Investor trust destroyed

Individual investors who got severely burned during the height of the economic crisis in 1998 have not returned to the stock market even though share prices have begun to pick up along with the increasingly stronger macroeconomics and political stability.

Capital Market Supervisory Agency chairman Herwidayatmo said, at the 25th anniversary of the revamping of the Jakarta Stock Exchange (JSX) last week, that domestic individual stock investors remained few at only about 50,000, compared to around two million before the market collapsed in 1998.

Likewise, foreign portfolio investors, who accounted for more than 50 percent of stock transactions before the crisis, have not come back, though many companies with bright business prospects are now ripe for the picking, with their share prices languishing at rock-bottom levels. Foreign investors today account for a mere 10 percent of transactions.

The stock market has indeed been picking up since early this year, backed up by strengthening macroeconomics and political stability, rupiah appreciation, a steadily declining interest rate and positive regional sentiment.

Further buoyed by several confidence-building measures such as the successful sale of Bank Central Asia, the Paris Club rescheduling of government debts, a higher pace of asset sales and firmer action against recalcitrant debtors, the JSX Composite Index, the benchmark price indicator, has risen to 455 now from below 350 late last year.

Individual investors in mutual funds that invest in stocks, bonds and other money market securities also increased impressively from 51,720 with total investments of Rp 8 trillion (US$888 million) last December to 75,430 with Rp 24.5 trillion now as deposit interest rates have declined steadily.

These encouraging developments have nevertheless failed to significantly restore confidence in the capital market.

Herwidayatmo cited the still fragile economic condition, the extreme lack of good corporate governance and the disappointment with the way small investors are treated by securities and listed companies as the main reasons.

But there is another factor, we think, that is no less influential, if not more important: the lack of consistency in reform implementation and law enforcement, as reflected in the wild volatility in the pace of the economic recovery process.

Just look at how bumpy has been the economic-growth road map. In terms of gross domestic product, the economy contracted by almost 14 percent in 1998, was flat in 1999, expanded by 4.8 percent in 2000, but grew only 3.3 percent in 2001 and is estimated to expand by another 4 percent this year.

The market expected the economy to grow steadily, albeit at a relatively low rate, as the nation and the government gained more experience and learned more in the transition from an authoritarian rule to a democratic one, from a centralized government to a decentralized power system.

But what has so far occurred is a process of one step forward being followed by two steps back, one progress nullified by new mistakes.

This stop-and-go development is also reflected in the market sentiment.

For example, the stock market recovery in the first seven months of this year still paled in comparison to the bullish market sentiment that took place even as early as the transition administration of B.J. Habibie in May 1998 to October 1999 when the JSX Composite Index rose above 600.

The market remained buoyant during the early period of Abdurrahman Wahid's government but almost collapsed during the turbulent, confusing last six months of his less than two years of rule.

The stock market capitalization, which is currently around Rp 287 trillion (US$31.8 billion at the prevailing rate of Rp 9,000), is way below Rp 452 trillion ($63.6 billion at the prevailing rate of Rp 7,100) in 1999.

True, as Herwidayatmo said, listed companies should improve their governance practices to attract investors.

But these developments show how important policy consistency and predictability are for investors. The market does not expect miracles, nor dramatic progress, in view of the uphill challenges faced by the government in managing the economy through the turbulent period of democratization and regional autonomy.

What investors and other economic players want to see is steady, if small, progress, not a zigzag, bumpy track that makes it almost impossible to reasonably calculate business risks.