1. Bond Market Development in Indonesia Presented at: ADBI Symposium on “Designing a Financial Market Structure in Post-Crisis Asia” 10 May 2001, Halekuni Hotel - Hawaii

2. Numbers of Stocks & Bonds Issuers 1990 - 2000

3. Values of Stocks & Bonds Issued 1990 - 2000 (Rp. Trillion)

4. What factors caused the slow development of bond market in Indonesia..?

5. 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

6. HISTORICAL PERSPECTIVE  Indonesia financial history was dominated by state banks and SOEs  It created an unfavorable climate for the development of securities market SOURCES OF FINANCING OF INDONESIAN CORPORATION (Trillion Rupiah)

7. 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 SOURCES OF FINANCING OF INDONESIAN CORPORATION (Trillion Rupiah)

8. Numbers of Stocks & Bonds Issuers 1997 - 2000

9. OBSTACLES  Costs & Burdens of Bond Issuance  Legal Rights and Certainty  The Link between Banks and Commerce  Demands for bonds

10. 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

11. 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

12.  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

13. 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

14. 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

15. 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

16. Copyright, 2000 © FRS & Associates, Inc. Herwidayatmo Chairman of the Indonesian Capital Market Supervisory Agency - BAPEPAM