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.