Coping with the globalization of financial marts

By Sahala Sianipar

JAKARTA (JP): On May 19, 1997, Southeast Asian central banks joined forces to stabilize Thailand's baht from pressure exerted by currency speculators. The Bank of Thailand's (BOT) ability to defend the baht was necessary to ensure investors' confidence in Thailand.

The crisis in Thailand signals the globalization of the currency market in Southeast Asia which is characterized by the free flow of information and capital that amounts to US$2 trillion per day (McKinsey Global Institute, 1996). Furthermore, the crisis poses a challenge to Southeast Asian monetary authorities regarding their ability to avoid a future currency crisis. What lessons can be learned by other emerging markets in the region including Indonesia, Malaysia, and the Philippines? To what extent does the currency market affect the development of the equity market in other Southeast Asian emerging markets?

Thailand's financial crisis was not surprising given the country's economic performance in the past two years. Thailand's current account deficit of 8.5 percent and 6.9 percent (Lehman Brothers, 1997) of its GDP in 1996 and 1997 respectively, a series of bad loans to the property sector, deteriorating exports, and an inconsistent macroeconomics policy leading to the replacement of the country's monetary authorities have contributed to the recent financial crisis. In addition, disappointing financial performance of many listed companies led to the decline of the stock market where its market capitalization declined from $107 billion in October 1996 to $68 billion in May 1997.

Thailand's financial crisis certainly has implications for its neighbors, including Indonesia. The Indonesian financial market has developed rapidly in the past 10 years, primarily due to the government's deregulation measures in the late 1980s. Indonesia currently has more than 200 commercial banks. The Jakarta Stock Exchange (JSX) market capitalization reached more than $90 billion by the end of April 1997, compared to $12 billion at the end of 1992.

A growing number of Indonesian companies have turned to the capital market for an alternative source of funds. The rapid development of the Indonesian capital market can be attributed to the globalization of the financial market in Asia. Investors do not recognize national borders; they tap into markets that promise higher returns. Both Thai and Indonesian financial institutions have been fueled by portfolio investment.

Although there are certain fundamental differences which separate Indonesia from Thailand, both countries share the characteristics of "emerging economies" such as the strong industrialization drive, a high current account deficit (Indonesia recorded 4.0 percent and 4.2 percent of GDP in 1996 and 1997 respectively) as the result of growing imports, the rapid expansion of the financial sector (particularly the banking industry), and the high exposure of lending to various construction (e.g. property, infrastructure) projects. As long as Indonesian monetary authorities continue to exercise its prudent monetary policy, the country will not experience such a crisis as Thailand and Mexico did in late 1994.

The globalization of the financial market is inevitable. Globalization is characterized by the continuous flow of capital driven by information across national borders. The Jakarta Stock Exchange grew once the government opened the door to foreign investors. As a result, the market has been dominated by foreign investors.

The globalization of the capital market presents challenges to capital market authorities as market players become more sophisticated. The violation of trading practices, the decisive role of information toward share prices, and the growing demand for diverse financial instruments constitute challenges faced by the Indonesian capital market in this new global market. It is no secret that there is a wide gap between regulations and market practices in Indonesia's capital market.

Cases involving Bank Pikko, Bank Mashill, and other listed companies exemplify the growing number of sophisticated players in the capital market industry. New instruments are being proposed by market players such as stock options, secondary mortgage facility (SMF), and asset-backed securities (ABS) that indicate players' increasing demand to diversify their investment vehicles. Capital market authority will have to be ready to anticipate the market trend and minimize the gap between regulations and market practices.

In addition to internal factors, the sustainability of Indonesia's economic growth, the quality of its financial institutions, and consistency of its macroeconomic policy have implications on the future of the country's capital market. Public policy formulation will have to account for the development of the capital market which serves as an alternative source of generating capital.

The globalization of the Indonesian capital market comes at a time when the market is in its developing stage. Two issues that capital market participants have to address during its development are the absence of the quality of information and a set of public policies aiming to enhance market competitiveness. Information is still a luxury item in terms of the Indonesian capital market. Research reports are in general targeted to foreign investors. Researchers in the capital market have difficulties obtaining the latest data on the market partly due to the recent development of the market. As a result, investment decisions are exercised without accurate on hand information.

In terms of policy, it is important that the policy anticipates the future development of the capital market. Malaysia's Vision 2020 does not only entail the country's political, economic, and social agenda; the vision also aims to transform Kuala Lumpur as the Southeast Asia's next financial center. Kuala Lumpur's Stock Exchange (KLSE) has emerged as the largest market in Southeast Asia with more than $270 billion market capitalization (Asiaweek, 1997). For a country with 17 million people, it is quite an achievement. In late 1996, the Malaysian government launched two future exchanges to complement KLSE.

In doing so, investors have more options to invest in Malaysia. The Malaysian government realizes that if the country wishes to achieve its target by the year 2020, a significant amount of capital is required to finance its economic expansion. KLSE has received the mandate to meet the demand of capital necessary for the country's long-term growth and its monetary authority also continues to equip market regulators with the necessary tools to oversee an increasingly sophisticated market.

Globalization is inevitable for the Indonesian capital market. The challenge is how the market can emerge as a competitive capital generating institution at the global level.