MANILA, PHILIPPINES - The Asian Development Bank (ADB) is extending a $300 million loan to Indonesia to help increase investor confidence, expand the availability of nonbank financing, boost demand for capital market products, and grow Islamic-compliant insurance products in the fast-expanding economy.
"As a rapidly growing middle income country, Indonesia needs to increasingly tap domestic savings in order to mobilize spending on critical investments such as infrastructure and social services," said Stephen R. Schuster, Senior Financial Sector Specialist in ADB's Southeast Asia Department. "The success of the government's ambitious national development plans depends on promoting more investor participation and inclusive financial services."
The loan for the Financial Market Development and Integration Program will further strengthen regulatory oversight, deepen capital markets and help unlock long-term savings. It continues the ADB's two-decade long partnership with the Government of Indonesia, which has led to the government making significant progress in promoting prudential regulation and development of domestic financial markets in Indonesia.
More recently, program policy reforms have promoted deeper and more liquid financial markets, strengthened sector surveillance and governance, and supported the merger of the country's stock exchanges and the creation of an independent bond pricing agency. Anti-money laundering protocols have been put in place and investor protections established.
The impact of government reforms supported by ADB has been substantial. The total amount traded in benchmark government securities increased 25 fold between 2007 and 2011, while the government's prudent fiscal and debt management resulted in Indonesia gaining two investment grade ratings in late-2011 and early-2012. There has been a surge in corporate bond issuance between 2009 and 2011, with the upward trend continuing in 2012. Pension and insurance assets have also grown sharply.
However, more reforms are needed to further expand and increase participation in the capital markets and other parts of the nonbank financial sector, and to unlock long-term savings. This program targets an increase in nonbank finance subsector assets to 65% of GDP by 2014 from 60% in 2010 and aims to increase the level of domestic ownership of tradable government securities to 73% by 2012 from 70% in 2010.