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CHAPTER 6
Financial Market
Deepening Policy
Bank Indonesia continued to strengthen its policies on financial market deepening
in order to support the sustainability of financing and economic growth. Working
through the Coordination Forum on Development Financing by Means of the Financial
Market, Bank Indonesia, the Financial Services Authority and the Ministry of Finance
are committed to accelerating financial market deepening. This is regulated by the
National Financial Market Development and Deepening Strategy (SN-PPPK) and a
range of subsidiary policies.
ECONOMIC REPORT ON INDONESIA 2018
ECONOMIC REPORT ON INDONESIA 2018 | CHAPTER 6 | 85
Chapter 6
Financial Market Deepening Policy
he aim of the financial market deepening policy derivative transactions for hedging against exchange
is to expand the role of financial markets in rate risk. The positive performance on the forex market
Tsupporting sustainable economic growth. If a was also accompanied by a steady level of forex market
financial market is deep, liquid, efficient, inclusive and efficiency, reflected in the low level of the bid-ask spread
secure, its role in supporting economic activity will on spot US dollar transactions against the rupiah,
be maximized. A deep and liquid financial market will and in sizable transaction volume. And on the money
enable more efficient allocation of capital, and will serve market, growth in the repo market provided support for
as a basis for new sources of economic financing. And if management of rupiah liquidity over the longer term. In
financial markets are also inclusive and secure, this will relation to infrastructure financing, the FK–PPPK forum
cushion them against shocks in the event of upheavals. coordination by Bank Indonesia with the Ministry of
A greater variety of market instruments for financing and State-Owned Enterprises succeeded in October 2018 in
risk management in long-term financing, in addition to finalizing financing agreements for strategic infrastructure
greater diversity of investors, will contribute positively to projects worth USD13.6 billion.
the provision of economic financing alternatives.
Working through the Coordination Forum on 6.1. Preparing a National Strategy
Development Financing by Means of the Financial Market
(FK–PPPK), Bank Indonesia, the Financial Services Bank Indonesia, OJK and the Ministry of Finance, working
Authority (OJK) and Ministry of Finance have developed together in the FK–PPPK, drew up the SN–PPPK, the
National Financial Market Development and Deepening national strategy for expanding the role of financial
Strategy (SN-PPPK) to accelerate the pace of financial markets as a source of economic financing.The national
1 strategy represents a joint commitment of the three
market deepening. The national strategy represents a
joint commitment by the three authorities to optimize authorities to create a deep, liquid, efficient, inclusive and
the role of financial markets as a source of development secure financial market. As well as enhancing the role of
financing. Consistent with the strategy, Bank Indonesia’s financial markets as a source of development financing,
policy for financial market deepening in 2018 focused on the strategy also contributes to the establishment of
efficiency improvements on the money and forex markets market structures that are able to support financial
to help promote long-term financing instruments as a system stability. It is envisaged that these market
source of economic financing. Bank Indonesia developed structures will bring about: (i) financial markets with the
instruments to expand hedging, manage liquidity/sources capacity to provide financing and investment alternatives
of short-term funds and strengthen market credibility. The for business and the public; (ii) financial markets
policy was also introduced to support expansion in long- operating efficiently and securely; and (iii) financial
term investment on the capital market. A further measure markets that are able to facilitate mitigation of risks for
for reinforcing the role of financial markets involves market actors.
more extensive innovation of instruments for financing
infrastructure projects. These Bank Indonesia strategies The strategy is needed because of an existing lack of
are coordinated on an ongoing basis with OJK and the depth in domestic financial markets, as evidenced by
Ministry of Finance, within the FK–PPPK. the limited sources and volume of funds for financing.
According to data for the five years from 2014 to 2018,
The actions taken under the financial market deepening about 70% of economic financing is sourced from bank
policy had a positive impact on market developments in credit or financing (Chart 6.1). However, the volume
2018. On the forex market, the various efforts to educate of funds for financing through financial markets,
market actors have contributed to a rising volume of a measurement of financial market deepening, is
insufficient for the domestic economy. The level of
financial market depth in Indonesia is below that of
1 Bank Indonesia, OJK and the Ministry of Finance are members of the FK–PPPK, which was peer countries (Chart 6.2). This constrains availability of
set up in April 2016 to promote financial market deepening for development financing.
86 | CHAPTER 6 | ECONOMIC REPORT ON INDONESIA 2018
Chart 6.1. Indonesia’s Economic Financing Chart 6.2. Comparison of Financial Market Deepening
Grafik 7.2. Perkembangan Pembiayaan Ekonoi Indonesia Grafik 7.3. Perbandingan Kedalaman Pasar Keuangan di Asia 2017
Percent Ratio to GDP, Percent
Proportion of Bank Financing Proportion of Non-bank Financing 500 Credit Capital Market Cap
100 450 Sovereign Bonds
400 Corporate Bonds
90
80 350
70 300
60 250
50 200
40 150
30 100
20 50
10 0 a a d a
i m i n i
s a s a d
0 e n y l n
n t a i I China
o e l a
2014 2015 2016 2017 2018 d i a h
n V M T
I Philippines Singapore
Source: OJK Source: World Bank, Asian Development Bank
funds for investment financing, including for financing risk mitigation. Demand and supply will interact in a
of the infrastructure projects that are now a key focus of healthy and dynamic way through robust intermediation
Indonesia’s economic development. institutions. The second pillar, development of reliable
market infrastructure to support price discovery, is
The financial market deepening strategy consists of about building a stronger market structure.2 The quality
three development pillars, six market pillars and seven improvements in financial market infrastructure that
ecosystem elements (Figure 6.1). The first development will be undertaken to ensure efficiency and security will
pillar is development of sources of economic financing refer to international standards related to the global
and risk management. To reinforce these goals, Indonesia financial reforms introduced following the 2008 crisis.
