Capital market set for stronger performance

JAKARTA (JP): Stock exchange executives and securities analysts estimate a more promising outlook for the Indonesian capital market next year.

They predict that the estimated faster growth in the country's economy will become the prime mover of the capital market activities.

Other fundamental factors supporting the expected stronger growth in securities trading are the planned introduction of a new capital market law, the modernization of the trading system and the change in tax treatment.

Tito Sulistio, the president of the over-the-counter (OTC) stock market, describes the outlook for stock trading activities as the best in the Indonesian capital market's history.

He said that the improvement in the trading system of the Jakarta Stock Exchange (JSX), such as trading automation, combined with the launching of a new capital market law, should significantly improve the confidence of both local and foreign investors.

"The new trading and legal infrastructures will not only facilitate trading activities but also should be able to effectively curb unfair practices.

The government is expected to introduce the capital market law early next year, during which the JSX is expected to launch its trading automation.

He said the recent entry of major securities companies from the United States, such as Merrill Lynch, will also allow wider financial access to the local capital market.

Tax

The introduction of a new tax law in January, which will also replace the capital gain tax with a withholding system, is also expected to serve as an important facilitator of the capital market.

Investors are expected to pay less tax under the new system, which will be based on transaction value rather than on capital gains as imposed at present.

"The only threat is the upward trend in interest rates," he said here yesterday.

Tito, a former president of a securities company, said that the impact of the estimated rise in the interest rates should be minimal as the government's stronger commitment to curbing inflationary pressure can be expected to result in lower interest rates.

If the government can check the inflation rate at eight percent to 10 percent, the impact of the rise in the interest rates in the United States will remain under control, he said.

Securities analysts estimate that there will be another rise in the U.S. interest rates in the first quarter of next year, but that the upward trend will ease during the rest of the year.

"That means that the impact of the rise in the U.S interest rates will not be so significant in relation to the rise in domestic interest rates," a securities analyst said.

He warned that stronger impact could come from internal factors, such as the possible overheating of the Indonesian economy.

"If the economy is overheating, the central bank will encourage rises in interest rates to curb the inflationary pressure," he added.

Tito estimates that a rise in the interest rates to 17 percent per annum would be endurable.

"What we are really afraid of is interest rates reaching above 18 percent per annum, a level which could disrupt the capital market," he said.

Basjiruddin Sjarida, the president of the Surabaya Stock Exchange (SSE), describes 1995 as an important year of momentum for the Indonesian capital market.

He said foreign fund managers, which invested around US$0.5 billion in Indonesia last year, are expected to further increase their investments on the local markets as the impact of the new trading facilities.

The listing of 38 companies in the January-November period raised the capitalization on the JSX by 50 percent to Rp 105.19 trillion ($48.9 billion) from Rp 69.29 trillion as of December last year.

However, the JSX Composite Index dropped by over 18 percent in the January-November period, or by over 20 percent, up to last week on the impact of the decline in the foreign presence.

Foreign investors, the dominant factor in trading activities, significantly reduced their portfolio investment weights this year as a consequence of the persistent rises in U.S. interest rates. (hen)