Through 2014, not only the condition of Indonesia’s macro economy weakened but also the banking sector was in trouble. The condition was signified by tight liquidity, slow credit extention and net margin interest going down.
In mid 2014, bank’s liquidity was calculated by Loan-to-Deposit Ratio and had reached 92.19% by directives of BI and OJK.
However liquidity eased to become 89.42% by end of 2014 when credit also only grew by 11.6% this growth was by far lower than 2013 which was only 21.6%. Betterment of fundamental economy was believed to propel growth of economy and the banking sector.
Economic growth in 2013 was notably high, i.e. 5.78% and credit growth was above 20%. On the other hand, deficit in current transaction in 2013 was posted at USD 29.115 billion or around 3.13% of GDP.
Growth of credit and reduced deficit to USD 26.23 billion by end of 2014 were positive signals of betterment.
In the banking industry, Net Interest Margin was down to 4.23$ by end of December 2014; and yet at that time NIM of the banking industry was still 4.89%. In 2012 NIM was still 5.49% Downturn of NIM was not merely due to slowdown of credit growth.
Increased Cost of Fund as result of “interest war” specially fixed deposit interest was more prevalent as the cause. This was reflected in BOPO ratio which increased to 76.29% by end of 2014 while in fact by end of 2013 BOPO was still 74.08%.
Growth of economy and the banking sector as main propeller of economy was expected to be sustainable. Import of consumptive goods which was the cause of deficit would diminish. The reason was that import would be dominated by auxiliary goods and capital goods.
The government sets target of economic growth at 5.7% by 2015 which means big opportunity for banks to grow credit. However with fund resources mostly in short term fund credit growth was predicted to be only at around 15% - 17%.
Liquidity was predictably easier as the Government had greater spending potentials compared to previous years; moreover with Third Party Fund growing better. To banks liquidity and Financial System Stability (SSK) was most important. Therefore when LDR had exceeded ceiling last year, anxiety grew.
Monetary crisis that happened 15 years ago was due to failure of banks in maintaining liquidity. With most of consumer’s fund already extend as credit, some banks were not ready to comply to customer’s rush.
With better liquidity, banks had enough room to grow credit so intermediary role could be maximized. Banks also had enough room to serve customer’s cash withdrawal. Still social and economical stability was needed to maintain consumer’s trust in banks.
Well balanced macro economy variables must be prioritized for the short term to ensure sustainable economy in the long run. Economic growth must not be spurred on too high in the short run so inflation and deficit could be managed.
BI wished that economic growth in 2015 and 2016 would be set at moderate level. In fact this year economic growth could be stepped up to 7%. But if such was done inflation would be high and deficit would widen which was certainly not good for fundamental economy.
Well balanced economic variables of the short term must be prioritized as Indonesia was still highly dependent on import. Indonesia’s Trade Balance showed that import of auxiliary goods was USD 9.61 billion or around 76.28% of total import in 2015. Import of capital goods totaled USD 2.2 billion or 17.48% of total import of the same period.
To jack up economic growth, Indonesia needed raw a materials and capital goods for the industry. If the need for import soared up, deficit would widen and such would depreciate Rupiah. Growing demand would push inflation higher up.
In the near future, deficit ratio would probably still increase as long as domestic supply was short. The effort to develop raw material industry at home was urgent to ensure supply.
In this case BI always prioritized on monetary policy mix designed to secure Indonesia’s fundamental economy. Stability of Monetary System was needed to keep long term investment flow in. Amidst export slowdown direct investment was expected to play its greater role.
Although credit growth 2015 was predictably better than 2014, BI was optimistic that inflation would be controlled at 3% - 5%. While lowering BI Rate from 7.75% to 7.50% on February 15 last, BI also lowered Deposit Facility Interest from 5.75% to 5.5% which signaled that BI was quite permissive to easing of liquidity.
BI’s decision to lower BI Rate on February last was different from most of the economist estimate that BI rate would remain at 7.75%; this indicated that BI Rate of 7.5% was believed to be in line with the effort to reduce deficit.
Deficit ratio by end of 2015 was estimated to be 3.1% of GDP which was worse than GDP by end of 2014 at 2.95% of GDP. However, as long as deficit was due to import for productive purpose like infra structure building, deficit which was slightly above 2.5% was notably healthy an well accepted by the market.
Therefore the Government and BI needed not to hesitate to jack up growth as long as the momentum was condusive. Deficit upturn slightly above 3% of GDP should not be too alarming as long as expenditures were for productive purposes.
The most important thing was that the Government must be able to communate the message honestly, objectively and constructively. Marketplayers would trust more if they could see infra structure building in broad daylight. Now the advice for all stakeholders was to stop all the discourse and start working. (SS)
Business News - March 6, 2015