Indonesia: Strengthening Indonesia's Capital Market

Sovereign Project | 32507-032

Summary

The TA will address immediate and short-term capacity building needs and complement the change management assistance provided by Australian Agency for International Development. The TA will support development of a deeper and more resilient capital market and enhanced supervision with improved regulatory resources and capacity. Key areas of focus under the TA include support for: (i) curricula for training programs and standards for certification for professionals in capital market-related fields; (ii) strengthened capacity of Bapepam-LK; (iii) recommendations and implementation of key reforms and regulations in the financial sector; and (iv) technical advice for the development of new capital market products, strengthened market supervision, and regulatory capacity with ultimate aims to improve overall governance standards of capital markets and investor protection.

Latest Project Documents

Title Document Date
Strengthening Indonesia's Capital Market Dec 2009

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Project Name Strengthening Indonesia's Capital Market
Project Number 32507-032
Country Indonesia
Project Status Closed
Project Type / Modality of Assistance Technical Assistance
Source of Funding / Amount
TA 7466-INO: Strengthening Indonesia's Capital Market
Technical Assistance Special Fund US$ 1.50 million
Strategic Agendas Inclusive economic growth
Drivers of Change Governance and capacity development
Sector / Subsector Finance - Money and capital markets
Gender Equity and Mainstreaming
Description

The TA will address immediate and short-term capacity building needs and complement the change management assistance provided by Australian Agency for International Development. The TA will support development of a deeper and more resilient capital market and enhanced supervision with improved regulatory resources and capacity. Key areas of focus under the TA include support for: (i) curricula for training programs and standards for certification for professionals in capital market-related fields; (ii) strengthened capacity of Bapepam-LK; (iii) recommendations and implementation of key reforms and regulations in the financial sector; and (iv) technical advice for the development of new capital market products, strengthened market supervision, and regulatory capacity with ultimate aims to improve overall governance standards of capital markets and investor protection.

The TA will cost $1,900,000 equivalent, of which ADB will provide $1,500,000. The TA will be financed on a grant basis from the ADB Technical Assistance Special Fund (TASF other sources). The government will provide the remaining $400,000 equivalent by providing counterpart staff and other support facilities. Bapepam-LK will be the executing agency for the TA. It will provide office space, counterpart staff, and other services to the consultants. It will closely coordinate with other stakeholders involved in TA implementation. A capital markets capacity-building committee comprising representatives from Bapepam-LK will be established to provide guidance on the allocation and use of training-related funds under the TA. The TA is expected to commence in March 2010 and be completed by December 2011.

A combination of consulting firms and individual consultants will be engaged in accordance with ADBs Guidelines on the Use of Consultants (2007, as amended from time to time), based on requirements to be identified during CMDPC implementation and the follow-up policy measures under the post-program monitoring framework. The activities will not be undertaken simultaneously, rather their implementation will depend on the pace of reforms undertaken over the next 2 years. The TA proposes a degree of flexibility in the methodology of consultant engagement, either through a firm or individuals.

Project Rationale and Linkage to Country/Regional Strategy

Financial sector reforms are crucial to raising Indonesia's growth rate and enhancing the economy's resilience. Indonesia's capital markets are relatively smaller and the secondary markets less liquid than those of most other Southeast Asian economies. With equity market capitalization at 36% of gross domestic product (GDP) as of October 2009, Indonesia has the smallest market; Hong Kong, China has the largest, followed by Singapore, Republic of Korea, Malaysia, People's Republic of China, Philippines, and Thailand. Even for debt markets, based on total bonds outstanding against GDP in 2008, Indonesia's ratio of 13.6% places it among the smaller markets in the region.