will target initiatives to stimulate demand and supply of The third pillar, that of reinforcing market structures,
financial instruments. On the demand side, initiatives are involves the establishment of an integrated and
aimed at expanding the investor base, while on the supply coordinated regulatory framework that promotes a keen
side, initiatives are focused on expanding the diversity understanding of financial products by market actors,
of instruments for financing, liquidity management and
Figure 6.1. National Financial Market Development and Deepening Strategy Framework
Gambar 7.1. Kerangka Pengembangan Pasar Keuangan
Vision:
To create deep, liquid, efficient, inclusive and secure financial market
MISSION : FINANCIAL MARKET AS NATIONAL DEVELOPMENT FINANCING SOURCE
TARGET KEY PERFORMANCE INDICATORS STRATEGIC ACTION PLAN
6 Markets Bond Market Stock Market Structured Products Money Market Foreign Exchange Islamic Financial
Market Market Market
1 2 3 POLICY COORDINATION,
3 Pillars SOURCES OF ECONOMIC FINANCIAL MARKET REGULATORY HARMONIZATION,
FINANCING AND RISK MANAGEMENT INFRASTRUCTURE DEVELOPMENT AND EDUCATION
The Fund Providers and Users Market Infrastructure Regulatory Framework
7 Ecosystem Instrument
Elements Benchmark Rate & Standarisation Coordination and Education
Intermediaries
Source: SN-PPPK
2 Market infrastructure that provides access to information, and quick, secure and efficient
settlement of transactions.
ECONOMIC REPORT ON INDONESIA 2018 | CHAPTER 6 | 87
and with regulations issued by one institution supporting Developing the interest rate derivatives market will
those of other institutions. support a more transparent price discovery in the
formation of yield curve on the money market and capital
The national strategy is divided into three phases that market. To develop the interest rate derivatives market, a
are envisaged for completion by 2024. The first stage, regulation was issued for conducting rupiah interest rate
that of strengthening foundations, is being carried out derivative transactions on the money market, including
in 2018 and 2019. The second stage, that of acceleration, the use of overnight index swaps (OIS) and interest rate
is scheduled to take place from 2020 to 2022. The third swaps (IRS).3 The purpose of this regulation is to ensure
stage, which involves deepening, will take place in 2023 clarity about the operation of interest rate derivatives on
and 2024. The three development stages have progress the rupiah money market, while providing space for the
targets that will be monitored by the FK–PPPK. The operation of market mechanisms. Under this regulation,
priorities are: (i) increasing the level of borrower and banks conducting rupiah interest rate derivative
lender participation, the role of intermediary institutions transactions with customers and/or foreigners are
and the alternatives for financial instruments; (ii) required to perform a needs analysis for rupiah interest
improving market efficiency, involving financial market rate derivatives as part of their banking prudence. This
infrastructure; and (iii) refining the legal or regulatory analysis will be evaluated at least once a year. In addition
framework and the competency of market actors. to issuing provisions to regulate interest rate derivatives,
Bank Indonesia also contributed to strengthening the
credibility of the money market benchmark rates to be
6.2. Promoting Financing Through used as a reference in interest rate derivative transactions.
Efficiency The objective of developing a forex derivatives market
In 2018, Bank Indonesia’s financial market deepening is to provide efficient instrument alternatives for market
policy focused on efforts to improve efficiency on the actors in hedging against exchange rate risk, and to
money and forex markets. Efficient markets will create bolster the resilience of market actors in the financial
favorable conditions for market actors and business to and real sectors. In practical and technical terms, the
obtain and/or manage short-term funds or liquidity and strengthening of the derivatives market will increase
to exchange foreign currency funds. Efficient money and the liquidity of existing hedging instruments. It will be
forex markets can also expedite business transactions. achieved in part by developing new instruments.
For market actors and business, the efficiency of these
markets can also be supportive of risk management – not In implementing the strategy to develop the forex
only for corporate liquidity risk, but also market risks, derivatives market, Bank Indonesia issued a new
in particular interest rate risk and exchange rate risk. In instrument, domestic non-deliverable forwards (DNDF), to
other words, efficient price formation on the financial expand the range of available hedging tools. The launch
markets, supported by well-managed risks, will stimulate of the regulation on DNDF instruments on 21 September
market and business interest in long-term investments. 2018 aimed to boost confidence among exporters,
In turn, the creation of these conditions can strengthen importers and investors to engage in economic activity
efficiency in financing. and investment. DNDF instruments offer greater flexibility
in hedging against rupiah exchange rate risk. Further,
Bank Indonesia launched this policy by employing a settlement of transactions is conducted on a netting basis
strategy of developing instruments to expand hedging and this permits greater efficiency in hedging costs (Box
activity, manage liquidity and sources of short-term funds, 6.2 Provisions for Domestic Non-deliverable Forward
and strengthen market credibility. Within the context Transactions). However, the expanding DNDF market
of promoting hedging, Bank Indonesia sought to create provides an alternative hedging instrument, particularly
a more sophisticated range of hedging instruments for foreign investors, most of whom previously used
through development of the interest rate and exchange non-deliverable forward (NDF) transactions on foreign
rate derivatives markets. Complementing this, the markets to hedge their rupiah asset holdings. With the
strengthening of market credibility took place through DNDF instrument, foreign investors are able to hedge on
measures to reinforce the credibility of benchmark rates
and an overhaul of the market code of conduct. 3 Bank Indonesia Regulation No. 20/13/PBI/2018 concerning Rupiah Interest Rate Derivative
Transactions, issued on 9 November 2018.
88 | CHAPTER 6 | ECONOMIC REPORT ON INDONESIA 2018
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