Following a consolidation boom of global stock exchanges from Singapore to New York, is Indonesia’s bourse feeling the pressure to find a market ally in ASEAN? Kate Lamb puts the question to Indonesia Stock Exchange (IDX) chief Ito Warsito.
The Singaporean Stock Exchange (SGX), Asia’s eighth-largest equity market, announced its planned $8.3 billion takeover of its Australian counterpart late last year. If the merger goes ahead – for which read defies political opposition in Australia – it would have a market capitalization of $12 billion, or three times the size of Nasdaq.
The proposed SGX-ASX tie-up has been a catalyst for a string of deals by rival exchanges both regionally and globally. In February the London Stock Exchange agreed to buy Canada’s TMX, while the NYSE and Deutsche Boerse recently announced their creation of the world’s largest stock exchange operator.
So just what is going on in global finance? “The trends are quite clear, all exchanges want to be big to attract big investors,” says Kenneth Ng, CIMB head of research in Singapore. “The scale of markets is becoming an important criterion for stock exchanges globally.”
The argument put forward in favor of the move is that the scale of the combined exchanges offers a number of benefits to investors and companies seeking capital from greater liquidity and new trading products. The bigger the better, say financial analysts, because it allows merged exchanges to broaden their markets, vie for bigger IPOs and save transactions costs, an estimated $30 million in the SGX-ASX scenario.
The logic, they claim, is as benign as any ordinary company merger: Mutually beneficial, increased efficiency and essentially two markets for the same product.
But the wave of global mergers has also sparked hype that smaller exchanges in ASEAN such as Indonesia, Malaysia and Vietnam could be forced to seal similar deals to compete in the future. “ASEAN markets, including Indonesia, are all quite small, especially in comparison to Singapore. To be relevant ASEAN markets should band together, but most governments there are nationalistic and are unlikely to do that. The possibility of any future mergers in ASEAN will rely on political will,” says Ng.
Threat vs. opportunity
“Right now,” says IDX head Ito Warsito, “a stock exchange merger between the IDX and another ASEAN exchange is not a possibility.” While not entirely ruling out such a move in the long term, Ito says that for a start the current capital law would prevent such a move, but most importantly the IDX is better off alone.
“Remaining a single entity is not necessarily negative for the IDX given our huge domestic potential. That is the Indonesian advantage. The SGX’s market capitalization is almost three times its GDP, while in Indonesia it is still less than 50% of Indonesia’s GDP,” he says.
Put simply, Indonesia’s domestic market potential means there is plenty of room for growth without a merger, while the only way for a mature market like Singapore to grow is to merge or acquire another exchange. The fact is that demutualized stock exchanges such as those in Sydney, London and New York are businesses in their own right and are propelled to continue generating profits for their shareholders.
“The need to merge is about the need to keep growing. Being demutualized means those stock exchanges have to focus on profit-making activities. The IDX is mutualized and not listed so it is focused on developing the market rather than profit,” says Ito.
The level of maturity of the American and European capital markets is also very high which is why similar mergers are occurring there. Capital markets in Indonesia, India and China are still developing so their growth potential is much higher than in mature markets.
The ASX-SGX merger will be positive for Indonesia, says the unfazed IDX chief. Not because Indonesia is involved in the transaction, although he hints at previous interest from the SGX, but for the added interest it will draw to the region. “We are not worried about the SGX getter bigger, it already is bigger whether it merges with the ASX or not,” he states.
Nor is he concerned the merger could lure the attention of international investors away from the archipelago to the city state. More than 60% of the tradable shares on the IDX are owned by foreigners, even though the IDX’s average daily trade is dominated by domestic investors. The problem is attracting those domestic investors onto the exchange.
With a total 350,000 investors on the IDX, or just 1% of the population, the number is low. To boost the figure, the mutualized IDX has launched nationwide programs such as its “Capital Market Olympics” in high schools to encourage future investment.
