Coping with the globalization of financial marts

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.