Economy of Indonesia: Financial Sector is Stable, Says KSSK

The statement of the KSSK is the result of a quarterly assessment of Indonesia's exchange rate performance, balance of payments, conditions of the capital, stock and bond markets, the fiscal situation, and the banking sector. Indonesian Finance Minister Sri Mulyani Indrawati read out the result of this assessment on Monday (24/10).

Despite stability, there remain ongoing external pressures, particularly sluggish global economic growth (led by the economic slowdown of China) that causes subdued global trade as well as low commodity prices. Meanwhile, Indonesia's banking sector is struggling with a rising non performing loan ratio. Due to weak credit demand from Indonesian companies and individuals the amount of good-quality loans has declined, while the amount of bad loans has increased. This is why the KSSK is eager to boost market confidence in Indonesia. By giving signals that the domestic economy is strengthening, the market should start to become confident again to engage in corporate or personal investment (for example companies are encouraged to invest in business expansion, and individuals are encouraged to purchase houses).

OJK Chairman Muliaman Hadad said credit growth in Indonesia's banking sector stood at a modest 6.83 percent (y/y) at the end of August 2016. He expects that this rate will not change too much in the remainder of 2016. Single-digit credit growth is something new to Indonesia as the country had become used to double-digit growth figures in recent years. Companies are now particularly hesitant to secure foreign-denominated loans as sharp rupiah depreciation in the years 2013-2015 has been a major burden. Rupiah-denominated credit, however, still grew at a solid pace of 10.7 percent (y/y).

Hadad emphasized that amid bleak global economic growth Indonesia should boost domestic financing of the domestic economy, particularly inclusive finance that includes the micro, small and medium sized enterprises in order to create a more just society. It is estimated there are about 50 million entrepreneurs that fall in this category in Indonesia.

Overall, Hadad sees a stable banking sector in Indonesia, despite the recent rise in non performing loans (which rose to 3.22 percent [gross] in August 2016). The stable situation in the banking sector is reflected by the 23 percent overall capital adequacy ratio (CAR).

Meanwhile, the central bank of Indonesia (Bank Indonesia) detects a new trend recently. Companies are now more willing to issue bonds or notes rather than seeking bank loans. Up to September 2016 firms have sold IDR 80 trillion (approx. USD $6.2 billion) worth of bonds and notes, while credit growth in the banking sector has been declining over the same period. Bank Indonesia Governor Agus Martowardojo added that the recently rebounding commodity prices could boost demand for credit in the remainder of 2016.

Martowardojo was also positive about several key indicators of Indonesia: (1) inflation has been under control and actually rather low for Indonesian standards at 3.1 percent year-on-year in September 2016, (2) the current account deficit has improved to around 2.0 percent of GDP, and (3) the Indonesian rupiah has strengthened about 4 - 5 percent against the US dollar so far this year. Meanwhile, the results of the tax amnesty program (which runs until 31 March next year) have been positive so far, strengthening the government's fiscal credibility. As long as the US Federal Reserve will not raise its key Fed Funds Rate this context could make Bank Indonesia decide to implement another interest rate cut before the end of 2016. Indonesia's key interest rate now stands at 4.75 percent.

Macroeconomic Indicators Indonesia:

	2010	2011	2012	2013	2014	2015	2016¹
• Gross Domestic Product²   (annual percent change)	6.4	6.2	6.0	5.6	5.0	4.8	5.0
• Consumer Price Index   (annual percent change)	5.1	5.4	4.3	8.4	8.4	3.4	3.1
• Current Account Balance    (percent of GDP)	0.7	0.2	-2.8	-3.3	-3.1	-2.1	-2.0
• Foreign Exchange Reserves   (in billion USD)	96.2	110.1	112.8	99.4	111.9	105.9	115.7³

^{¹ indicates a forecast
² Statistics Indonesia (BPS) shifted the basis of the computation from the year 2000 to 2010 and adopted a significantly updated methodology, hence GDP growth results between 2010 and 2014 have been revised in early 2015
³ per late-October 2016
Sources: World Bank, Statistics Indonesia, Bank Indonesia and International Monetary Fund (IMF)}

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