Measures needed to boost equity investment

Measures needed to boost equity investment

JAKARTA (JP): A survey conducted by the Association of
Indonesian Securities Companies reveals that a number of measures
are needed to make equity investment more attractive than fixed-
income investment.

In a report on the results of a survey, the association stated
that Indonesia's high interest rate level, now standing among the
highest in the Asia-Pacific region, is partly responsible for the
slow movement of the Jakarta Stock Exchange's (JSX) stock index
during the last five years. The JSX's composite index stood at
493.24 last Friday, compared with 406.49 at the end of 1989.

Indonesia's interest rates during the 1989 to 1994 period
averaged at 20.7 percent per annum, compared with 19.7 percent in
the Philippines, 16.3 percent in India, 12.8 percent in Thailand,
8.4 percent in Malaysia, 8 percent in Hong Kong and 6.4 percent
in Singapore.

In Indonesia, the report stated, the returns from equity
investment within the 1989 to 1994 period was equal with 0.15
percent of bond and fixed-income deposit investment.

"It will be difficult to convince domestic investors that
within the five year period, they only brought a total of 16
percent returns in equity investment, while they could get up to
100 percent in no-risk time deposits," the report said.

According to the report, as the stock composite index and
interest rates move inversely, it is necessary to keep interest
rates low. Keeping interest rates low is fundamental for a
sustainable bullish period of any stock exchange, which, in turn,
would attract domestic investors to enter equity investment.

With only 150,000 domestic investors or 0.8 percent of
Indonesia's total population, the country's stock exchanges still
lag behind those at other emerging markets.

Malaysia, for instance, has some four million domestic
investors; India records 40 million domestic investors; and
China, whose exchanges are relatively younger than Indonesia's,
books 11 million investors; while almost 50 percent of
Singapore's populations are recorded as stock investors.

Transactions

In terms of stock transactions, domestic investors control
only less than 30 percent of overall transactions, while the rest
are handled by foreign investors. The trend shows that the share
of domestic investors is very limited.

"It's a fundamental problem for Indonesia's stock exchanges,"
the report stated.

Indonesia currently has two stock markets, the JSX in Jakarta
and the Surabaya Stock Exchange (SSE) in East Java.

The survey, which was conducted last July, involved 53 local
securities firms, or 31 percent of total securities companies in
the country. The results of the survey were presented at a
gathering of securities firms, the managements of both local
stock markets and the Capital Market Supervisory Agency (Bapepam)
at Niaga Tower last week.

The report on the results of the survey suggested that to
stimulate domestic investors, the government needs to consider
giving discount prices to domestic investors when any state
company has an initial public offering at local markets.

The report indicated that giving such discount prices will be
the most effective way to increase the number of domestic
investors entering stock markets.

When Singapore Telecom had initial share offering, for
instance, it gave a discount price to Singapore's domestic
investors. As a result, the number of Singapore's domestic
investors increased dramatically from 300,000 to 1.4 million
overnight.

"Besides, such discount pricing can serve an effective tool to
materialize one of a stock exchanges' missions, that is carrying
out income distribution," the report said.

Under Indonesian regulations, any company which conducts cross
listings at foreign and domestic markets are not allowed to give
discount prices.

Review

However, Bapepam's chairman Bacelius Ruru promised last week
to review rulings which prohibit dual-listed companies to
discount prices.

The report also suggested that to stimulate the domestic
market, the government needs to reactivate banks as institutional
investors on stock markets, give pension funds more room to
invest their money in equity, legalize margin trading and open-
ended mutual funds.

The report said banks contributed significantly to the
emergence of the JSX at the end of the 1980s, before they were
prohibited from investing in stocks in 1991, under the February
1991 deregulatory measures.

In addition to banks, the country's pension funds are also
very potential institutional investors. They are projected to
collect a total fund of Rp 50 trillion (US$22 billion) within the
next five years.

"If just 10 percent of the funds are invested in stocks, it
will give a substantial contribution to the performance of
domestic investors," the report read, adding that currently total
free-floating shares at the JSX are equal with Rp 25 trillion or
20 percent of its total market capitalization. (rid)