Efficient stock mart key to cut in interest rates

JAKARTA (JP): High interest rates in Indonesia have made the stock market less attractive for domestic pension fund investments but an efficient stock market can help cut the rates, an analyst said.

The president of PT Makindo, Gunawan Yusuf, told a seminar yesterday that once the stock market becomes efficient, meaning that the fundamentals of listed companies strengthen and their shares perform accordingly, those companies could force banks to reduce interest rates.

"Sometimes it is the banks which offer profitable companies credit. Under these circumstances, the borrower is in a strong position to ask for a lower interest rate," Gunawan said.

As a consequence, banks will lower their interest rates, an action which could eventually force down their time deposit rates, thereby making them less attractive than other instruments, he added.

An efficient stock market will also make it a more attractive source of funds. This situation will tighten competition between banks and the stock market and will also help curb any rise in interest rates.

Gunawan cited an example that before 1990, the interest rates in Malaysia fluctuated at a range of 14 to 16 percent. But when the stock exchange became more efficient in 1990, the interest rate dropped to a level of 9 to 10 percent.

"However, it is not the right time for Indonesia as the government still needs high interest rates to prevent the economy from overheating," he conceded.

Pension fund

Speaking on how to lure pension funds to the stock market, Gunawan said that one way to compensate for high and fixed returns offered by banks is by changing the investment strategy of pension funds.

"Fund managers are required not only to maximize total return but also to protect the pension funds from losses," he said.

He said that there should be a contract between pension funds and fund managers which include an item about capital reserve funds.

The capital reserve fund is a guarantee that fund managers return the total investment of a pension fund after a certain period in case a stock portfolio gives no return.

Gunawan said that fund managers are prohibited from guaranteeing the return on investments to third parties, including pension funds.

"Therefore, we need a capital reserve fund to make sure that at least pension funds do not lose money in down markets," Gunawan added.

He said that if pension funds want to invest in the stock market they have to do it on the basis of a long-term strategy.

"Based on our past experiences, investing in the stock market long term (at least three years) gives a return of about 22 to 23 percent per annum compared to that of a time deposit which yields only 18 to 19 percent," Gunawan noted.

Gunawan said that pension fund investments in the stock market are still very small.

Indonesia has approximately 400 pension funds with total assets of Rp 17 trillion at the end of 1995. (08)