The Next Leap for the Indonesian Economy: Deeper Capital Markets

The Next Leap for the Indonesian Economy: Deeper Capital Markets

By Mukul Raheja on 9:13 am February 5, 2014.

The presence of robust, deep, regulated and liquid capital markets is essential for any economy to function efficiently. For an emerging and growing economy like Indonesia it is especially crucial. Not only do functioning capital markets offer an alternative to bank borrowing for private businesses seeking financing, they also help the government get access to cheaper sources of funding to finance the national budget and infrastructure projects.

Considering the enormous existing infrastructure deficit in Indonesia, which acts as an impediment to economic growth, and the resulting anticipated infrastructure spending that will be required in the future, finding a means to finance large infrastructure projects will be a central concern for the government in the coming years. The vitality of developed and transparent capital markets in aiding the infrastructure creation and thus abetting economic growth cannot be overstated.

In addition to the benefits for government and private businesses, deeper yet well regulated capital markets also offer avenues for saving and investment to the common investor seeking returns higher than those from the conventional banking options. In emerging economies, inflation is a common problem, as is low returns on investment, which is like a hidden tax on the public.

To avoid the vicious cycle of low returns on savings leading to low domestic consumption, the existence of alternative investment options in the form of sound capital markets is a matter of necessity and not choice.

Capital markets in Indonesia have come a long way since the Asian Financial Crisis of 1998, making slow and steady progress. While prior to 1997 the Indonesian government did not issue bonds, the third quarter of 2013 saw Indonesia become the fastest-growing bond market in East Asia on a quarterly basis, with a growth rate of 3.9 percent, according to the ADB’s Asia Bond Monitor.

Although capital markets in Indonesia have made progress and are poised to grow further, there is still a long way to go. While Indonesia’s market capitalization of listed companies reached close to 50 percent of GDP in late 2013, Indonesia remains some way behind regional peers like Malaysia, for which the number was close to 150 percent.

The issues of enhanced transparency and better information availability also need to be addressed on a priority basis. Only when domestic companies are more forthcoming regarding their balance sheets, corporate structure and other necessary disclosures, will we really see more of them listing on the Indonesia Stock Exchange (IDX).

In terms of the number of companies listed on the stock exchange, IDX has about 489 companies, while the number for Thailand is 577 and India, the Asian leader, boasts of 5,267 companies. Unless Indonesian companies adopt better corporate governance structures and openness in information sharing, they will not be able to list and reap the benefits of obtaining financing at favorable rates.

Another concern that demands attention is Indonesia’s heavy dependence on foreign capital flows, more commonly known as “hot money,” and overseas investors, especially in the sovereign debt market. Currently, overseas investors hold about a third of the outstanding sovereign bonds. Moreover, foreign holding of the Indonesian local currency bonds stands at 31.2 percent as of September 2013, which is the highest in East Asia.

The extremely low level of domestic investor participation is a major concern that government agencies and the IDX need to tackle head-on. According to government figures, about 500,000 people, or just 0.2 percent of the total population, are listed as registered investors in Indonesian capital markets. Malaysia has between 5 and 6 million registered investors, about 20 percent of the total population. The high taxation rate on buying bonds, which is between 15 to 20 percent for local investors, is a key factor that discourages local investment.

The severity of over-dependence on foreign capital inflows and overseas investors and an inability to enthuse local investors is reflected in the setback that the government suffered in November last year. Against a target of selling $450 million worth of dollar-denominated bonds meant only for local investors, the government managed to raise only $190 million. The government attributed this failure to the fact that it was a new product for the Indonesian market and the complete absence of a secondary market in Indonesia.

Unless a robust domestic debt market is developed and the participation of local investors increases through financial education and awareness campaigns, the threat of hot money leaving the country during bad times will always be a problem for Indonesia.

Consequently, deeper, robust, regulated and liquid capital markets, with an emphasis on a sound domestic debt market and inclusivity through enhanced participation of domestic investors would prepare Indonesia to vie for quality foreign capital in the Asean Economic Community environment. It would also help Indonesia weather any global or extra regional financial turmoil, which could lead to the abrupt outflow of hot money.

Finally, an environment of balanced checks by the regulatory authority and of transparency and improved corporate governance on the part of Indonesian companies would make these companies more competitive regionally and enable them to raise capital at competitive rates through multiple options.

Mukul Raheja is a researcher at the consultancy firm Strategic Asia. He can be contacted at


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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