Jakarta. Indonesia can unlock $70 billion in additional funding annually from its capital market, should the government provide much-needed financial resources to develop ambitious infrastructure projects, according to a recent report by consulting firm McKinsey & Company.
The archipelago needs an estimated Rp 4,900 trillion ($368 billion) to develop 225 national strategic projects proposed by President Joko "Jokowi" Widodo, including power stations, roads, railways, airports, dams and ports.
However, the state budget has only allocated Rp 1,500 trillion to that end, or less than a third of the necessary funding.
The country's capital market – which raised Rp 607 trillion from new stock issuances and bonds last year – can provide opportunities to narrow the infrastructure funding gap, Joydeep Sengupta, leader of Asia-Pacific banking practices at McKinsey, told the Jakarta Globe in a recent interview.
"Our research suggests that policy makers in emerging economies can drive sustainable long-term capital market growth through six foundational policies focusing on increasing issuer demand, broadening supply bases, establishing market benchmark securities, improving intermediation and greater internationalization," Sengupta said.
He referred to a conclusion in McKinsey's report, titled "Deepening Capital Markets in Emerging Economies," which estimates that a total $800 billion in annual capital markets is needed to fund emerging opportunities in the region.
The report, published last week, analyzed key performance indicators for Indonesia and other Asian economies and then formulated inputs for policymakers to deepen capital markets.
"Issuers in Indonesia lack options to diversify their funding," he said.
According to Sengupta, there is an absence of a long-term corporate bond market in Indonesia. Issuers also face a volatile and higher cost of capital for debt securities compared to other economies in Asia.
"Investors suffer from higher market impact costs due to a low liquidity in equity and debt markets, and relatively higher taxes, resulting in lower returns," he said.
There are few so-called "early wins" that help build momentum, conviction and resolve among stakeholders in the country, whose support is required to deepen the capital market, Sengupta said.
He said the country can follow proven methods that have worked in other markets; for instance, selling state-owned enterprises' shares to the public can catalyze broader equity development.
Establishing mortgage corporations can also encourage development of securitization markets, which in turn can broaden debt securities. Sengupta also suggested the creation of an institution to support infrastructure companies with capital market financing.
Indonesia is already taking steps in that direction, following efforts by the Ministry of Finance, Financial Services Authority (OJK) and Indonesia's Central Securities Depository (KSEI).
The government is planning to raise Rp 21 trillion from initial public offerings by state-owned enterprises this year, including subsidiaries of state construction firms Wijaya Karya and Pembangunan Perumahan, and port operator Pelabuhan Indonesia I.
It also established the state-controlled investment firm Sarana Multi Infrastruktur to facilitate lending to national infrastructure projects.
Capital market agencies also recorded some success in increasing the number of investors and listed companies, Sengupta said. As of Dec. 31, around 903,000 investors were recorded, compared to 433,607 a year earlier. Most of those, however, are concentrated exclusively in Java and Sumatra.
The number of listed companies in the country also increased to 537 last year after 16 IPOs.
"We believe that setting up empowered capital market corporations that focus on long-term gains, invest in talent, engage a broad group of stakeholders and that unlock growth through smart actions will help accelerate deepening capital markets," Sengupta said.
The full report by McKinsey can be found here.