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.