Study on the

The Indonesian Securities Market

1. 
   Stock Market
   

The Jakarta Stock Market Exchange (JSE) was reopened in 1977 as part of a capital market supervisory agency (Bapepan) under the Ministry of Finance. The JSE was separated from the Bapepan and was privatized on December 4,1991. The Surabaya Stock Exchange (SSE) was established on March 30,1989. The Bapepan has a simplified listing procedure and a trading system in the Indonesian stock exchange. The Jakarta Stock Exchange introduced a centralized settlement system for all listed securities in June 1994.

The Indonesian Stock market has expanded rapidly in recent years due to the development of the market infrastructure, expansion of domestic and foreign investor base and improvement in the regulation and supervision in the securities market. However, the Indonesian stock market is still relatively underdeveloped compared to that of the neighboring countries as stated in Table 6. To achieve sound and rapid development, the Indonesian stock market must promote transparency and fairness in the market, such as, prohibition of insider trading.

There is favorable prospect in the Indonesian stock market since the institutional investors are rapidly expanding and many companies are willing to shift their funding from bank credit to self-financing, such as, issuing stocks and bonds.

2. 
   Bond Market
   

The Indonesian bond market was in its infancy prior to 1984. There were no government bonds in Indonesia as the Indonesian government had pursued a balanced budget and had offset the deficit through the foreign official assistance program.

The capability of the government to control domestic interest rate was weakened after the government relaxed controls on bank credit and interest rates because the foreign capital movement became interest-rate sensitive. The financial authorities had strong incentive to foster the money market to sterilize foreign capital inflow. Bank Indonesia issued the SBI (Sertificat Bank Indonesia), its certificate, in order to sterilize the effects of foreign capital inflow. The SBI is the most important money market instrument in Indonesia. The private sector commercial paper (SBPU-Surat Berharga Pasar Uang) was introduced in 1985. It also proved as an ineffective instrument. But the money market of Indonesia did not develop enough to meet the governmental monetary objectives because the Indonesian money market was very shallow and narrow. The authorities had no choice but to use a non-market mechanism. Professor Mr. Sumalin, the Minister of Development Planning and Acting Minister of Finance, instructed a number of large state-owned companies to convert Rp900billion of their deposit, mainly in state-owned banks, into SBI in July 1989. The second ‘Sumalin shock’, was introduced in February 1991 when Mr. Sumalin became the Minister of Finance. He implemented a withdrawal of Rp7 to Rp 8trillion(US$ 3.64billion to US$ 4billion at the time) from the monetary base. The withdrawal amount was nearly half the stock of M1. The financial authorities restored their autonomy of the monetary policy through high cost expenses.

Many private non-financial companies have tried to raise funds by issuing bond and commercial paper. To meet the monetary market situation, PT Pefindo(Pemeringkat Ef Indonesia), a private rating company, was established in 1995. The size and participants of the money market have been increasing in recent years. The secondary market for bonds is still inactive because pension funds and insurance companies have held the issued bonds until the maturity date.

The market is expected to be more active in the near future as many large state and private companies try to diversify the funding source from banks to various financial instruments

3. 
   Institutional Investors
   

The necessary precondition for capital market development is the growth of institutional investors as mutual funds, insurance companies and pension funds to channel individual saving into capital market. The Indonesian institutional investors are still in its initial development stage. The Bapepan permitted institutional investors to invest a maximum of 85% of net assets in the stock market. Though pension funds developed rapidly, they invested 85% of their assets in bank deposit. The investment of institutional investors is not at a satisfactory level yet. The high real returns and safety is required in order to induce the institutional investors to invest their assets into capital market.