Shallow Financial Market Threatens Indonesia's Growth


Indonesia stands to lose $600 billion from its economy and, with it, its aspired spot among G7 countries by 2030 with current capacity of financial system, warns a study from New-York based consulting firm Oliver Wyman and the Mandiri Institute, an economic think tank of the country's largest lender, Bank Mandiri.

The report, titled "Financial Deepening in Indonesia: Funding Infrastructure Development, Catalyzing Economic Growth," suggests the country must develop initiatives to boost numbers of investors, bond issuers, listed companies and financial instruments in order create a pool of funds that will support economic growth.

"To achieve its GDP growth aspiration of $4.1 trillion by 2030, we estimate that the size of total financial capital base [the sum of bonds and equity market] will need to grow by six to eight times and reach $4 trillion to $6 trillion by 2030," the report said.

That equals to an annual growth rate of 13 percent to 16 percent over the next 16 years, compared to just 6 percent in the previous five years.

Indonesia, the study said, cannot rely on its banking system — whose loan-to-deposit ratio now reaches 89 percent — for financing as demands from large companies have already stretched its limited capacity due to a low domestic savings rate.

The study suggests, among its 40 initiative recommendations, that the government needs to exempt taxes to encourage Indonesians to invest in long term financial instruments, reduce regulatory and taxation burdens for listed and bond issuing companies, impose tax amnesty schemes to bring back more than estimated $200 billion of assets stored overseas and create a debt paper market for small-medium enterprises.

The report, drawing from experiences of other emerging markets, wrote people will engage more frequently in financial securities and commodities trading when everyone in the country is familiar with the financial system. In turn, the financial market can support economic growth by routing capital to productive investments, offering opportunities to gain private wealth and increase the economy stability by diversifying sources of financing.

“If Indonesia wishes to become a G7 economy by 2030, it needs to sustain the growth in capital markets and to do this, it urgently needs to embark on a series of reform measures aimed at financial deepening,” said Bernhard Kotanko, Oliver Wyman head of Asia Pacific, in a statement.

Currently, Indonesia's equity market only registers 450,000 investors out of its 250 million population. Indonesia lists 518 companies at the Indonesia Stock Exchange, despite having between 2,500 to 3,000 companies with more than $10 million in annual turnover.

Indonesia's equity market to GDP ratio stood at 49 percent, compared to over 100 percent in Thailand and Malaysia. Indonesia's bonds market to GDP ratio was at 13 percent.

Source: The Jakarta Globe

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I'm Burhan Turnip, an investment junkie based in Jakarta, Indonesia. This is my take on writing Indonesia investor blog. Let's break down investing topics in Indonesia. Get in touch with me via burhanturnip [at] gmail [dot] com

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