commodity prices, coal and palm oil companies—and their shares—experienced a severe decline, which also dragged down the national economy as a whole. Stocks in general fell. In just five years, coal stocks have declined by 90% or more.

    Luckily, while the commodity business was falling, other industries such as property, construction and tech began to rise. As a result, the national economy, despite a significant slowdown, did not fall into crisis. The JCI, despite having dropped in 2013 and 2015, still grew overall, or approximately 45% in total in the last five years.

    Even as commodity prices continued to fall in recent years, I have always believed that the decline will eventually stop. When the coal price dropped, for example, it’s just a matter of supply and demand alone. Along with China’s slowdown, the largest coal consumer in the world, coal demand also fell while there was oversupply from coal miners—and that’s when coal prices began to drop. However, did China stop using coal? Obviously not! Similarly, other Asian countries, including Indonesia, are still using coal for power plants and steel mills. So when the supply and demand of coal reach a point of balance, then that’s when the price will stop declining, and will rise again.

    For CPO, the story is the same: The price dropped because of falling demand, not because people stopped using CPO (in fact, CPO is still essential for use in cooking oil, pharmaceutical products, cosmetics and so on). Look at oil: Every time the price drops, people always speculate that it is because the world will stop using it, because we now have electric cars. Yet it’s been almost 200 years that oil has been used as fuel for motor vehicles, and we still use gasoline for cars.

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