The FINANCIAL -- The Asian Development Bank (ADB) is providing further financial assistance to Indonesia to support its drive to develop deeper, more liquid capital markets as part of ongoing financial reforms to strengthen the economy.

The ADB Board of Directors on November 16 approved a $300 million loan for the second phase of the Capital Market Development Program Cluster. The proceeds cover the cost of policy reforms and to provide budgetary support for the government’s fiscal stimulus program in response to the global economic crisis. The program, which underpins the government’s medium-term financial reform agenda, is designed to help unlock the potential of the capital markets to provide long- term funding for infrastructure and other critical development needs.

Indonesia has a well-developed and well-regulated banking sector that accounts for about 80% of the financial industry’s assets. However its lending capability is constrained by the short- term maturities of its assets, and the nonbank sector, including equity and debt markets, remains relatively small and illiquid.

In response, the program is supporting wide-ranging policy reforms designed to improve information disclosure and surveillance, strengthen governance and investor protection, boost financial intermediation, and diversify financial products, in order to create more resilient and efficient capital markets.

“Together with broader economic reforms in Indonesia, the reform of capital markets will contribute to financial sector stability, to productivity growth and employment generation, and to poverty reduction,” said Valliyoor Subramanian, Principal Financial Sector Specialist (Capital Markets) in ADB’s Southeast Asia Department.

Under the second phase of the program, actions have been taken to increase the range of treasury bill maturities on offer, to establish a taskforce to examine options for an integrated regulator for the financial sector, to initiate the development of a Capital Market Master Plan for 2010-2014, to establish an investor protection fund, to introduce hedging instruments such as stock options and index-based futures, and to set up an ASEAN equities trading board with five other participating countries.

Indonesia’s economy has expanded strongly over the past decade. However, the global economic crisis - which saw an outflow of foreign investor funds and international credit dry up- has highlighted the need to expand domestic sources of financing to preserve growth. Strengthening the capital markets will provide long term funds to aid growth and development, provide a safe and stable environment for investors, and help reduce debt refinancing risks.

As full capital markets reform will take time, ADB and other development partners, such as Japan International Cooperation Agency and Australian Agency for International Development, are planning technical assistance to support the continuation of reform measures beyond the end of ADB’s two-stage program, including policy actions laid out under a post-program monitoring framework through to 2011.

ADB’s loan, from its ordinary capital resources, has a 15-year term, including a grace period of three years, with interest determined in accordance with ADB’s LIBOR-based lending facility.

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