The Indonesia country strategy and program for 2006-2009 identifies deepening of the financial sector to promote enhanced financial sector resilience as one of five key areas of ADB interventions. The ADB Capital Market Development Program Cluster (CMDPC) evolved from the government's medium term development plan (2004-2009) and supported the governments financial sector reform agenda in line with the country strategy and program, with a principal focus on development of capital markets. A policy reform program (1 January 2006 to October 2010), under the CMDPC, comprises two subprograms: subprogram 1 from January 2006 to September 2007 and subprogram 2 from October 2007 to August 2009. The government recognizes that the reform program will need to extend beyond the two subprograms. In line with this, a post-program partnership framework for follow-up policy actions for September 2009-June 2011 was developed in consultation with various agencies. The government and financial industry recognize the importance of this capacity-building initiative and discussions have been under way for some time among government agencies, industry associations, and local universities. The CMDPC aims to support these efforts and lend momentum via the TA, which will help meet immediate needs and allow for a systematic approach to medium- and longer-term efforts.

Impact Greater financial sector diversification and resilience.
Project Outcome
Description of Outcome Increased contribution of the capital market todomestic financing
Progress Toward Outcome

The performance targets for the outcome statement include the following; increase in market capitalization by 50% over the medium-term, by 2012, and doubling of the number of individual holders of market securities, equities, and government bonds, including through mutual

funds from 2007 2012.

Progress is considered satisfactory. Stock market capitalization has effectively doubled to 45% of GDP in 2012 from 20% in 2008 although stock market capitalization has only now returned levels posted before the global financial crisis. However, the size of the local currency bond market has remained stagnant at around 15% of GDP with new issuance outpaced by GDP growth. The number of individual investors has continued to grow but remains small at around 400,000. Tracking progress toward this goal is complicated by the tendency of Indonesian citizens to invest in their own market through Singapore to minimize taxation.

Implementation Progress
Description of Project Outputs

Sequenced implementation of the capital market master plan (2010 2014)

Benchmarking of regulatory standards to support enhanced regional cooperation initiated

Capacity in Bapepam-LK for investigation and enforcement strengthened.

Selected FSAP recommendations implemented

Investor protection fund established.

Human resource capacity development program for Bapepam-LK established

Capital market database and website established

Capital markets institute established.

Compliance framework for capital markets established.

New products (e.g. mortgage credit insurance) introduced including hedging instruments (allowing for deeper and more liquid capital markets)

Insurance industry consolidated

Status of Implementation Progress (Outputs, Activities, and Issues)

The TA was completed on 31 December 2014. SEPF is now working on the closure of all contracts and TA account. The TA remained active for an unusually long period of time. This situation arose out of delays associated with the transition, and migration of supervisory responsibilities to the newly created unified regulator, OJK, from the nonbank financial regulatory Bapepam-LK. This transition was accompanied by a large volume of purely administrative tasks for which TA did not represent an acceptable mode of support.

The TA is in an advanced state of implementation. As originally envisioned, the TA supported a wide range of training activities. In-house compliance training was provided to broker-dealers in conjunction with the government's requirement for the industry to develop and adhere to internal compliance guidelines. This effort was further back-stopped with an external workshop on compliance management in capital markets. The TA also provided significant and extented support to the government's efforts to introduce the international standard Global Master Repurchase Agreement to Indonesia. International and national law firms provided technical advice, drafting and translation. However, this project has been delayed due to conflicts with national regulations which, for example, appear to require such documentation be presented in Bahasa, and by the insistance of the regulator to restrict counter-parties from choosing their governing law. Finally, the TA supported attendance at a number of APEC workshops which focused on internal audit, derivatives, and structured products, among others.

More recently, the TA provided support to the Ministry of Finance''s Fiscal Policy Office as the successor executing agency for the TA. Funding was provided to support a continuing subscription to Oxford Economics, which bolstered the agency's macroeconomic forecasting. In addition, the TA provided support to a number of international conferences, hosted by Indonesia, that covered a range of economic issues such as avoiding the middle income trap.

Throughout the life of the TA, ADB has supported the placement of a long-term resident advisor to the Office of the Chairman (Bapepam-LK and its successor, OJK) who provided assistance with project management and capacity development. While the advisor focused broadly on achieving the goals of the Capital Market Master Plan, specific achievements include the investor area, straight-through processing, and the launch of the investor protection fund. Recently, a second long-term resident advisor was placed in OJK to act as a project manager in support of the IT master plan. Various additional TA projects have been organized around these two resident advisors.

