Over the past few years, implementing a comprehensive structural reform programme has been the cornerstone of government policy to stimulate longterm economic activity. A major aim of this programme has been to address weaknesses in the financial system,an aim that Bank Indonesia, the country’s central bank, has also tirelessly pursued. In particular, it has concurrently implemented three major efforts to accomplish this goal.
First, enhanced capital adequacy requirements for financial institutions have been formulated and adopted to strengthen the banking sector. Second, Bank Indonesia has overhauled its regulatory infrastructure by adopting risk-based bank supervision and examanation methodologies and by raising disclosure requirements to encourage increased transparency. These measures have already begun to help restore confidence in the viability of the country’s banking sector and have contributed to reducing system risk. Bank Indonesia aims to comply with international best practices by creating the regulation infrastructure needed to adopt the upcoming New Basel Capital Accord, to ensure the health and vitality of the country’s banking sector.
Third, Bank Indonesia in conjuction with the Ministry of Finance, the Capital Market Supervisory Agency (Bapepam) and other relevant government agencies has been promoting the development of legal, clearing and regulatory infrastructure. However, Bank Indonesia is fully aware of the difficulty and time-consuming nature of this task. Such measures are preconditions for capital market development, but markets will only grow when market players begin to participate in the process, something that will only occur once a comprehensive range of eeconomic, technical and political factors are in place that will foster confidence.
Indonesia has systematically adopted stel-by -step practical approach, based on collaboration among all government agencies, to creating an environment in which these economic, technical and political factor build confidence and lead to the robust development of the capital markets. An equity market and a rudimentary bond market is now a primary focus. A primary stage of Bank Indonesia’s strategy is to establish a comprehensive market for goverment bonds, which will eventually become the backbone of the corporate and other sesctors of the bond market that are likely to emerge. The market for goverment bonds will help provide a benchmark yield curve and establish the overall credit curve according to which all other issues will be priced.