Investor trust destroyed

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.