Indonesia, despite being ASEAN’s largest economy, faces significant challenges that hinder its financial deepening. Its capital markets remain shallow relative to regional peers due to entrenched structural, institutional, and socioeconomic issues. Overcoming these hurdles is crucial for channeling the country’s substantial savings into productive, long-term investments to unlock its full economic potential. One recent development in Indonesia’s financial sector is a tightening of banking liquidity. This is driven by multiple factors, including a risk-on sentiment amid the escalating trade war, which caused capital outflows. Domestically, issues such as loan growth surpassing deposit growth, increased competition for third-party funds, and the government’s financing needs have also contributed. However, regulators and the government are actively working to stabilize the system and address these pressures.
Indonesia’s finance system is predominantly bank-centric, with banks holding about 75% of all financial assets. This legacy of state-led finance limits access to long-term capital, as short-term deposits mainly fund banks, resulting in a small corporate bond market that accounts for only roughly 2% of GDP. Developing a robust capital market requires a larger base of domestic institutional investors, which currently stand at just 5.2% of GDP. Unlike developed nations, where pension funds are significant long-term capital sources, Indonesia’s pension participation is limited, and investment strategies tend to be conservative, restricting diversification and long-term returns.
The country’s stock market is also underdeveloped relative to its size. Liquidity remains limited, with trading concentrated among blue-chip stocks and many large companies, including SOEs, holding low proportions of free-floating shares. Recent policy measures, including the introduction of liquidity providers, aim to improve market liquidity. Notably, retail investor participation has surged, with over 17 million investors—nearly double from five years ago—highlighting the importance of improving financial literacy. An educated retail investor base can foster sustained market activity, deepen market liquidity, and make Malaysian and Singaporean markets stronger competitors in the region.
In comparison, Singapore remains the leading financial hub among ASEAN nations. Its high market capitalization, liquidity, and strong regulatory environment make it a key gateway for regional and international capital flows. Thailand and Malaysia have more mature markets with higher participation from domestic retail and institutional investors. Thailand boasts the highest non-financial corporate debt-to-GDP ratio among Asian countries, whereas Malaysia is positioning itself as a leader in Islamic finance, with Shariah-compliant securities constituting over 64% of its market capitalization in 2023.
The Indonesian corporate bond market, although expanding, remains underdeveloped with the total outstanding value reaching approximately US$402 billion by December 2024. Corporate bonds account for a tiny share of the economy, around 2% of GDP, as companies predominantly rely on bank loans. Domestic investors favor shorter-term bonds, creating reluctance toward longer-term debt, which constrains the growth of a liquid bond market. To stimulate this sector, easing issuance processes, reducing costs, and providing guarantees or ratings could help attract more issuers and investors, ultimately fostering a more vibrant secondary market.
Despite global economic volatility and uncertainties, Indonesia is poised to remain a significant driver of long-term global growth. Strategic fiscal and monetary measures are expected to mitigate the impact of external shocks. Moving forward, domestic demand—bolstered by private-sector activity and consumer spending—will be crucial in sustaining economic momentum and fostering deeper capital markets. These developments are essential for Indonesia to leverage its economic potential fully and integrate more effectively into regional and global financial systems.
July 23, 2025, The Jakarta Post
(https://www.thejakartapost.com/business/2025/07/23/how-deep-is-indonesias-capital-market.html)