Urip Hudiono, Jakarta – Although the chances of another crisis crippling Indonesia's economy may be slimmer now due to the improvements made to the banking sector and monetary policy, caution was still needed as regards vulnerabilities in the financial markets.
Among the problems were the limited amount of investment products available in Indonesia's financial markets, as compared to huge global excess liquidity, which increased the potential for market shocks, Bank Indonesia Senior Deputy Governor Miranda S. Goeltom said.
"If the demand for investment products far outstrips the supply, what happens is that prices rise sharply," Miranda said Thursday during a seminar on Indonesia's economy 10 years after the Asian financial crisis. The seminar was organized by Tempo magazine.
Miranda said that the price-to-earnings ratio (PER) for Indonesian shares had risen to some 20 points, which was already enough to cause concern, although still much lower than China's 40-point level.
An excessively high PER meant that investors were paying too much for shares compared to the earnings potential of the company, making them overvalued, which in turn would lead to a price correction. Sudden corrections could shock the market and infect the entire economy.
Analysts have also been warning of the possibility of a stock-market bubble in Indonesia, which could be abruptly burst by large-scale capital withdrawals by foreign investors.
Miranda said that today's excess liquidity in the global markets was driving fund managers to be more creative in developing various higher-risk investment schemes in their continuous search for higher yields. This added complexity to the market, including Indonesia's, which was still undergoing a deepening process.
It could also affect the commodities futures, Miranda said, thereby creating vulnerabilities for Indonesia's economy, which was highly dependent on commodities exports.
Given this situation, the central bank would continue to work closely with market regulators and expand its gathering of market information so as to detect any signs of a crisis at an early stage, and take prompt action to ward it off.
"I think it is impossible for Indonesia to simply close up its financial markets to avoid a crisis. What must be done now is to make capital flows more detectable," Miranda said.
Former banker Robby Djohan from the University of Indonesia's graduate studies program, said Indonesia must strengthen its economic fundamentals by developing its domestic markets if it wanted to truly free itself from the persistent danger of economic crisis.
"There must be greater public participation in the economy. Indonesia must build on its own 'social capital' of a large domestic market and a more qualified population by improving education," he said. "If not, then our economy will forever be like a yo-yo, bouncing from one crisis to another."