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Amid declining interest rates and increased optimism about
the economy, the prospect of raising funds on the financial markets
seems rosier. This leads us to one important question: could the role
of financial market financing surpass bank lending in supporting
economic growth, hence reducing unemployment and poverty?
Amid optimism and global liquidity in the international capital
markets, the composite index of stocks listed on the Jakarta Stock
Exchange has surged by over 40 percent this year to the 1,700 level,
making it among the best performing stock indexes in the region.
This is juxtaposed with an increase in the value of the money raised by
firms on the financial markets. Funds raised from both initial public
offerings (IPOs) and rights issues on the capital market this year may
come close to Rp 15 trillion, over one-and-a-half times that raised in
the year before.
A similar picture can be seen in the bond markets. As interest rates
decline and bond prices surge, bond issues (net of bonds maturing),
will probably come close to around Rp 6 trillion this year, or over
double the amount of net issues last year.
However, the value of financing from the equity and bond markets
combined has some way to go before matching the value of the loans
disbursed by banks in the form of working capital and investment
credits (around Rp 40 trillion in the first nine months of this year).
But as stock prices surge and bank lending rates remain high, financial
market financing has become of increasing importance.
In spite of that, just how enthusiastic should one be about this trend?
How can financial market financing support economic growth, which is
the means of achieving reductions in unemployment and poverty? Perhaps
we can shed some light on this question by looking at the decomposition
of financial market issues by industry.
Apparently, the utilization of the financial markets as a source of
financing has not been broad based across all sectors. Roughly three
quarters of the amount issued over the past two years belonged to firms
in the tertiary or service sectors (most of the issues from the
tertiary sector were made by firms in the financial services industry,
as banks need funds to strengthen their capital base and consumer
finance companies need to expand their activities).
Meanwhile, the participation of the primary (agriculture and mining)
and secondary (manufacturing) sectors has been rather limited. Over the
last couple of years, the primary sector contributed less than 15
percent to financial market issuances, whereas the secondary sector
contributed a little under 10 percent.
Unfortunately, it is investments in the primary and secondary sectors
that have been contributing most in terms of job creation per money
spent. The available data shows that to generate the same amount of
employment, the tertiary sector this year needed on average four times
the amount of investment as was required by the secondary sector.
So the dominance of the tertiary sector in equity and bond market
issuances seems to suggest that the financial markets are not
contributing very substantially towards unemployment and poverty
reduction!
Although plenty of reasons can be adduced to explain the low
participation of the secondary sector in financial market financing, it
seems that the main problem lies at the industry level. A glance at
bank credit data also shows minimal exposure to the secondary sector.
Since 2000, outstanding loans to the tertiary sector have surged but
credit to the secondary sector grew sluggishly. From an position of
equality in 2000, the former is now more than double the latter!
Of course, there is no evidence to suggest that the secondary sector
has had no other financing sources apart from the banks and financial
markets. But what is clear is that output growth from the secondary
sector has slowed significantly since the 1997 financial crisis.
While output growth from the tertiary sector has recovered to, if not
exceeded, the six percent pre-crisis average, pre-crisis real output
growth from the secondary sector has not. Over the last six years, the
figure averaged a mediocre five percent, well below the 11 percent
pre-crisis average. Many have attributed these trends to issues
affecting manufacturing industry, such as a lack of competitiveness,
low labor productivity, etc.
In many advanced economies, the contribution of the financial markets
toward economic growth and job creation surpasses that of the banks.
Indonesia can, and may eventually, reach that stage. How long it takes
us to get there will depend on how quickly the problems at the micro
level are dealt with.
Disclaimer:
This article should not be taken as a recommendation made by P.T.
Bahana Securities to enter into any investment agreement.
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