Projection for Credit Growth in Indonesia Cut Again
Bank Indonesia cut its projection for credit growth in the nation's banking sector this year from the range of 10 - 11 percent year-on-year (y/y) to 7 - 9 percent (y/y). This downward revision is in line with the central bank's earlier decision to cut its forecast for economic growth from the range of 5.0 - 5.4 percent (y/y) to 4.9 - 5.3 percent (y/y) in 2016. The slightly less rosy outlook is caused by the Indonesian government's decision to cut spending for the remainder of the year, while global economic growth remains subdued.
Bank Indonesia Governor Agus Martowardojo informed that credit growth in Indonesia reached 8.7 percent (y/y) in the first quarter of 2016 and 8.9 percent (y/y) in the following quarter. These results are below earlier forecasts and indicate that credit disbursement in Indonesia's banking sector is yet to pick up. Demand for corporate credit has been below expectations as the economic recovery of Indonesia is still in the early stages. Similarly, demand for consumer credit remained subdued as Indonesian consumers remain cautious after experiencing several years of weakening purchasing power.
Contrary to Indonesia's overall economic growth - which is expected to accelerate from 4.8 percent (y/y) in 2015 to 5.1 percent (y/y) in 2016 - credit growth in Southeast Asia's largest economy is expected to continue its slide into 2016 to touch the weakest growth pace since late-2009. The table below shows that Indonesia had become used to a very high credit growth pace in 2011-2013 (after the recovery in 2010).
Credit Disbursement at Indonesia's Commercial Banks:
| 2011 | 2012 | 2013 | 2014 | 2015 | |
| Credit (in IDR trillion) |
2,200.1 | 2,725.7 | 3,319.8 | 3,706.5 | 4,092.1 |
| Y/Y Growth (%) |
24.6 | 23.9 | 21.8 | 11.7 | 10.4 |
Source: OJK
Bank Indonesia also informed that deposit growth (or third-party funds growth at banks) slowed from 6.4 percent (y/y) in Q1-2016 to 5.9 percent (y/y) in Q2-2016. However, with the looser monetary and macroprudential policy mix (including the looser loan-to-value ratio in the property sector), in combination with the government's tax amnesty program, Bank Indonesia expects credit growth to accelerate on the middle-long term and, therefore, it will encourage future overall economic growth.
Perry Warjiyo, Deputy Governor at Bank Indonesia, says there are three factors that will give rise to accelerating credit growth in Indonesia in the second half of 2016: (1) lower interest rates, (2) higher liquidity, and (3) the improving domestic economy.
The central bank adopted the BI 7-day reverse repo rate as its new benchmark monetary tool at the August policy meeting. This move should push lending rates down, hence giving rise to growth in credit demand. So far this year the central bank had cut its previous benchmark monetary tool (BI rate) by 100 basis-points from 7.50 percent to 6.50 percent in the first six months of 2016. Warjiyo said that by July 2016 deposit rates at banks had fallen by 91 basis-points, while credit rates had only fallen by 47 basis-points over the same time.
Other matters that support lower interest rates in Indonesia, according to Warjiyo, are the lower minimum reserve requirement (GWM) and portfolio inflows into stocks and bonds.