Coping with the globalization of financial marts<\/p>\n
By Sahala Sianipar<\/p>\n
JAKARTA (JP): On May 19, 1997, Southeast Asian central banks
\njoined forces to stabilize Thailand's baht from pressure exerted
\nby currency speculators. The Bank of Thailand's (BOT) ability to
\ndefend the baht was necessary to ensure investors' confidence in
\nThailand.<\/p>\n
The crisis in Thailand signals the globalization of the
\ncurrency market in Southeast Asia which is characterized by the
\nfree flow of information and capital that amounts to US$2
\ntrillion per day (McKinsey Global Institute, 1996). Furthermore,
\nthe crisis poses a challenge to Southeast Asian monetary
\nauthorities regarding their ability to avoid a future currency
\ncrisis. What lessons can be learned by other emerging markets in
\nthe region including Indonesia, Malaysia, and the Philippines? To
\nwhat extent does the currency market affect the development of
\nthe equity market in other Southeast Asian emerging markets?<\/p>\n
Thailand's financial crisis was not surprising given the
\ncountry's economic performance in the past two years. Thailand's
\ncurrent account deficit of 8.5 percent and 6.9 percent (Lehman
\nBrothers, 1997) of its GDP in 1996 and 1997 respectively, a
\nseries of bad loans to the property sector, deteriorating
\nexports, and an inconsistent macroeconomics policy leading to the
\nreplacement of the country's monetary authorities have
\ncontributed to the recent financial crisis. In addition,
\ndisappointing financial performance of many listed companies led
\nto the decline of the stock market where its market
\ncapitalization declined from $107 billion in October 1996 to $68
\nbillion in May 1997.<\/p>\n
Thailand's financial crisis certainly has implications for its
\nneighbors, including Indonesia. The Indonesian financial market
\nhas developed rapidly in the past 10 years, primarily due to the
\ngovernment's deregulation measures in the late 1980s. Indonesia
\ncurrently has more than 200 commercial banks. The Jakarta Stock
\nExchange (JSX) market capitalization reached more than $90
\nbillion by the end of April 1997, compared to $12 billion at the
\nend of 1992.<\/p>\n
A growing number of Indonesian companies have turned to the
\ncapital market for an alternative source of funds. The rapid
\ndevelopment of the Indonesian capital market can be attributed to
\nthe globalization of the financial market in Asia. Investors do
\nnot recognize national borders; they tap into markets that
\npromise higher returns. Both Thai and Indonesian financial
\ninstitutions have been fueled by portfolio investment.<\/p>\n
Although there are certain fundamental differences which
\nseparate Indonesia from Thailand, both countries share the
\ncharacteristics of \"emerging economies\" such as the strong
\nindustrialization drive, a high current account deficit
\n(Indonesia recorded 4.0 percent and 4.2 percent of GDP in 1996
\nand 1997 respectively) as the result of growing imports, the
\nrapid expansion of the financial sector (particularly the banking
\nindustry), and the high exposure of lending to various
\nconstruction (e.g. property, infrastructure) projects. As long as
\nIndonesian monetary authorities continue to exercise its prudent
\nmonetary policy, the country will not experience such a crisis as
\nThailand and Mexico did in late 1994.<\/p>\n
The globalization of the financial market is inevitable.
\nGlobalization is characterized by the continuous flow of capital
\ndriven by information across national borders. The Jakarta Stock
\nExchange grew once the government opened the door to foreign
\ninvestors. As a result, the market has been dominated by foreign
\ninvestors.<\/p>\n
The globalization of the capital market presents challenges to
\ncapital market authorities as market players become more
\nsophisticated. The violation of trading practices, the decisive
\nrole of information toward share prices, and the growing demand
\nfor diverse financial instruments constitute challenges faced by
\nthe Indonesian capital market in this new global market. It is no
\nsecret that there is a wide gap between regulations and market
\npractices in Indonesia's capital market.<\/p>\n
Cases involving Bank Pikko, Bank Mashill, and other listed
\ncompanies exemplify the growing number of sophisticated players
\nin the capital market industry. New instruments are being
\nproposed by market players such as stock options, secondary
\nmortgage facility (SMF), and asset-backed securities (ABS) that
\nindicate players' increasing demand to diversify their investment
\nvehicles. Capital market authority will have to be ready to
\nanticipate the market trend and minimize the gap between
\nregulations and market practices.<\/p>\n
In addition to internal factors, the sustainability of
\nIndonesia's economic growth, the quality of its financial
\ninstitutions, and consistency of its macroeconomic policy have
\nimplications on the future of the country's capital market.
\nPublic policy formulation will have to account for the
\ndevelopment of the capital market which serves as an alternative
\nsource of generating capital.<\/p>\n
The globalization of the Indonesian capital market comes at a
\ntime when the market is in its developing stage. Two issues that
\ncapital market participants have to address during its
\ndevelopment are the absence of the quality of information and a
\nset of public policies aiming to enhance market competitiveness.
\nInformation is still a luxury item in terms of the Indonesian
\ncapital market. Research reports are in general targeted to
\nforeign investors. Researchers in the capital market have
\ndifficulties obtaining the latest data on the market partly due
\nto the recent development of the market. As a result, investment
\ndecisions are exercised without accurate on hand information.<\/p>\n
In terms of policy, it is important that the policy
\nanticipates the future development of the capital market.
\nMalaysia's Vision 2020 does not only entail the country's
\npolitical, economic, and social agenda; the vision also aims to
\ntransform Kuala Lumpur as the Southeast Asia's next financial
\ncenter. Kuala Lumpur's Stock Exchange (KLSE) has emerged as the
\nlargest market in Southeast Asia with more than $270 billion
\nmarket capitalization (Asiaweek, 1997). For a country with 17
\nmillion people, it is quite an achievement. In late 1996, the
\nMalaysian government launched two future exchanges to complement
\nKLSE.<\/p>\n
In doing so, investors have more options to invest in
\nMalaysia. The Malaysian government realizes that if the country
\nwishes to achieve its target by the year 2020, a significant
\namount of capital is required to finance its economic expansion.
\nKLSE has received the mandate to meet the demand of capital
\nnecessary for the country's long-term growth and its monetary
\nauthority also continues to equip market regulators with the
\nnecessary tools to oversee an increasingly sophisticated market.<\/p>\n
Globalization is inevitable for the Indonesian capital market.
\nThe challenge is how the market can emerge as a competitive
\ncapital generating institution at the global level.<\/p>",
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