W

hile Indonesia has become one of the sexiest investment destinations in the emerging economies, one of the backbones of growth drivers '€” the capital market '€” is still creeping.

Southeast Asia recorded a strong economic growth over the last two decades with an annual average growth of 5.7 percent from 1990 to 2014 and the strong economic growth in the region was accompanied by improved business confidence.

In February 2015, the average business confidence index of Southeast Asian countries was 69 and Indonesia recorded 105, which was among the top in the world while the average of the developing countries was 76 (Note: China (115), Germany (106.7), Malaysia (86), Thailand (49) and the Philippines (34), France (76), US (52), Japan (12), Korea (74), India (57), and other developing countries in LAC, Brazil (46) and Peru (54)).

In addition, Japan, the largest investor in Southeast Asia, has placed Indonesia among the top three investment destinations for more than a decade, and a number of investment banks have rated Indonesia with BBB since 2012.

Strategic portfolio investments usually follow long-term investment behavior.

So why is the capital market in Indonesia still underdeveloped?

There are three indications that Indonesia'€™s capital market is still underdeveloped. The first indication is that the number of publicly listed firms in Indonesia in 2014 was still relatively low, totaling only 506 as of 2014 compared with that in its peer countries such as in China (2,613), Singapore (775), Malaysia (905) and Thailand (613).

The second is that in terms of the total value of stocks traded, Indonesia recorded the second-lowest figure of countries in the region, according to the World Development Indicators, 2015.

The third indication is that firms in Indonesia still do not rely on equity or stocks as their sources of investment. Based on the Enterprise Survey, about 86 percent of investment was financed by internal revenues. Only 3 percent of investment is financed by equity and 6 percent by banks.

But, then, what are the root causes of the underdeveloped capital market in Indonesia?

First, the limited number of instruments (stocks, bonds, rights, warrants, futures, mutual funds) and derivative products.

Domestic companies and local retail investors are familiar mostly with traditional banking products and less exposed to capital market derivative products.

Second, the low interests of firms to '€œgo public'€ as a result of problems related to the tax system. When firms '€œgo public'€, they have to disclose their financial statements, including tax payment statements, while many companies still prefer to enjoy '€œinvisible tax gains'€ from the inefficient tax system in Indonesia.

Many businesses have cited tax administration and the tax system as one of the biggest barriers to doing business in Indonesia.

Individual investors also prefer to invest in fixed assets such as property and land as there are no significant progressive taxes on property and land in Indonesia and in deposits at banks because of the relatively high interest rates offered by banks.

Banks in Indonesia recorded an average net interest margin of 5.3 percent from 2000 to 2014, which was the highest in Asia, compared with South Korea (1.7 percent), Malaysia (2.8 percent), the Philippines (4.1 percent) Thailand (4.4 percent) and Vietnam (3.4 percent) (International Financial Statistics, 2015).
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