There's a pot of gold at end of Indonesian rainbow: World Bank

http://www.thejakartapost.com/detailheadlines.asp?fileid=20070112.@02&irec=1
January 12, 2007

Urip Hudiono, The Jakarta Post, Jakarta

With the country's banks still facing problems in channeling their excess liquidity into more productive loans, Indonesia should consider financing its development from a "pot of gold" that it is currently sitting on: pension and insurance funds, and the capital markets.

According to a World Bank report launched Thursday, Indonesia has the potential to tap into and mobilize an additional Rp 374.5 trillion (US$41.1 billion) from financial resources outside the banking sector so as to achieve more sustainable development and economic growth.

Apart from providing a pool of funds that matches the needs of long-term development, the report said that non-bank resources could help improve access to and reduce the cost of financial services, as well as improve the stability of the financial sector.

"At 14 percent of GDP, these (non-bank resources) are significant," World Bank lead financial economist P.S. Srinivas said during the launching of the report.

"What is needed now is for these (non-bank resources) to be better managed -- a broad agenda of reforms to broaden the debate beyond banks and bring non-bank financial institution issues to center-stage."

Indonesia needs additional infrastructure investment of $5 billion from long-term resources each year to sustain the government's 6 percent annual mid-term economic growth target.

The country's banks, however, have a limited capacity to provide such long-term capital due to their practice of obtaining most of their funds from short-term deposits. Moreover, they have had problems expanding lending in the past due to high inflation and interest rates, which only subsided late last year.

The report also states that one of the reasons why Indonesia was severely affected by the 1997 Asian financial crisis was because of its overreliance on financing from a collapsing banking sector, without a "spare tire" in the form of soundly developed non-bank financial resources.

There is no doubt that Indonesia's non-bank financial resources are underdeveloped. Pension funds, for example, continue to invest 40 percent of their funds (Rp 42 trillion) in short-term deposits and mutual funds, while insurance firms invest a third (Rp 23 trillion) of their funds in such instruments.

The World Bank report, therefore, recommended a number of measures that the government could take so as to improve Indonesia's capital markets, and pension fund and insurance sectors -- most importantly, the effective implementation and enforcement of existing regulatory frameworks.

"Tax treatment also plays a key role. Rationalize taxation across all non-bank financial sectors to encourage their development," the report said, while further recommending that the country's Capital Market and Financial Institutions Supervisory Agency (Bapepam-LK) be made independent as soon as possible.

Consumer education and improving the skills and capacity of market participants are also crucial, the report said. As things stand, many Indonesians do not grasp the benefits of insurance, and pension and mutual funds, while very few companies seek to raise capital from the stock or bond markets.

The World Bank report is based on data from 2005.

Bapepam-LK's latest figures on non-bank financial institutions show that the country has 157 insurance companies with total assets of Rp 141 trillion, 301 pension funds with total assets of Rp 66.9 trillion, 216 finance companies with total assets of Rp 97.5 trillion and 53 venture capital firms with 15,357 clients and total assets of Rp 2.3 trillion.