Question

About Financial Market :

1. Explain the role of financial markets ?

2. Provide three real examples of Indonesian capital market participants and explain their roles ?

Answer 1

Firstly understand bthe financial market:

Money Market-: Market for short term loans for businesses and households. It includes inter bank lending too.

Capital Market- Market where securities such as shares and bonds are issued to raise medium to long term finance for businesses and government.

Foreign exchange market- Market where currencies are traded.

There are 6 major roles of financial market:

1. To facilitate saving by businesses and households: offers a secure place to store money and earn interest.

2. To lend to businesses and individuals: Financial markets provide an intermediary between savers and borrowers.

3.To allocate funds to productive uses:-Financial markets allocate capital to where the risk adjusted rate of return is highest.

4. To facilitate the final exchange of goods and services such as contactless payments systems foreign exchange etc.

5. To provide forward markets in currencies and Commodities: Forward markets allow agents to insure against price volatility.

6. To provide a market for equities: Allowing business to raise fresh equity to find their capital investment and expansion.

In 2012, the financial sector in Indonesia was around 100% of GDP. This was a much smaller comparison to other ASEAN countries.

Domestic credit-40% of GDP

Corporate bonds-13% of GDP

Stock market-50%of GDP

But now, its structure has changed a lot. The role of the equity market has risen at the cost of banking and the corporate bond market.

Some more development of NBFC sector too was the reason of change.

In equity market, foreign investors own around 43% of capitalisation. In government bond market offshore investors hold around 40% of outstanding amounts.

Today the market value of SOEs is a substantial 25% of Indonesia stock market capitalisation. They are among the most liquid stocks trafed and are part of LQ45(the 45 most traded stock in the exchange)

Largest SOE by market capitalisation is PT Telekomunikasi Indonesia. It has 72% market capitalisation.

Another bellwother stock is Bank Mandiri with 4.5% of market capitalisation and 2otger state owned bank are also among the largest in the country. These 3 banks share of 11% of market capitalisation.

The top 45 liquid traded stocks make up about 69% of market cap.

Since market capitalisation bonds started, trading in early 2000, market liquidity has picked up.

So in conclusion, Indonesia's financial sector esp; in capital market is at an early stage of development. There are two consequences. First it has a limited ability to fund economic growth and second, it is prone to global market volatility.

Market volatility limits the participation of the public to sophisticated individuals and corporations.