ADB Provides $300.7M for Indonesia's Capital Market Development Program

Asian Development Bank (ADB)

MANILA, PHILIPPINES - The Asian Development Bank (ADB) is providing $300.7 million for the development of capital markets in Indonesia to make them more resilient and competitive in order to support a high sustainable rate of economic growth.

The Capital Market Development Program Cluster will be implemented in two subprograms, the first of which will receive a $300 million loan. The second subprogram is expected to be ready for approval by the ADB board about 18 months after the first subprogram takes effect. Indonesia is expected to borrow between $200 million and $300 million for the second subprogram.

The program will promote transparency and information disclosure in capital markets, enabling market valuation of fixed-income instruments. It will also promote deeper and more liquid financial markets, improve market surveillance and investor protection, and strengthen governance and human resource capacity.

“These are essential in building confidence in capital markets and institutions. The reforms will strengthen investor protection and will increase the non-bank financial sector’s share of total financial assets,” said Valliyoor Subramanian, Principal financial sector specialist for capital markets of ADB’s Southeast Asia Department.

Financial sector reforms are crucial to raising Indonesia’s economic growth rate and in honing the resilience of the economy. Since the Asian financial crisis in 1997, Indonesia has undertaken key financial sector reforms and has succeeded in restoring the banking sector to solvency and profitability. However, the rate of economic growth has not returned to pre-crisis levels. Indonesia needs investments, especially in infrastructure, but the domestic financial sector does not have the capacity at this point to provide adequate levels of appropriate funding.

The financial sector is shallow and dominated by banks, which are not yet capable of providing long-term financing of the type needed for infrastructure investments. The non-bank financial sector, in particular the capital markets, while still small, offer an opportunity to reinvigorate growth through more efficient intermediation.

The reforms stipulated under the ADB-backed program are expected to encourage the development of new financial instruments and new kinds of intermediation and enhance the efficiency of financial markets in pricing risks.

“Together with the broader economic reforms being undertaking in Indonesia, the development of the capital markets will contribute to productivity growth, employment generation and financial sector stability,” said Mr. James Nugent, Country Director, Indonesia Resident Mission.

The program will be supported by a technical assistance estimated to cost $1.5 million. ADB will provide a $700,000 grant, while the Financial Sector Development Partnership Fund, established by the government of Luxembourg, will extend a $500,000 grant. The balance will be shouldered by the government of Indonesia.

The technical assistance will support efforts to be undertaken by the government and Bapepam-LK, the supervisory authority for capital market and non-bank financial institutions, with a focus on supporting the capacity building in key areas and institutions related to capital market development.

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