Efforts needed to boost local investor base

JAKARTA (JP): Bank Indonesia sees the need to develop a domestic investor base in the country's capital market to minimize the negative impact of foreign short-term investment.

Managing director of the central bank, Paul Soetopo, said here yesterday that foreign investors, who presently control about 70 percent of transactions on the local stock exchanges, were too dominant.

"While this (foreign presence) is welcome, I think it is important we use every means to greatly develop a domestic investor base to deepen security markets," he said at a seminar on financial and securities markets.

Soetopo said it was not surprising to see the leading role of foreign investors in the capital market because Indonesia's capital market was still young compared with other markets in the Southeast Asian region.

"Foreign investors are at the forefront and understand market and trading. Indonesian investors, in many cases, still have a lot to learn," he said in his paper.

Soetopo suggested the base of domestic institutional investors be developed well, especially pension and mutual funds.

"If nothing else, this will provide companies with a more viable alternative to banking financing," he said.

Soetopo also stressed the importance of law enforcement in the capital market to avoid manipulation of the market.

He acknowledged that several years ago Indonesia had introduced a capital market law and a set of implementing regulations to protect the investing public. "But they still lack strong legal enforcement which has hampered capital market development," he said.

Legal enforcement, he added, was important in the area of transparency to avoid insider trading and ensure fair transaction practices in the market.

Paul said the Indonesian securities and money market had experienced tremendous growth over the past few years due to market liberalization.

He said Indonesia's banking liberalization, which started in 1983, had resulted in the growing number of banks operating in Indonesia. There are about 239 commercial banks operating in Indonesia today.

The foreign exchange market has also developed steadily over the years, he added.

"The money market, especially the foreign exchange market, has developed rapidly since 1993," he said.

The daily average volume of transactions in the domestic money market has risen to Rp 2.6 trillion (US$896.55 million) today compared with Rp 0.3 trillion in 1993.

"During the same period, the volume of foreign exchange transactions also increased to more than US$10 billion per day today from $3 billion per day in 1993," he said.

He said the same was true for the capital market.

"The number of listed companies, volume of trading, funds mobilized and market capitalization has increased steadily since then," he said.

There are about 286 listed companies on the Jakarta and Surabaya Stock Exchanges now with a market capitalization of Rp 260 trillion.

But he said liberalization had also made the country more sensitive to external shocks and pressures.

"This hit home in July when the regional crises sparked by problems in Thailand led to a classic case of contagion effect. Virtually all of Southeast Asia felt the waves of the Thai baht problem and we are still feeling it to this day," he said.

The rupiah has plunged 20 percent against the American dollar over the past two months or more than 25 percent since January this year.

The rupiah was the hardest hit by the domino effect of the Thai baht devaluation since early July. (aly)