Savings-investment gap needs to be reduced: Emil

JAKARTA (JP): Former cabinet minister Emil Salim suggested yesterday that the government improve Indonesia's investment climate by attaining clean governance and creating savings- mobilization instruments to reduce the savings-investment gap.

Speaking at a seminar entitled "Asia Pacific Exchanges in the Borderless World," Emil quoted a World Bank report which estimates Indonesia's annual gross investment to be about 30 percent of the country's gross domestic product (GDP), while putting gross savings at 27.3 percent of GDP, leaving a savings- investment gap of 2.7 percent of GDP.

He said the country's savings-investment gaps have been covered up by significant capital inflow, either through official development assistance or direct private investment.

"Official development assistance, however, is bound to decline because Indonesia is gradually moving to the upper class of middle income countries," Emil said. "And direct private investment is facing fiercer competition from new emerging markets, such as China, India, Vietnam and Cambodia."

Indonesia has revised its investment target for the current five year development plan period, which will end in March 1999, to Rp 815 trillion (US$358 billion) from the original target of Rp 660 trillion, to attain economic growth averaging 7.1 percent per annum.

To succeed amid fierce competition for foreign investment, Emil said, Indonesia must strive to enhance its domestic investment climate by forcefully adopting clean governance.

"Indonesia has now come to the point where irregularities, corruption, bribes and similar traits are becoming the major factor hampering its competitive position," he told the seminar, which was organized by the Jakarta Stock Exchange (JSX) and attended by more than 500 local and foreign executives.

Emil served as a cabinet minister from 1971 until 1988. He was state minister of administrative reform and vice chairman of the national development planning board from 1971 to 1973, transportation minister from 1973 to 1978, state minister for development and environmental management from 1978 to 1983 and state minister of population and environment from 1983 to 1988.

Emil suggested yesterday that the government consolidate and create as many instruments as possible for mobilizing domestic savings.

"In this context, the government, most significantly, needs to consolidate and revitalize the Indonesian capital markets," Emil said.

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

Emil said that the Indonesian capital markets are suffering from serious weaknesses, such as low liquidity and low market capitalization, compared with other exchanges in the region.

The number of domestic investors is only about 200,000, he said, while Malaysia, Thailand, India and China already have millions of domestic investors.

With such a low domestic participation, the capital markets essentially float on foreign investors, which account for up to 70 percent of average trading transaction value in Indonesia, he added.

"It is not an Indonesian capital market if it is dominated by foreign investors," Emil said. "The time is ripe now to move forcefully in the development of a viable Indonesian capital market."

Following the passing of the capital market bill into law by the House of Representatives on Monday, Emil said, the basic legal framework is already in place.

He said that the automation of trading on the JSX, which was launched by President Soeharto yesterday, represented the fulfillment of an important prerequisite for strong JSX growth.

Emil also called on the central bank, the finance ministry and the capital market supervisory agency to strengthen their cooperative efforts to boost equity investment, saying that the central bank's interest rate policies have a significant effect on the volume of transactions on the capital markets.

State enterprises can also boost local capital markets by selling their shares on the domestic markets, Emil said, even though the limitations of the local markets' liquidity might make meeting the needs of state enterprises difficult.

"However, by selling (the state companies') shares abroad, it (the government) does not strengthen Indonesia's domestic economic capacity. And it also leaves the second class enterprises to operate on the domestic capital market, while the strong and the bold are going international," Emil added. (rid)