Capital markets promising but require much study

Capital markets promising but require much study

JAKARTA (JP): Noted world economists said here yesterday that
the Indonesian capital market has a bright future, but warned
that the government has much homework to do in order to make the
dream a reality.

President of the Manila-based Asian Development Bank (ADB)
Mitsuo Sato said the future of the Indonesian capital market is
very promising, given the strength of the country's economy.

"There are a number of shortcomings, however, that need to be
overcome to turn the capital market into an efficient financing
alternative," he said in a limited press interview.

Speakers at the interview, held within the framework of the
two-day PACAP Capital Market Conference which will be officially
opened by President Soeharto today, included Merton H. Miller,
the 1990 Nobel Laureate in economics, and Richard W. Roll,
Allstate professor of insurance and finance at the Universities
of California Los Angeles.

Sato suggested that the Indonesian government introduce more
capital market instruments to give more facilities to both the
investing public and companies seeking investment funds.

Miller and Roll were of the same view on the need to minimize
government intervention in trading activities. They suggested
that the government ease restrictions in pricing and foreign
share holding.

"The essence is that any restrictions should be abolished," he
said, adding that the government's policy which limits foreign
ownership in portfolio investments to a maximum of 49 percent of
the total listed shares is one major shortcoming the Indonesian
government should deal with.

Restriction

Miller said restricting foreign equity holding will limit the
growth of the capital market itself, while limiting securities
prices will bring the market away from the free market mechanism,
the key factor in attracting foreign investors.

"If you intend to develop your market, you should certainly
abolish such restrictions," Miller said.

The government's policy to limit foreign ownership to a
maximum of 49 percent in the portfolio investment has been widely
criticized because it is seen as inconsistent with the rule on
the direct investment sector, where the ceiling for foreign
equity holdings is set far higher at 95 percent.

The Capital Market Supervisory Agency (Bapepam) limits prices
of shares sold on the primary market to a maximum of 13 times the
price earnings ratio.

"The government's control over foreign exchange rates should
also be lifted to make securities trading more attractive," Roll
said.

He said intervention by the central bank in fixing rates of
foreign currencies against the rupiah should be also diminished
to make trading on the domestic capital market more appealing to
foreign investors.

Both Miller and Roller agree that removing restrictions both
in pricing and in foreign equity holding will further revitalize
the ailing stock trading activities on the local markets.

Trends

Share prices have been on the downturn over the last two
months due to a declining foreign presence. The Jakarta Stock
Exchange (JSX) Composite Index has dropped by around 25 percent
since January when it hit 612.88, its highest level in three
years. The index closed at 453.68 yesterday.

As many as 220 companies have so far tapped the capital market
potential to raise funds for their investment projects, and
according to Bapepam, funds raised by both share and bond issuers
hit a spectacular figure of over Rp 25.59 trillion (US$12.18
billion) as of May this year.

According to reliable sources, at least 100 companies are
still waiting for the green light from Bapepam to "go public."

The ADB president said that Indonesia has no other choice but
to develop its capital market to maintain its high economic
growth because financing from the banking sector is no longer
adequate to meet the demand for fresh investment funds.

Indonesia needs at least Rp 660 trillion (US$305 billion) in
new investment funds to achieve its projected average economic
growth of 6.2 percent annually over the next five years. Seventy-
three percent of the total is expected from the private sector.
(hen)