Optimistic about Indonesia’s current and future growth, Ito says the IDX has grown threefold over the past year. “When I took office in 2009, the total market was less than $100 billion (Rp1 trillion), and I set a target of reaching 300 billion by 2012, but we already achieved that last year. We are at the beginning of a strong growth trajectory and I expect it to continue,” he says, adding the IDX is hoping to see the trillions of rupiah held in Indonesian bank savings shifted to stocks and bonds.
Despite the touted Indonesian advantage, analysts claim the proposed tie-up will encourage more Indonesian companies to list on the merged bourse. In December 2010, SGX chief Magnus Bocker more than hinted as much when he said one of the aims of the combined exchange would be to target emerging companies from Indonesia, Vietnam, Malaysia and other ASEAN nations.
“The merger is more of a threat than an opportunity. The SGX-ASX will have more capital and that will be attractive to Indonesian companies,” says Syaiful Adrian, a Ciptadana Securities analyst. “But really,” he qualifies, “it is not a major threat because Indonesia has a very interesting future.”
With the ASX’s strength in resources and the SGX’s focus on securities, the partnership could appeal to a wide range of business activity. “The new merged bourse will be a good challenge for Indonesian companies, especially for resource-based companies as the Singapore exchange will be more prestigious and more tightly regulated than in Indonesia. Companies listed there will have a broader scope,” says Juniman, an economist at PT Bank Internasional Indonesia (BII).
Ito, however, sees it very differently, emphasizing that is only beneficial for companies to have a dual listing on exchanges in different time zones, as is the case with PT Telkom and PT Indosat on the NYSE.
Indonesian companies such as palm oil giant Wilmar International are already listed on the SGX, but Ito is confident that a dual listing is not always in a company’s best interests.
“History tells us that dual-listed companies such as PT Aneka Tambang and others have suffered liquidity issues in foreign markets. When Berlian Laju Tanker (Tbk) listed on the IDX and the SGX its coverage dropped.
“What people don’t know is that brokers’ bonuses are directly related to the trading of shares. If a company has a dual listing in a similar time zone, brokers don’t have full bonus pull and therefore trade them less,” he explains, adding that he doesn’t believe the merged bourse will lure a significant number of companies wanting to list outside of Indonesia.
The global trend
While any future tie-ups in the region are purely speculative at this point, ASEAN stock exchanges are becoming more connected through cross trading, which allows for direct and faster trading on a single electronic system.
The initiative is currently focused on technological linkages, but Ito says there are several prerequisites for the linkage to be successful. Harmonizing rules and formulating a dispute-resolution mechanism are the major challenges, he says.
Market consolidation in Europe, America and Canada also calls into question the greater need for regulation, especially following the global financial crisis, says BII’s Juniman.
“Hypothetically, if there was another global financial crisis and these stock markets were merged, the affects would be more rapid and more dangerous. There need to be new global regulations to prevent another crisis from occurring,” he says, but adds that ailing European economies such as Greece, Ireland and Spain could benefit from more access to capital from exchange mergers there.
For other brokers, the stock market is symptomatic rather than causal and any additional liquidity in the event of worldwide panic would certainly not hurt. Stock exchanges are only trading facilitators, agrees Ito.
“The increased liquidity of merged bourses should curb severity in medium-bad times and would try to help in catastrophic times but would be like a whisper in a hurricane. Everything is already connected, the fact that two stock exchanges are owned by the same group is rather immaterial,” says one Asian-based fund manager.
Finance logic aside, the proposed SGX takeover faces several political challenges in Australia. The merger must first be approved by the Australian parliament and treasurer as the well the country’s Foreign Investment Review Board (FIRB). The SGX, which will own 57% of the company, was recently forced to sweeten the deal to quell nationalistic doubts and criticism of the 15% stake in the SGX that is owned by a Singaporean government-linked company.
“Takeover versus merger,” muses Ito on the ensuing debate. “It’s about politics. The US and European markets have a more egalitarian mindset and are less nationalistic than in Australia,” he muses. He points to a large tropical fish kept in a tank by his office. “Do you know this fish?” he asks. “It’s an Arowana, a carnivorous fish from Kalimantan. It is better off alone,” he laughs. GA