The Indonesia Stock Exchange (IDX) has had a very good run over the last several years. Since 2015, market capitalization (the total value of companies traded on the exchange) has grown by an average of 12 percent every year, reaching an all-time high of $748 billion at the end of last year. From 2022 to 2023 alone, market cap increased by 23 percent.
This is especially interesting given that the U.S. Federal Reserve began raising interest rates in 2022. Based on what we know about how global capital flows work, we might have expected Indonesian stocks to take a hit as investors sold equities in emerging markets and moved into supposedly safer assets like U.S. government bonds. That did not happen, and Indonesia’s stock market continued growing despite high interest rates in the United States.
Neighboring exchanges have fared less well. The SGX in Singapore saw its market cap shrink by 3 percent in 2023, ending the year at around $599 billion. Thailand’s SET contracted 17 percent, down to $487 billion. The Malaysian exchange, Bursa Malaysia, grew by 4 percent between February and December 2023, but at $364 billion it closed the year with less than half the market cap of the IDX.
Two big IPOs helped buoy the IDX in 2023. PT Amman Mineral Internasional, which operates Indonesia’s second largest gold and copper mine on the island of Sumbawa, listed on the exchange and ended the year with a market valuation of around $30 billion. Barito Renewables, which operates a number of geothermal power plants, also listed and saw its stock price skyrocket to a truly unsustainable level before eventually correcting and falling back down to earth.
While these two IPOs added tens of billions of dollars to the IDX market cap, there are other more systemic factors underpinning the exchange’s growth. Developing domestic capital markets, including bond and stock markets, has been an important priority during the administration of outgoing President Joko Widodo. Deeper domestic capital markets make growth more balanced and sustainable because you aren’t forced to rely on a single source or type of capital like foreign investment or lending.
Getting more companies to tap the IDX to raise funds has been an important part of the government’s economic development strategy, and Jokowi surrounded himself with a capable team of economic policymakers who have helped put this plan into action. From 2020 to 2023, 190 new companies listed on the exchange. This includes highly publicized blockbusters, like technology company GoTo, but there have also been many smaller firms doing modest IPOs. As these companies grow, so does the exchange’s market cap.
Another interesting part of this story is that the majority – about two-thirds – of all transactions on the IDX are done by domestic investors, rather than foreign. This may be part of the reason why the Indonesian exchange wasn’t hit as hard when interest rates went up in the United States. Even if foreign investors sold off Indonesian equities to chase higher interest rates in the U.S., there is apparently a sufficiently large class of domestic investors in Indonesia who were able to absorb the sell-off. This is a good thing for Indonesia’s long-term financial stability.
In order to maintain this momentum, regulatory supervision of the financial sector will become increasingly important. Indonesia has not always had the best reputation when it comes to regulatory oversight. But as domestic capital markets deepen and play a bigger role in the country’s economic development, policing fraudulent and corrupt practices becomes a matter of national interest. This is something the incoming administration of Prabowo Subianto (which is likely to bring in a new economic management team) will need to keep a close eye on, especially as the IDX on its current growth trajectory could pass $1 trillion in market capitalization in the next few years.