Edited by Yung Chul Park, Takatoshi Ito and Yunjong Wang
Chapter 13: Financial Centers in East Asia: An Indonesian Perspective
13. Financial centers in East Asia: An Indonesian perspective Titik Anas, Raymond Atje and Mari Pangestu 1. INTRODUCTION This chapter will explore the evolution of Indonesia’s ﬁnancial sector after the 1980s deregulation and especially after the 1997–98 crisis. Between 1983 and 1989 the Indonesian government undertook major ﬁnancial reforms. The eﬀects of those reforms on the subsequent development of the country’s ﬁnancial sector were quite dramatic. Within a few years there had been a large increase in the number of banks and branches, and in the amount of credit. Capital markets also experienced signiﬁcant development, especially after foreigners were allowed to buy stocks. The number of listed companies and the market capitalization increased signiﬁcantly, albeit from small numbers. The rapid ﬁnancial development proved to be unsustainable, however. The 1997 ﬁnancial crisis propelled the sector into a turmoil from which it has not fully recovered yet. Part of the reason was the weak legal and regulatory mechanisms. Prudential regulations, supervision and enforcement were inadequate. Meanwhile, banks were driven into increasingly risky businesses such as real estate lending and the like, by intense competition. Another factor was the rapid ﬁnancial integration prior to the crisis. Foreign banks gradually crowded local banks out of the top-tier corporate lending hence heightening the competition among local banks for lower grade business lending. In addition, high domestic interest rates forced domestic ﬁrms, banks included, to borrow oﬀshore. Most of the oﬀshore debts were unhedged. Eﬀorts have been taken to...
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