Efficient stock mart key to cut in interest rates

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)