CREDIT GROWTH VERSUS ECONOMIC GROWTH

The development of the global economy in 2013 and 2014 had a direct in the Indonesian economy, which is predicted to grow by 5.02%, or down from 5.78% in 2013.

The economic slowdown is mainly influenced by falling exports due to falling to global demand and commodity prices, as well as the policy on the restrictions of exports of raw minerals. Although over all exports declined, manufacturing exports tend to improve in line with the continued recovery of the United States.

In addition, the slowdown was driven by a lack of government consumption in line with budget saving program. Meanwhile, investment activity still experienced limited growth.

Bank Indonesia and the government in the framework of facing the challenges of uncertainty of the normalization of US monetary policy and uneven global economic recovery are required to act carefully and responsively.

Understandably, the US economic recovery is increasingly solid, while Europe economic recovery is still slow. On the other hand, china’s economy is also in a slowing trend, while the Japan is still in recession.

The slow global economic recovery, accompanied by a decline in world oil prices, encouraged decline in world commodity prices significantly. Recovery in advanced economies is expected to continue in 2015 in order to sustain Indonesian economic growth from the trade path.

However, a number of external or regional/global risks will still be a challenge to national macroeconomic stability in 2015, particularly high volatility of the global financial markets in line with the possible increase in the Fed Funds Rate (FFR) in the US and decline of world commodity prices.

According to the World Bank, the continued weakening of world trade, China’s economic activity which has not fully recovered, and the volatility of global financial markets led to the vulnerability of currency will be a series of key external factors for not achieving 7% economic growth optimism.

The World Bank also estimated that the Indonesian economy in 2016 and 2017 could only grow 5.5%. on the other hand, global economic growth in 2015, which is estimated at only 3% or 0.4%, faster than the previous year estimate, then surged 3.3% in 2016 and slowed again 0.1% in 2017.

The US will be a rich country with the best economic performance in the world this year, with a projected growth of 3.3% but the world economy will be marked again by weakness in the Euro area and Japan, and with slower growth from the emerging markets.

China will see a slow expansion to a level of 7% in 2015. Meanwhile, Japan, Asia and Australia will be the fastest growing regions. Papua New Guinea’s economy is predicted to be a country with the best performing economy, with 15% growth, almost two times faster than other countries. But the country with the worst performance is Sierra Leone, due to Ebola outbreak in West Africa.

Interestingly, the International Monetary Fund (IMF) revised the projection of global economic growth this year from October 2014 estimate at 3.8% to 3.5%. consecutive revision is also experienced by the Eurozone, Japan and the ASEAN-5, which are now projected to grow by 1.2%, 0.6% and 5.2% from 1.3%, 0.8% and 5.4%, respectively. Preliminary estimates revised the previous projection at 1.5%, 1.0%, and 5.6%.

The only growth region which escaped the revision is the US, which original forecast is 3.1% to 3.6%. Meanwhile, China and India are projected to decrease from the previous estimate at 7.1% to 6.8% and from 6.4% to 6.3%.

World Economic Outlook Update released by IMF reported that four main factors that lead to the revision. First, the drop in oil prices by 55% since September due to weak demand accompanied by increased production.

Second, the continued unequal growth between regions, marked by the boom of USA economic growth coupled by decline of growth in Japan and Europe. Third, the strengthening of the US dollar exchange rate which is followed the weakening of the Euro and the Yen as well as the currencies of commodity exporting countries.

Fourth, increase of interest rates and other macroeconomic risks, including rising government bond yields due to oil price decline in a number of regions, particularly in commodity exporting countries. Correction of economic growth in a number of major regions in Asia which occurred almost simultaneously, led by China and Japan, which this year is projected to experienced contraction to 0.6% and 6.8%, respectively.

The IMF said there are at least two major factors that explain this situation. First, the magnitude of China’s economic influence in the region  given its position as one of the country’s largest importer and exporter in Asia along with Japan. Second, the decline of commodity-export-based countries, such as Indonesia.

Drop in oil prices since September 2014 has been suppressed almost all export commodity prices, that it erodes the real income of those countries.