Geographical Location
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design
During Project Implementation
Business Opportunities
Consulting Services

A combination of consulting firms and individual consultants will be engaged in accordance with the Guidelines on the Use of Consultants by Asian Development Bank and its Borrowers (2007, as amended from time to time), based on the requirements to be identified during the course of implementation of the Program and the follow-up policy measures under the post-program monitoring framework. Quality-based selection procedure will be followed for selecting the consulting firm. Short-listed firms will submit simplified technical proposals.

1. Assistance in regulatory issues arising from IOSCO self-assessment and FSAP+++ assessments

- International Expert in IOSCO Standards (1.5 person-months)

2. Support the implementation of the Capital Market Master Plan (2010-2014)

- International Experts ( to be decided based on CMMP developed by end 2009 - a maximum of 10 person-months for internatiional and 5 person-months for national experts is envisaged). A consulting firm is likely to be engaged.

3. Improving market surveillance and investor protection: Stock-taking of regulatory framework

- International Financial Sector Regulatory Expert (2 person-months)

- National Financial Sector Expert (2 person-months)

4. Support to strengthen Bapepam-LK's investigative and enforcement capacity by providing the necessary training proram and secondment with the relevant enforcement/regulatory authorities.

- International Capital Market Regulatory and Enforcement Expert (2 person-months)

5. To develop an Implementation Plan to regulate Investor Protection Funds for the Securities Market/Credit Guarantee

- International Securities Market Regulatory Expert (2 person-months)

- National Securities Market Legal Expert (2 person-months)

6. Development of a structured and comprehensive Human Resource Capacity Program for Bapepam-LK

- International Senior HR Specialist (6 person-months)

- National HR Expert (6 person-months)

7. To develop a comprehensive database and user-friendly website to provide consolidated capital markets and NBFs information akin to "One-Stop Information Centre" for capital markets

- International Database/IT expert (3 person-onths

- National Website Designer (3 person-months)

8. Establishment of Capital Markets Institute for capital markets

- International Institutional Development Expert (4 person-months)

9. Comprehensive compliance framework for capital markets to enhance investor protection and support capacity building

- International Capital Market Regulatory and Compliance Expert (2 person-months)

10. New Products: Mortgage Credit Insurance and Other Risk Management Products

- International Mortgage Credit Insurance Expert (2 person-months)

11. Support for Insurance Industry Consolidation

- International Insurance Industry Expert (2 person-months)

- National Insurance Industry Expert (2 person-months)

Responsible ADB Officer Stephen Schuster
Responsible ADB Department Southeast Asia Department
Responsible ADB Division Public Management, Financial Sector and Trade Division, SERD
Executing Agencies
Ministry of FinanceFrans Seda Building
Jln. Dr. Wahidin Raya No. 1
Jakarata 10710, Indonesia
Cap. Mkt. & Financial Inst. Supervisory Agency Mr.Gonthor AzizGedung Soemitro Djojohadikusumo
Departemen Keuangan RI
Jl. Lap Banleng Timur 1-4, Jakarta 10170
Timetable
Concept Clearance 16 Oct 2009
Fact Finding 10 Mar 2009 to 20 Mar 2009
MRM -
Approval 04 Dec 2009
Last Review Mission -
PDS Creation Date 28 Jul 2009
Last PDS Update 31 Mar 2015

TA 7466-INO

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
04 Dec 2009 18 Jan 2010 18 Jan 2010 31 Dec 2011 31 Dec 2014 -
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
1,500,000.00 0.00 400,000.00 0.00 0.00 0.00 1,900,000.00 04 Dec 2009 1,257,409.80
Title Document Type Document Date
Strengthening Indonesia's Capital Market Technical Assistance Reports Dec 2009

Safeguard Documents

See also: Safeguards

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Evaluation Documents

See also: Independent Evaluation

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