No rest for RI capital market

No rest for RI capital market

By Sahala Sianipar

JAKARTA (JP): The Indonesian capital market performed well in
1996 due partly to the continued flow of overseas capital,
greater participation of domestic investors and strong earnings
posted by banks, consumers and manufacturing industries.

rates in 1996 and its active policy in keeping inflation low
contributed to the spectacular gain recorded by equity markets
both in developed and developing countries.

The U.S. market's strong achievement in 1996 spilled over to
emerging markets in Asia and Latin America. Most Southeast Asian
markets posted significant gains in 1996 except Thailand where
the market suffered from the government's inconsistent political
and economic policy.

Despite the July 27 riot last year, the Jakarta Stock Exchange
(JSX) managed to gain more than 20 percent in 1996. In the second
week of trading in 1997, the JSX Composite Index reached an all-
time high of 674.13.

A positive performance in 1996 is no reason for market
participants in Indonesia to be overconfident. There are several
fundamental issues that capital market participants should
address in 1997 which could hinder sustained growth of the market
including the low level of liquidity, market efficiency,
investors' level of confidence and capital flows to and from
Indonesia (i.e. the sustainability of overseas funds in the
market). These issues are part of the long-term agenda that tend
to be overshadowed by short-term issues in the market including
market rumors and the political situation.

The low level of liquidity is primarily due to the small
number of Indonesian investors in the equity market. The low
level of participation of domestic investors in the equity market
can be attributed to the low level of knowledge and the fact
investors are not interested in entering the market.

The level of liquidity also correlates to the level of
investor confidence in the market. Retail investors who have
sufficient disposable income are highly skeptical of the equity
market. They prefer time deposit and real assets over shares.
Domestic institutional investors also allocate a greater portion
of their portfolio in time deposits and real assets.

In addition, the central bank's position on interest rates
also affects market liquidity. The central bank has been under
pressure to reduce interest rates to stimulate higher economic
growth. Although lower rates will be welcomed by market players,
the high spread offered by the Indonesian market is a primary
reason for continued capital inflows.

The challenge for the central bank in 1997 will be to ensure
continued capital inflows through a prudent fiscal and monetary
policy. The Indonesian capital market will certainly benefit from
the government's consistent monetary policy and continuous dialog
between the government and market participants is necessary to
ensure the sustained growth of the Indonesian equity market.

Privatization should play a greater role in attracting local
investors. In 1996 there was one state-owned enterprise that
entered the market, Bank Negara Indonesia (BNI) 1946. The timing
of BNI's listing confused market players due to the government's
mixed signal.

A paper delivered during a JSX-sponsored conference in October
1995 by an official from DBS Securities Singapore, who underwrote
Singapore Telecom's shares, the success of the flotation was
primarily due to a well-planned campaign that included various
incentive schemes for retail investors (e.g. free and discounted
shares). In Malaysia, domestic investors receive priority for
shares in the primary market. In essence a well-planned and
executed privatization of state-owned enterprises is an effective
means to attract domestic investors to the equity market.

Indonesian companies have increasingly turned to the equity
market to raise capital. More importantly Indonesian companies
have the option to be listed overseas due to a higher level of
liquidity and greater access to the global capital. Given the
borderless nature of global capital, Indonesian companies are
exposed to a variety of financial instruments including fixed
income products, global depository receipts (GDR) and others such
as asset-backed securities (ABS).

In 1996 Indonesian companies were among active bond issuers in
the region. The entry of Indonesian companies into the overseas
bond market was not surprising. A high level of liquidity in the
secondary market, cheaper costs and lower coupon rates constitute
a few reasons for issuing bonds overseas.

The central bank's issuance of the Yankee Bonds in July 1996
should also have encouraged more firms to list in the United
States (e.g. Bank BNI 46's US$150 million Yankee Bonds in 1997).
Will companies' greater appetite for bonds reduce their interest
in the equity market?

Not necessarily. Raising capital through the equity market is
still profitable. The challenge in 1997 is for Indonesian market
officials to ensure sustained interest of the private sector to
tap into the domestic equity market. Conducive investment policy
for domestic institutional investors, reliable and efficient
trading infrastructure, competitive listing requirements and
consistent enforcement of rules and regulations are imperative to
increase players' confidence and participation in the market.

The accelerated process of globalization will also affect
companies' strategies in tapping global capital. The foreign
currency market is an example of the global market where
transactions occur around the clock across the globe. Equity and
bond markets have not yet reached the same volume of the foreign
exchange market.

An important factor in bridging investors worldwide is the
rapid development of information technology products. Due to the
constant update of computer and satellite communication,
information has become common property for market participants.
In fact investors have so much information they often don't know
what to do with it. The challenge for companies, including
Indonesians who wish to tap into global capital, is how they can
develop and disseminate the most effective information to
investors.

The efficient market theory (EMT) acknowledges the power of
information on the stock price of a given company. It is
imperative for companies to carefully design, develop and
implement their corporate messages to seize investors' attention
in today's increasingly competitive market.

The Indonesian equity market's performance in 1997 will depend
on both local and overseas interest and confidence. Market
officials will need to ensure an efficient, fair and transparent
market environment. At the same time companies will have to
improve the quality of their information to guarantee sustained
interest in the market.