Indonesia Need to Balance Financial Deepening and Stability
Selasa, 20 September 2016 - 08:16 WIB
Indonesia Need to Balance Financial Deepening and Stability
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JAKARTA - Financial development in Indonesia has evolved at a relatively slow speed in comparison to peer countries. Although this provides opportunities for financial deepening, the International Monetary Fund (IMF) has been quick to remind Indonesia that deepening should be balanced with stability to avoid a crisis.
"There is evidence that too fast a pace of financial development leads to instability," IMF Mission Chief for Indonesia, Luis E. Breuer said during International Seminar on Financial Market Deepening 2016: The Way Forward for Indonesia in Jakarta on Monday (19/9).
IMF data shows that credit booms in Thailand, Argentina, Uruguay, Greece and Brazil were followed by banking crises. Therefore, he suggests regulatory reform as a method of promoting financial development and stability simultaneously.
Breuer said the money market was the cornerstone of a competitive and efficient system of market-based intermediation because it stimulated an active secondary bond market by reducing the liquidity risk attached to bonds and other term financial instruments and assisting financial intermediates in managing liquidity risks.
"It is also prerequisite for the development of derivative markets where funding costs are a key variable, particularly the case with the forward foreign exchange market," he explained.
Meanwhile, Finance Minister Sri Mulyani said deepening of the national financial market is critical for Indonesia to accelerate economic growth amid global weakness.
Given the low degree of financial market participation in Indonesia, many financial institutions had revised down their growth projections due to the current economic situation, the Minister said.
"Compared to the region, our financial penetration is shockingly low, only slightly better than that of Vietnam," Sri Mulyani said.
Indonesia, Sri Mulyani said, was faring better with regard to economic growth, with an annual increase of 5.18 percent achieved in the second quarter. However, the growth rate was not high enough to support social welfare, as a high poverty rate and inequality ratio were persistently troubling the country.
To address these issues, the government was continuing efforts to create more balanced and inclusive growth, among other measures through the financial sector, which contributed 4.2 percent to the gross domestic product (GDP) in 2016, up from last year’s share of 3.9 percent of GDP.
Meanwhile, the banking industry had become more saturated than other financial sector industries. Higher growth should be expected from non-bank financial institutions, Sri Mulyani said.
"That is why it is very critical to diversify the financial sector and its instruments," she reiterated.
"There is evidence that too fast a pace of financial development leads to instability," IMF Mission Chief for Indonesia, Luis E. Breuer said during International Seminar on Financial Market Deepening 2016: The Way Forward for Indonesia in Jakarta on Monday (19/9).
IMF data shows that credit booms in Thailand, Argentina, Uruguay, Greece and Brazil were followed by banking crises. Therefore, he suggests regulatory reform as a method of promoting financial development and stability simultaneously.
Breuer said the money market was the cornerstone of a competitive and efficient system of market-based intermediation because it stimulated an active secondary bond market by reducing the liquidity risk attached to bonds and other term financial instruments and assisting financial intermediates in managing liquidity risks.
"It is also prerequisite for the development of derivative markets where funding costs are a key variable, particularly the case with the forward foreign exchange market," he explained.
Meanwhile, Finance Minister Sri Mulyani said deepening of the national financial market is critical for Indonesia to accelerate economic growth amid global weakness.
Given the low degree of financial market participation in Indonesia, many financial institutions had revised down their growth projections due to the current economic situation, the Minister said.
"Compared to the region, our financial penetration is shockingly low, only slightly better than that of Vietnam," Sri Mulyani said.
Indonesia, Sri Mulyani said, was faring better with regard to economic growth, with an annual increase of 5.18 percent achieved in the second quarter. However, the growth rate was not high enough to support social welfare, as a high poverty rate and inequality ratio were persistently troubling the country.
To address these issues, the government was continuing efforts to create more balanced and inclusive growth, among other measures through the financial sector, which contributed 4.2 percent to the gross domestic product (GDP) in 2016, up from last year’s share of 3.9 percent of GDP.
Meanwhile, the banking industry had become more saturated than other financial sector industries. Higher growth should be expected from non-bank financial institutions, Sri Mulyani said.
"That is why it is very critical to diversify the financial sector and its instruments," she reiterated.
(rnz)
