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[JAKARTA] Indonesia has the largest economy in South-east Asia, but you can't tell from its financial markets, which are a fraction the size of some of its neighbours.
The nation's regulators have tried to change that, and progress is being made. The rupiah's daily trading volume has climbed more than 40 per cent in four years. There's also greater activity in hedging and the central bank has allowed a wider scope of derivatives. The value of money market transactions in the first quarter was nearly double the volume seen in all of 2013.
"While I'm happy about what we've accomplished, it's still not in line with expectations when compared with our peers," said Nanang Hendarsah, who last year took charge of a new central bank unit to develop the country's markets. "We still have a lot of homework."
The goal: a market where investors can be confident of getting competitive prices and executing trades in a timely fashion - unlike during the 2013 "taper tantrum" when some had to wait days for foreign-exchange deals to go through. Greater size and liquidity in stocks and bonds would offer new channels of funding for Indonesian companies seeking to benefit from the nation's swelling middle class.
"More developed markets predominantly rely on stock- and debt-based funding rather than bank loans as they're more efficient, but our capital markets aren't big enough for this," Mr Hendarsah said.
Indonesia's bureaucrats have been overhauling long-held customs. Years ago, officials would call traders chastising them for setting the rupiah at levels authorities didn't like. Mr Hendarsah, then assistant to the central bank governor, vowed to let market forces play a greater role and to put a stop to the phone calls.
Bank Indonesia has eased trading restrictions in other ways, including allowing cross-currency swaps and expanding the scope for foreign funds' participation, and it has given the market a boost by ordering companies to hedge currency exposure. Alongside the deepening in money markets, the central bank chose the seven-day reverse repurchase rate as its policy benchmark, tying monetary decisions more closely to actual borrowing costs.
Priorities now include tightening rules on trader conduct, rolling out more complex instruments, and setting up a clearing house and electronic trading platform for currency and money-market transactions.
A bigger market can withstand shifts in capital flows and lead to more efficient pricing, lowering cross-border risks for foreign investors and attracting much-needed funding, Mr Hendarsah said. That would be a boon for President Joko Widodo's infrastructure-investment plans, which cover construction projects from ports to railways.
The central bank's goal is to grow Indonesia's foreign-exchange market to the equivalent of about 3 per cent of the value of the country's trade by 2020, around the level found in Thailand and Malaysia now, Mr Hendarsah said. Indonesia's current ratio is only 1.8 per cent.
"Measures by Indonesia to move up the export value chain, open up sectors to foreign investment and deepen its financial markets all help to make the FX market more robust," said Vishnu Varathan, a senior economist at Mizuho Bank Ltd in Singapore.
Credibility is important, as well as the assurance that investors can enter and exit freely, said Ikhwani Fauzana, head of rates trading at PT Bank Negara Indonesia in Jakarta.
"Now we're in a virtuous cycle of more people hedging, meaning more market participants creating a more stable market that can attract inflows," Mr Fauzana said. "The hope is this continues and slowly rebuilds trust."