For decades, the Indonesia Stock Exchange has run like a members’ club, where the brokers who trade on the IDX also own it. But that cozy arrangement is about to end under an amended financial sector law that requires the exchange to demutualize.
The Financial Services Authority, or OJK, has issued a new regulation on exchange shareholders, opening the way for the Finance Ministry, Bank Indonesia and the newly established Danantara sovereign wealth fund to hold IDX stakes.
Danantara’s stake in the exchange is the part everyone is watching. Its chief executive, Rosan Roeslani, has put it at roughly 5% to 10%. Yet a shareholder document reported by Bisnis Indonesia in September indicated 40.12%, a figure Danantara says is not final.
Skeptics already see maneuvers geared for an eventual IDX initial public offering (IPO). But the bigger issue is arguably how the IDX’s reformed ownership structure will affect how well Bank Indonesia’s policy rate transmits through the economy.
The timing is no coincidence. Supply chains are fraying, trade disputes keep flaring and capital moves in and out of emerging markets with little warning. Economies with deep domestic markets can ride that out. The rest rent stability from foreign investors.
A bank-heavy system
Indonesia’s financial system still leans heavily on its commercial banks. Stock market capitalization has long hovered below 50% of gross domestic product, according to CEIC Data and World Bank benchmarks, while Singapore, Malaysia and Thailand are well above that.
Thin markets are a headache for any central bank. Bank Indonesia can move its policy rate, but banks decide how quickly to pass it on.
Each lender sets its own timetable for deposit and lending rates, dictated by its balance sheet and quarterly margins rather than the latest Bank Indonesia policy decision. That means an official rate change can actually take months to reach firms and households.
Thin markets also magnify outside shocks. When foreign money heads for the exits, too few domestic buyers are willing to take the other side. The rupiah then takes the hit from capital flight, and Bank Indonesia must spend reserves or raise rates, often when the real economy needs easier, not tighter, money.
What ownership changes
Demutualization can change how an exchange behaves. Singapore, Sydney and Kuala Lumpur show how. Once broker cartels lost their grip, the exchanges stopped optimizing for guaranteed commissions and began to worry about market depth.
Technology was overhauled, settlement sped up and the product range expanded, from interest-rate derivatives and index futures to corporate bonds and sustainable finance instruments.
Sovereign capital brings something else: patience. Singapore’s Temasek and Malaysia’s Khazanah are the usual models of state money that thinks in decades rather than quarters. Indonesia remembers the 2013 taper tantrum, when the rupiah was swept up in the emerging-market rout.
Imagine another sell-off after a hawkish Federal Reserve meeting or another flare-up in the Middle East. Most investors run for the door. One with a long horizon and a big balance sheet can stay put, or even buy when foreigners flee the scene. That keeps prices from free-falling, keeps markets functioning and can stop a local scare from becoming contagion.
Plumbing for monetary policy
The change fits with Bank Indonesia’s Money Market Development Blueprint, known as BPPU 2030. If the money, bond and equity markets are well connected, a change in the central bank’s policy rate should reach yield curves and corporate borrowing costs far faster than it does now.
Deeper capital markets would also ease pressure on banks. Long-term infrastructure loans funded by short-term deposits invite a maturity mismatch, and shifting some of that funding to public markets reduces the risk.
A larger domestic investor base would help, too. The more Indonesians and Indonesian institutions own Indonesian assets, the less the market depends on foreign portfolio money that can vanish overnight. That gives Bank Indonesia room to set policy for local conditions rather than whatever is spooking investors in New York.
But ownership alone will not create depth. Pension funds, insurers and retail investors need reasons to hold local assets, and companies need reasons to list in the first place. Demutualization of the IDX is thus only a first step, not the finish line.
Governance test
None of this works without trust, and mixing state ownership with a public market will be delicate, to say the least. The chief worry is a conflict of interest.
Danantara already holds large stakes in state-owned companies that dominate the exchange’s listings. If it also owns part of the exchange, private participants will fairly ask whether the referee is also playing the game.
Global institutional investors, whose money shapes index weightings and liquidity, are allergic to political interference. A whiff of favored listings, privileged data or a heavy government hand, and they won’t stick around to ask questions.
Officials say the right things. Pandu Sjahrir, Danantara’s chief investment officer, has said regulation and supervision will remain with OJK, which has stressed that new shareholders, including Bank Indonesia, must not compromise the exchange’s independence.
Promises are cheap, though. OJK must be willing and able to police the exchange as it would any other market operator. Danantara should put its own commitments on the record: adopt the Santiago Principles for sovereign wealth funds and the OECD guidelines on the governance of state-owned enterprises, publish how it votes and make regular disclosures.
A smaller minority stake, not 40.2%, would also help with confidence. Anchor investors are welcome; controlling ones make investors nervous.
Get this right, and the benefits will reach well beyond a livelier Indonesian bourse. Monetary policy would work better, the economy would be less exposed to shocks from abroad and Bank Indonesia would have more room to maneuver. Get the governance wrong, and investors will price in the risk before the first trade under the new structure.
Indonesia’s stock exchange is being rebuilt. Whether it becomes a foundation of Indonesia’s financial sovereignty or a cautionary tale will depend on how credible its safeguards prove to be.
Rabiul Misa is a junior analyst at Bank Indonesia. His work focuses on monetary economics, payment systems, financial inclusion, MSME development, and public policy. His commentary has appeared in Asia Times, Modern Dyplomacy, Kompas.id, Kompas.com, Tribun News, ANTARA News and Kumparan, covering topics monetary policy, cross-border payments, digital finance, MSME development and regional economic development.
