Can capital markets beat crisis?<\/p>\n
By Rini M.S. Soewandi<\/p>\n
The following article is based on a paper presented at the
\nCapital Market Conference on Aug. 24, 1999 in Jakarta.<\/p>\n
JAKARTA (JP): The role of business is critical at this time in
\npushing along what we hope is the beginnings of recovery. People
\nat every level of society are dependent on us to do our part.<\/p>\n
I am particularly aware, and I am sure every member of the
\nbusiness community here today is equally aware, that business
\ncannot do its job without finance. The development of the capital
\nmarkets in Indonesia since the early 1990s held hope that we were
\ncreating alternative sources of finance. That hope still exists
\nand it is important that the capital markets become a far more
\nfrequent vehicle for corporate financing than they have been so
\nfar.<\/p>\n
We all also know that capital markets inevitably involve an
\nelement of risk. That is rightly so, since the possible returns
\nfrom the markets well outstrip those of traditional investments.
\nThe level of risk represented by our markets is the next
\nquestion. I think what we have witnessed over the past two years
\nis a market reaction to a level of risk that is too high.
\nSpeculative capital simply disappeared.<\/p>\n
Obviously, in order to make the markets a more stable source
\nof capital, the average level of risk needs to be reduced. If
\ninvestors can have more confidence in our markets, they will not
\nonly be inclined to invest more, but also to retain those
\ninvestments for longer periods.<\/p>\n
There has already been much said today about good corporate
\ngovernance and transparency. I ask no apologies for turning again
\nto these subjects. We all claim that we want more of them, but
\nyear after year, we are still saying more needs to be done.
\nAction to achieve good corporate governance and transparency
\nmust, we can only assume, be considerably less than the amount of
\ntalk that goes on.<\/p>\n
The capital markets themselves must be part of this process.
\nEssentially, what is needed is a strong regulator to control
\nissue regulation and strong supervision to monitor day-to-day
\nactivities.<\/p>\n
These two roles allow investors to have confidence in the
\nmarkets. The functions of the supervisory body make sure that the
\nactivities of the market are clean. It is common to refer to the
\nconcept of the level playing field. This means, very simply, that
\neverybody has the same chance. If investors can be confident that
\nthe playing field is level, in a country with so much potential
\nas Indonesia they will recognize the opportunities. They will
\nwant to assist in the recovery of the economy.<\/p>\n
A lot has been done to make sure our markets work well. We can
\ndo more. The role of Bapepam (Capital Market Supervisory Agency)
\nas the monitoring and controlling mechanism for the Jakarta Stock
\nExchange (JSX) can be boosted. To date, it has done a good job of
\nkeeping the market honest. Even so, the onus remains very largely
\nwith the companies listed on the JSX. These companies can be more
\nresponsive -- and in a genuine way -- to the disclosure required
\nof them.<\/p>\n
One issue that needs to be addressed is to find a more precise
\ndefinition of the requirements on disclosure. When is a given
\nfact about a company confidential information and when should
\nthat fact be made public knowledge. If there is no agreement on
\nwhat disclosure means, the playing field could be considerably
\nflatter for some players than for others. That is a situation
\nthat investors do not like. So however far the Indonesian capital
\nmarkets have gone, there is still more to do.<\/p>\n
Next is the role of business, those companies listed on our
\nexchanges. They need to be transparent in their financial
\ndealings, their alliances, and other factors that influence
\nmarket perceptions. They need to display -- and possess -- a high
\nlevel of corporate governance. They need to be professionally
\nmanaged by teams that are able to be pro-active. It is a very
\nsimple recipe, though it is not so easy to achieve.<\/p>\n
The result is confidence on the part of investors that they
\ncan trust the Indonesian capital markets as a responsible area of
\ninvestment. The companies listed on that exchange will be assumed
\nto have displayed high levels of all these factors. The
\nalternative, of course, is hardly likely to inspire confidence.
