'Growth in capital mart should not hurt financial sector'

'Growth in capital mart should not hurt financial sector'

JAKARTA (JP): Efforts to spur the growth of local capital
markets should not necessarily sacrifice the country's financial
sector, Bank Indonesia Governor J. Soedradjad Djiwandono said
here yesterday.

"It is true that low interest rates serve as an important
factor for the development of our capital markets," Soedradjad
said after addressing a two-day seminar on Asia Pacific Exchanges
in the Borderless World.

However, if the central bank cut its discount rates, it could
create massive capital flight, which would in turn hamper
Indonesia's financial standing. "So there must be a trade-off,"
he said.

Soedradjad made the remark following suggestions from former
cabinet minister Emil Salim and the Association of Indonesian
Securities Companies that the central bank consider lowering the
country's interest rates to attract investors to increase equity
investment.

Such "high" domestic interest rates, Soedradjad said, are
deliberately aimed at mobilizing domestic savings to help cover
up the country's savings-investment gap.

"Increased fund mobilization efforts will require increased
levels of efficiency from both our banking and capital market
institutions," Soedradjad told some 500 executives attending the
seminar, which ended yesterday.

Soedradjad said that in its interest rate policy, the central
bank properly adjusts domestic rates to those prevailing abroad
and closely relates them to domestic assets. Such a policy is
taken to counter the speculative flow of foreign capital.

"The key point to keep in mind is that in this case the tail
should not wag the dog: macroeconomic policy management should
not adjust to short-term capital flows," Soedradjad said.

Reforms

The government is pursuing reforms to improve its basic
infrastructure, which, he said, is to support the development of
both money and capital markets as the borders between the two
diminish.

Soedradjad noted that it is compulsory to develop local stock
markets into an efficient exchanges, especially given the
influence that capital markets have on managers and investors in
their investment making decisions.

"In the long run, efficient capital markets will provide a
good channel for investment since these markets reflect the
fundamentals of the economy," the central bank governor said.

If the capital market is efficient so that it reflects fully
the fundamentals, Soedradjad said, macroeconomic policy decisions
will be much easier because they rely on signs transmitted by the
capital market.

However, he warned that capital markets are not driven solely
by news of fundamental economic factors. In addition to the
investors who rely on fundamentals and who usually the take
longer-term view, there are many "noise traders" who often trade
on sentiment.

"The presence of noise traders may transmit the wrong signals
to the policy makers," Soedradjad said, adding that globalization
may add to such problems for policy makers because a borderless
capital flow may cause stock prices to fluctuate wildly.

Since it is difficult to eliminate speculation in capital
markets, he suggested that policy makers better understand,
monitor and gauge the size of capital inflows through capital
markets. (rid)