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)