Bond Market Development in

IndonesiaPresented at:

ADBI Symposium on“Designing a Financial Market Structure in

Post-Crisis Asia”10 May 2001, Halekuni Hotel - Hawaii

Numbers of Stocks & Bonds Issuers 1990 - 2000

132

347

23

91

0

50

100

150

200

250

300

350

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Numbers of Bonds Issuers Numbers of Stocks Issuers

Values of Stocks & Bonds Issued1990 - 2000 (Rp. Trillion)

226

290

50

100

150

200

250

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Values of Bonds Issued Values of Stocks Issued

132

347

23

91

0

50

100

150

200

250

300

350

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Numbers of Bonds Issuers Numbers of Stocks Issuers

226

290

50

100

150

200

250

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Values of Bonds Issued Values of Stocks Issued

What factors caused the slow development

of bond market in Indonesia ..?

Is Bond Market Development a New Topic in Indonesia ?

In 1994, an Indonesian Credit Rating Agency was founded

Following the founding of Indonesian CRA, Securities Commission required that all bond issues be rated by a domestic credit rating agency

In 1995, World Bank conducted a study on Asian Bond Market, including Indonesian Bond Market

In 1997: SSX undertook study regarding bond market

trading systems; Citibank prepared a report on settlement issues

of bond trading for Indonesian Clearing & Guarantee Corporation

HISTORICAL PERSPECTIVE Indonesia financial history was dominated by state

banks and SOEs It created an unfavorable climate for the development

of securities market

63.6

97.7113.6

123.7

148.3

188.9

234.6

293

61.5244.08

33.2221.8215.0211.1910.13.82

0

50

100

150

200

250

300

89 90 91 92 93 94 95 96

Bank Securities Market

SOURCES OF FINANCING OF INDONESIAN CORPORATION(Trillion Rupiah)

HISTORICAL PERSPECTIVE

The 1997 crisis had an effect on the future development of securities market

The economic difficulties have developed awareness of the dangers of over-reliance on short-term bank finance

378.1

89.62

545.4

94.84

277.3229.86

320.4

254.84

0

100

200

300

400

500

600

1997 1998 1999 2000

Bank Securities Market

SOURCES OF FINANCING OF INDONESIAN CORPORATION(Trillion Rupiah)

Numbers of Stocks & Bonds Issuers 1997 - 2000

70

306

70

309

76

321

91

347

0

50

100

150

200

250

300

350

400

450

1997 1998 1999 2000Numbers of Bonds Issuers Numbers of Stocks Issuers

OBSTACLES

Costs & Burdens of Bond Issuance

Legal Rights and Certainty The Link between Banks and

Commerce Demands for bonds

Cost & Burdens of Bond Issuance(Issuers’ Perspective)

Delay and cost of submitting a registration statements

Cost of underwriting and distributing the bonds

Cost of hiring a transfer agent Cost of hiring a trust agent to represent the

interest of bond holders Cost of contracting with a credit rating

agency Cost of listing the bonds on an exchange Incovenience of disclosure of corporate

activities and financial data to the public and competititor

LEGAL RIGHTS & CERTAINTY

Investors’ Perspectives

Bankruptcy Law Since 1905, rarely used by local

business practioners and was firstly amended in 1998

The commercial court was firstly introduced in August 98

The first case was registered in Sept. 1998

The contents of the new Law and early court decisions invite many criticisms

Judicial Independence Negative perception on

integrity of the court system Lack of experienced and well-

trained judges on commercial disputes

Unpredictable outcomes The “dependence” judges

LEGAL RIGHTS & CERTAINTY

Investors’ Perspectives

The Link between Banks and Commerce

No strict prohibition on cross-ownership of banks and commercial enterprises

The widely existence of financial services conglomeration

Risk of non-renewal short-term loan for transaction among affiliated considered as insignificant

DEMAND FOR BONDS: INSTITUTIONAL

INVESTORS The Laws governed institutional investors are

relatively new The link between banks and institutional investors Institutional investors learned unhappy

experience from the securities market during the crisis of 1997-1998

High interest rates and government guarantee on bank deposits created disadvantages for bond market

Relatively weak in marketing and distributing bonds

The impact of bank recapitalization program Lack of tax incentives for issuers and investors

CONCLUSION

Radical measures to change unfavorable climate for bond market development is needed:

adequate political will to confront established economic interests

harmonization in tax and banking policies, insurance, pension fund and securities regulation

promote private sectors initiative issued government guaranteed

corporate bonds

Copyright, 2000 © FRS & Associates, Inc.

HerwidayatmoChairman of the Indonesian Capital Market Supervisory Agency - BAPEPAM