Fitch Ratings: Systemic Risks in Indonesian Banking System Declined

Global credit rating agency Fitch Ratings expects slowing credit growth in Indonesia to reduce systemic risks in the country’s banking sector. In a report entitled Macro-Prudential Risk Monitor, which was released on 3 March 2015, it was mentioned that the macro-prudential risk indicator (MPI) for Indonesia was lowered from '3' (high risk) to '2' (moderate risk). Primary reason for this risk cut was the slowdown in the country's real credit expansion to below 5 percent in 2014 (from a peak of almost 20 percent in 2011).

Credit expansion in Indonesia, Southeast Asia’s largest economy, has been slowing as the country’s central bank (Bank Indonesia) implemented a tighter interest rate environment. Amid high inflation (caused by two subsidized fuel price hikes in June 2013 and November 2014) Bank Indonesia gradually raised its key interest rate (BI rate) from 5.75 percent to 7.75 percent over the past two years (although this benchmark was cut by 25 basis points in mid-February). By raising borrowing costs the central bank prioritized the safeguarding of Indonesia’s financial fundamentals over higher economic growth.

Fitch Ratings Senior Director Ambreesh Srivastava stated that cooling credit growth was also due to Indonesian banks’ increased competition for third-party funds (offering higher interest rates to attract these funds). However, over the medium-term, credit expansion in Indonesia may accelerate (in comparison to other markets) due to the country’s relatively low level of private credit to gross domestic product (GDP) at 34 percent at end-2014, particularly as Bank Indonesia cut its BI rate in mid-February (and another rate cut is expected later in 2015).

Fitch Ratings informed that rapid credit growth and growing leverage in Asia remain a concern. Six countries that are classified in the highest risk category are Indonesia, China, Hong Kong, Macao, Mongolia and Sri Lanka. However, slowing economic growth in China, the world’s second-largest economy, has helped to slow credit growth in Asia. Despite slowing, real credit growth remains high in China at 19 percent in 2014 (but considerably down from 37 percent in 2009). Meanwhile, Fitch Ratings detects high household debt to GDP ratios in Thailand and Malaysia, and which could become threats to the banking system.

Fitch Ratings’ Macro-Prudential Risk Indicator (MPI) report identifies the build-up of potential stress in countries’ banking systems due to a specific set of circumstances: rapid credit growth associated with bubbles in housing or equity markets, or appreciating real exchange rates, the latter sometimes associated with asset market bubbles. The focus of the report is thus only one potential source of bank systemic stress.

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