So, in general, economic recovery in Asia in predicted to begin in 2016, but not China, which is believed to be still corrected to 6.3%. at the same time, growth in Japan, India, and ASEAN-5, is predicted to start improving to 0.8%, 6.5% and 5.3%, respectively.

The global economic slowdown suppresses the Indonesian economy, which in turn suppresses the growth of bank credit in Indonesia. It was noted that bank credit growth of 15-17% in 2014 could almost certainly not achieved. Until November 2014, credit of commercial bank only grew 11.89% a year.

Indonesian Banking Statistics as of November 2014 shows that commercial bank loans to third parties reached IDR 3,596 trillion. In November 2013, loans to third parties reached IDR 3,292 trillion.

According to the usage, investment credit as of November 2014 reached IDR 881,519 trillion, only grew 13.73% in a year. A significant deceleration compared with November 2013 which grew 33.31% in a year. In November 2013, investment credit reached IDR 775,085 trillion.

Working capital loans also slowed from 18.98% a year as of November 2013 to 11.57% a year as of November 2014. Working capital loans in November 2014 reached IDR 1,713 trillion, and in November 2013 at IDR 1,535 trillion.

The slowdown also occurred in consumer loans, from 15.25% a year as of November 2013 to 10.84% a year of November 2014. Consumer loans reached IDR 1,001 trillion in November 2014, up from IDR 903 trillion in November 2013.

The weighted average lending rates from January to November 2014 increased by 57 bps to 12.96% while the 1-month deposit rate rose 30 bps to 8.22%. The increase in deposit rates mainly occurred in the second quarter of 2014 in line with bank’s tightened liquidity conditions and rising guarantee interest rate (LPS rate) by 25 bps to 7.75%. in the third quarter of 2014, bank liquidity improved to withstand a further rise in interest rates on deposits.

Based on the usage, an increase in lending rates mainly occurred in Working Capital Loan interest rates, which rose 72 bps to 12.84%. Meanwhile, Investment credit Consumer Credit rates increased by 56 bps and 40 bps to 12.39% and 13.53%, respectively.

Earlier in 2014, bank Indonesia and the financial Service Services Authority (OJK) encouraged banks to put brakes on credit. As a result, economic growth slowed in 2014, only recorded a 5.02% growth down from 5.78% in 2013. At the end of 2013, credit growth reached 21.6% in a year, from IDR 2,707 trillion in December 2012 to IDR 3,292 trillion in December 2013.

Slowing economic growth in Indonesia, which follows the direction of the global economy, is predictable from the start, since 2013, the prices of export commodities have started to go down due to weakening global demand. Import-export trade deficit in 2013 reached USD 4.06 billion, mainly due to the contribution of very large oil imports. In mind-2013, the US central bank, the Fed, also announced a policy on the reduction of monetary stimulus.

Reduction of government bond purchase was carried out periodically until there is no more stimulus. Bank Indonesia also raised the benchmark interest rate or BI rate to control inflation and current account deficit (DTB) which is still large. In 2013, the DTB reached 29 billion US dollars. Until the end of 2014, the DTB is targeted at no more than 25 billion US dollars.

In mid-November 2014, after rising gradually, BI Rate becomes 7.75% in anticipation of inflation as a result of reduction of fuel subsidies. With a relatively high benchmark interest rate, the demand for credit finally slows.

Apparently, credit slowdown is deeper than the target directed. This is not only because of the high interest rates, but also because business see that economic slowdown could affect demand for products.

However, Bank Indonesia is re-targeting credit growth of 15-17% in 2015. Some parties question about how it is possible that credit growth may e lower than the target, as in 2014.

The situation in 2015 is believed to be different from 2014 because of liquidity factor. Last year, bank liquidity is very tight, so that the loan to deposit ratio (LDR) once reached 92.19%. this year, liquidity is estimated to be much more loosely because government spending on energy subsidies is much smaller than in 2014.

It certainly gives a positive sentiment to the national economy this year. Indonesia’s economic performance in the midst of the high number of global and domestic challenges relatively good, because macroeconomic stability is maintained. Economic growth performance is still quite high, especially supported by household consumption, which remains solid. In 2015, economic growth is expected to be higher, which grew at around 5.7% according to assumption of revised state budget (APBN-P) 2015. (E)

Business News - February 18, 2015