Can capital markets beat crisis?

Can capital markets beat crisis?

By Rini M.S. Soewandi

The following article is based on a paper presented at the
Capital Market Conference on Aug. 24, 1999 in Jakarta.

JAKARTA (JP): The role of business is critical at this time in
pushing along what we hope is the beginnings of recovery. People
at every level of society are dependent on us to do our part.

I am particularly aware, and I am sure every member of the
business community here today is equally aware, that business
cannot do its job without finance. The development of the capital
markets in Indonesia since the early 1990s held hope that we were
creating alternative sources of finance. That hope still exists
and it is important that the capital markets become a far more
frequent vehicle for corporate financing than they have been so
far.

We all also know that capital markets inevitably involve an
element of risk. That is rightly so, since the possible returns
from the markets well outstrip those of traditional investments.
The level of risk represented by our markets is the next
question. I think what we have witnessed over the past two years
is a market reaction to a level of risk that is too high.
Speculative capital simply disappeared.

Obviously, in order to make the markets a more stable source
of capital, the average level of risk needs to be reduced. If
investors can have more confidence in our markets, they will not
only be inclined to invest more, but also to retain those
investments for longer periods.

There has already been much said today about good corporate
governance and transparency. I ask no apologies for turning again
to these subjects. We all claim that we want more of them, but
year after year, we are still saying more needs to be done.
Action to achieve good corporate governance and transparency
must, we can only assume, be considerably less than the amount of
talk that goes on.

The capital markets themselves must be part of this process.
Essentially, what is needed is a strong regulator to control
issue regulation and strong supervision to monitor day-to-day
activities.

These two roles allow investors to have confidence in the
markets. The functions of the supervisory body make sure that the
activities of the market are clean. It is common to refer to the
concept of the level playing field. This means, very simply, that
everybody has the same chance. If investors can be confident that
the playing field is level, in a country with so much potential
as Indonesia they will recognize the opportunities. They will
want to assist in the recovery of the economy.

A lot has been done to make sure our markets work well. We can
do more. The role of Bapepam (Capital Market Supervisory Agency)
as the monitoring and controlling mechanism for the Jakarta Stock
Exchange (JSX) can be boosted. To date, it has done a good job of
keeping the market honest. Even so, the onus remains very largely
with the companies listed on the JSX. These companies can be more
responsive -- and in a genuine way -- to the disclosure required
of them.

One issue that needs to be addressed is to find a more precise
definition of the requirements on disclosure. When is a given
fact about a company confidential information and when should
that fact be made public knowledge. If there is no agreement on
what disclosure means, the playing field could be considerably
flatter for some players than for others. That is a situation
that investors do not like. So however far the Indonesian capital
markets have gone, there is still more to do.

Next is the role of business, those companies listed on our
exchanges. They need to be transparent in their financial
dealings, their alliances, and other factors that influence
market perceptions. They need to display -- and possess -- a high
level of corporate governance. They need to be professionally
managed by teams that are able to be pro-active. It is a very
simple recipe, though it is not so easy to achieve.

The result is confidence on the part of investors that they
can trust the Indonesian capital markets as a responsible area of
investment. The companies listed on that exchange will be assumed
to have displayed high levels of all these factors. The
alternative, of course, is hardly likely to inspire confidence.
If you do not have these three factors at least to some degree,
you can hardly expect anyone to want to invest.

As an example of these factors, I ask your indulgence for a
minute to look at my own company, Astra International. I choose
it for good reasons. One, because I know it very well. Second, I
don't think there is any doubt that it is a company that has
always demonstrated a high regard for the ingredients in our
recipe.

It is no secret that the economic crisis devastated our
balance sheet. From being on a high, we suddenly plunged into
disaster. When this city was out of control in May last year, we
woke up to the reality that this was going to be no short-term
recession, and that we had to work to re-position ourselves if we
were to survive.

We sold non-core businesses, we reduced our workforce across
the board with a voluntary retrenchment program that allowed us
to cut 25,000 off our payroll. In August last year, we suspended
principal payment on our debt. That announcement drove our share
value down to 6 percent of what it had been a year earlier. The
morale of our own workforce was at rock bottom. In October, we
suspended interest payments as well, further deepening the gloom.

We have survived. We have been able to re-structure in a way
that allows us adequate time for market recovery. We have
restored trust in our company.

Most important was the fact that we were transparent in our
dealings. We briefed our creditors each and every month. Slowly,
these creditors came to understand that Astra International was
committed to good corporate governance and transparency.
Investors also appreciated what we were saying. From the low
point after the suspension of capital payments when our shares
plunged to Rp 225, they now stand at Rp 3,100.

The message is simple enough. A commitment is required from
the market mechanism, from business, and from government. If all
three are prepared to act in a transparent manner and to insist
on good governance, investor confidence will return on a national
scale, as it did to Astra. With professional management,
transparency and good governance, the climate will be conducive
to more public issues in a well-managed market. Investors will be
there to buy those issues, because they will have confidence in
this country.

The process is, of course, never ending. Last year, Arthur
Levitt, chairman of the Security Exchange Commission, which
manages the most developed markets in the world, gave a speech
entitled The Numbers Game. He discussed the concept in U.S.
accounting practices which recognizes that some items may be so
insignificant that they are not worth accounting with exact
precision. He went on to say that some companies were misusing
the concept by intentionally recording errors in a bid to make
that very small difference between meeting profit projections and
failing to do so. This in the most mature market in the world.

If we look to other developing economies, the same message on
solid management, transparency and good governance comes through.
Nicolas Eyzaguirre, Executive Director of the IMF for Argentina,
Bolivia, Chile, Paraguay, Peru and Uruguay made the point at a
seminar in Washington last month that you do not have to feel the
pain yourself in order to learn. You can learn from others'
experiences, he said, just as much as South America learned from
the Chilean experience of the early 1980s. The lesson was exactly
what we are talking about today. I'll repeat the formula:
professional management, good corporate governance, and
transparency.

We in Indonesia have learned the hard way, because we chose to
ignore the examples that were there to learn from. In essence,
the recipe we need to follow is simple. Apply the recipe and
there will be confidence in our markets. But we need to really
use the recipe, not just talk about it. We all have a part in the
responsibility to make good governance and transparency an
integral part of our lives. If we do so, this country will reap
the rewards, not least among them the ability of our capital
markets to offer a sustained contribution to economic recovery.

The contribution that the markets can make is significant. We
have seen over the past two years how much we need strong,
reliable alternative methods of financing. Market players make
only one demand: that they can have confidence that the playing
field is level. It is up to us all to work to that end.

The writer is president director of PT Astra International
Tbk.