\nIf you do not have these three factors at least to some degree,
\nyou can hardly expect anyone to want to invest.<\/p>\n
As an example of these factors, I ask your indulgence for a
\nminute to look at my own company, Astra International. I choose
\nit for good reasons. One, because I know it very well. Second, I
\ndon't think there is any doubt that it is a company that has
\nalways demonstrated a high regard for the ingredients in our
\nrecipe.<\/p>\n
It is no secret that the economic crisis devastated our
\nbalance sheet. From being on a high, we suddenly plunged into
\ndisaster. When this city was out of control in May last year, we
\nwoke up to the reality that this was going to be no short-term
\nrecession, and that we had to work to re-position ourselves if we
\nwere to survive.<\/p>\n
We sold non-core businesses, we reduced our workforce across
\nthe board with a voluntary retrenchment program that allowed us
\nto cut 25,000 off our payroll. In August last year, we suspended
\nprincipal payment on our debt. That announcement drove our share
\nvalue down to 6 percent of what it had been a year earlier. The
\nmorale of our own workforce was at rock bottom. In October, we
\nsuspended interest payments as well, further deepening the gloom.<\/p>\n
We have survived. We have been able to re-structure in a way
\nthat allows us adequate time for market recovery. We have
\nrestored trust in our company.<\/p>\n
Most important was the fact that we were transparent in our
\ndealings. We briefed our creditors each and every month. Slowly,
\nthese creditors came to understand that Astra International was
\ncommitted to good corporate governance and transparency.
\nInvestors also appreciated what we were saying. From the low
\npoint after the suspension of capital payments when our shares
\nplunged to Rp 225, they now stand at Rp 3,100.<\/p>\n
The message is simple enough. A commitment is required from
\nthe market mechanism, from business, and from government. If all
\nthree are prepared to act in a transparent manner and to insist
\non good governance, investor confidence will return on a national
\nscale, as it did to Astra. With professional management,
\ntransparency and good governance, the climate will be conducive
\nto more public issues in a well-managed market. Investors will be
\nthere to buy those issues, because they will have confidence in
\nthis country.<\/p>\n
The process is, of course, never ending. Last year, Arthur
\nLevitt, chairman of the Security Exchange Commission, which
\nmanages the most developed markets in the world, gave a speech
\nentitled The Numbers Game. He discussed the concept in U.S.
\naccounting practices which recognizes that some items may be so
\ninsignificant that they are not worth accounting with exact
\nprecision. He went on to say that some companies were misusing
\nthe concept by intentionally recording errors in a bid to make
\nthat very small difference between meeting profit projections and
\nfailing to do so. This in the most mature market in the world.<\/p>\n
If we look to other developing economies, the same message on
\nsolid management, transparency and good governance comes through.
\nNicolas Eyzaguirre, Executive Director of the IMF for Argentina,
\nBolivia, Chile, Paraguay, Peru and Uruguay made the point at a
\nseminar in Washington last month that you do not have to feel the
\npain yourself in order to learn. You can learn from others'
\nexperiences, he said, just as much as South America learned from
\nthe Chilean experience of the early 1980s. The lesson was exactly
\nwhat we are talking about today. I'll repeat the formula:
\nprofessional management, good corporate governance, and
\ntransparency.<\/p>\n
We in Indonesia have learned the hard way, because we chose to
\nignore the examples that were there to learn from. In essence,
\nthe recipe we need to follow is simple. Apply the recipe and
\nthere will be confidence in our markets. But we need to really
\nuse the recipe, not just talk about it. We all have a part in the
\nresponsibility to make good governance and transparency an
\nintegral part of our lives. If we do so, this country will reap
\nthe rewards, not least among them the ability of our capital
\nmarkets to offer a sustained contribution to economic recovery.<\/p>\n
The contribution that the markets can make is significant. We
\nhave seen over the past two years how much we need strong,
\nreliable alternative methods of financing. Market players make
\nonly one demand: that they can have confidence that the playing
\nfield is level. It is up to us all to work to that end.<\/p>\n
The writer is president director of PT Astra International
\nTbk.<\/p>",
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