Capital market development lacks guidance<\/p>\n
Lin Che Wei, Director and Founder, Independent Research & Advisory, Jakarta<\/p>\n
Indonesia was the last of five countries to emerge from the
\nAsian financial crisis. One of the main reasons for Indonesia's
\nprolonged crisis was the massive banking failure, which in turn
\nwas due to the poor banking supervision and poor lending
\npractices among Indonesian banks.<\/p>\n
The big question we must answer is whether strengthening the
\nregulations on Indonesian banks is sufficient to address these
\nissues. Or should we focus on the creation of a capital market so
\nthe corporate world will have alternative financing? We believe
\nwith proper regulatory and supervisory guidance, a capital market
\nwould provide a more efficient way to allocate resources and
\naccelerate economic development.<\/p>\n
Does the government's post-IMF white paper answer the issue of
\ndirection and strategic positioning of the Indonesian capital
\nmarket amid the changing landscape of the global financial
\nsector? In simple language -- how should the Indonesian capital
\nmarket be positioned to play a more significant role in
\nsupporting economic growth, as well as meeting the challenges of
\nglobalization?<\/p>\n
Does the white paper address the issue of overdependence on
\nbanks in financial intermediation and underdeveloped capital
\nmarkets, which has been recognized as one of the serious problems
\nthat triggered the Asian financial crisis? What steps have been
\ntaken by the government to reduce this overdependence on banks?<\/p>\n
From the white paper we can conclude that, unlike the banking
\nsector, the development of the corporate bond market takes a
\nbackseat in the post-IMF economic program.<\/p>\n
It seems that Indonesia is not making a sufficient effort to
\ndevelop the corporate bond market to complement bank loans as a
\nsource of financing. The white paper has addressed the banking
\nissue quite thoroughly with six policy measures, including:
\nimprovement of banking regulations and supervision to fully
\ncomply with the Basel Accord core principle, rigorous enforcement
\nof prudential regulations, a certification program for bank
\nsupervisors and examiners, the divestment of banks under IBRA and
\na strengthening of the governance of state banks.<\/p>\n
We notice that in terms of capital market development, the
\npost-IMF white paper addresses six areas, namely: the
\nrestructuring of securities companies to strengthen financial and
\noperational capabilities; the restructuring of the stock exchange
\nto anticipate market liberalization and globalization;
\nstrengthening of the regulation and supervision of mutual funds;
\nimprovements in good corporate governances; introduction of new
\nstock market products, including asset-backed securities, sharia
\nproducts and option; and finally, the reorganization of the
\nCapital Market Supervisory Agency (Bapepam) to strengthen its
\nregulatory, supervisory and legal enforcement roles.<\/p>\n
However, none of these six capital market policies addresses
\nthe issue of capital market structure.<\/p>\n
Admittedly the development of a domestic bond market faces
\nhuge constraints, such as: the limited number of high quality
\nissuers who can economically issue bonds; poor legal,
\ninformational and judicial infrastructure and a poor corporate
\ngovernance record; relatively low demand for corporate bonds due
\nto rudimentary domestic institutional investors; a huge amount of
\ndeficit, which means the government is \"crowding out\" the private
\nsector in borrowing from the public.<\/p>\n
However, these factors are not a good excuse for not making an
\neffort to establish a domestic bond market. The recent issuance
\nof government bonds and the increased trading volume in these
\ninstruments are evidence that there is an appetite for bonds. A
\nlow loan to deposit ratio is further evidence that banks are not
\nefficient and effective in reviving the real sector.<\/p>\n
In addition, a rapid growth in assets under the management of
\nthe mutual funds industry in Indonesia and the huge need for
\nfunding from quality corporate entities provide an excellent
\nopportunity to establish a liquid domestic bond market.<\/p>\n
Without a clear strategy to develop the corporate bond market,
\nthe public might interpret the primary reason for the
\nestablishment of the government bond market to be the
\ngovernment's needs to finance its deficit rather than to provide
\na benchmark for corporate issuers. The government is more focused
\non how to solve its financing problems rather than reestablishing
\nalternative financing for the private sector to revive the
\neconomy.<\/p>\n
Sadly, nothing is being mentioned about the development of the
\nbond market. In order to facilitate the securing of credits, we
\nhave to strive to create a high degree of liquidity to minimize
\nmarket risk. The improvement of domestic bond markets is very
\ncrucial in this regard. At the moment the development of the
\ncorporate bond market is left purely to market forces without
\nproper guidance or support from the government.<\/p>\n
Without an adequate regulatory and supervisory framework, the
\nissuance of corporate bonds could be disastrous, as corporations
\nmight issue bonds recklessly, leaving investors to again bear the
\nbrunt. Unlike bank loans where the depositors are protected by a
\ngovernment guarantee (or deposit insurance in the future), in the
\ncase of banking failures public investors have to bear the risks
\nof their investment decisions. Due to a lack of information, weak
\nlegal infrastructure and a poor corporate governance record, bond
\ninvestors face a huge risk in investing.<\/p>\n
The government should try to improve the legal infrastructure,
\ncorporate disclosure and the enforcement of good corporate
\ngovernance to protect bond holders if the government wants to
\nensure the development of a healthy bond market.<\/p>\n
On the other hand, the regulators are also faced with a
\nproblem of creating a sufficient pool of reputable private firms
\nthat can periodically issue a large amount of corporate bonds.
\nToo many regulations might prevent corporates from issuing bonds
\nand instead opt for bank loans. This is dilemmatic as corporates
\nmight be tempted to raise financing in a less-regulated sector,
\nbe it the capital market or through bank loans.<\/p>\n
To get a well-balanced financial system it is important that
\nimprovements in banking supervision be followed by an increase in
\nthe regulation and supervision of bond issuances. Despite a huge
\ndemand for bond instruments, both from issuers as well as
\ninvestors, the white paper does not put sufficient emphasis on
\nthe legal, judicial and informational infrastructures to support
\nthe development of adequate corporate bond markets.<\/p>\n
The fear that corporate bonds might \"cannibalize\" bank loans
\nprobably explains the lack of emphasis on corporate bonds.<\/p>\n
It is important to recognize that corporate bonds are
\ncomplimentary to bank loans for financing economic development.
\nBank loans have a limited source of financing due to the short-
\nterm nature of banks' liabilities, which are mainly short-term
\nsaving accounts and time deposits. This means the banks' ability
\nto finance long-term projects without having maturity mismatches
\nin their assets and liabilities is limited.<\/p>\n
This is the area where the capital market can play a
\nsubstantial role for financial stability. On the other hand,
\nbanks will continue to be more efficient in providing short-term
\nworking capital for the corporate sector.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/capital-market-development-lacks-guidance-1447893297",
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"sponsor": "Okusi Associates",
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