Is In­done­sia in­flat­ing a credit bub­ble?

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His­tor­i­cally, sto­ries that begin with cen­tral banks eas­ing bank lend­ing re­quire­ments don’t of­ten have a happy end­ing, but In­done­sia may be able to dodge cre­at­ing a credit bub­ble.

One key rea­son is that mak­ing it eas­ier to get a loan in the ar­chi­pel­ago doesn’t mean there will be a lend­ing surge.

“Be­cause of the slow­down in growth, loan de­mand might not be there, even if the terms are a lit­tle more fa­vor­able now,” said Euben Paracuelles, an an­a­lyst at No­mura, not­ing that there’s al­ready a slow­down in de­mand for cars and mo­tor­cy­cles. “It’s not be­cause peo­ple can’t af­ford it. It’s be­cause they’re more cau­tious.”

In­done­sia’s cen­tral bank has its work cut out: the coun­try’s econ­omy has stum­bled so far this year, with first-quar­ter eco­nomic growth com­ing in at 4.7 per­cent on-year, be­low ex­pec­ta­tions and the slow­est pace since 2009, dur­ing the Global Fi­nan­cial Cri­sis.

But cut­ting its pol­icy rate from the cur­rent 7.50 per­cent isn’t a palat­able step, as In­done­sia is vul­ner­a­ble to a po­ten­tial spike in in­fla­tion and its cur­rency, the ru­piah, is al­ready weak. On Thurs­day, the cen­tral bank gover­nor said in­fla­tion in the sec­ond and third quar­ter was ex­pected to be around 7 per­cent. Be­cause the coun­try has a cur­rent ac­count deficit, it could also face a re­newal of fund out­flows once the U.S.U S Fed­eral Re­serve in­creases in­ter­est rates, some­thing an­a­lysts ex­pect as early as Septem­ber.

So Bank In­done­sia has turned to eas­ing loan-to-value re­quire­ments on mort­gages and low­er­ing down­pay­ments for auto and mo­tor­cy­cle loans, as well as re­view­ing banks’ re­serve re­quire­ments.

While this will likely spur some in­creased lend­ing, it’s not likely to have a huge im­pact on loans or eco­nomic growth, said Wel­lian Wi­ranto, an econ­o­mist at OCBC.

“Rates are still high. The amount you have to fork out is still high,” Wi­ranto said.

Con­sumer debt lev­els also aren’t par­tic­u­larly high in the coun­try, he said, with house­hold debt at around 20 per­cent of gross do­mes­tic prod­uct (GDP), com­pared with lev­els at as much as 80 per­cent in South Korea and Malaysia. Wi­ranto noted, how­ever, that get­ting “clean” data on In­done­sia’s house­hold debt is dif­fi­cult.

There’s an­other rea­son Ind In­done­sia might not be able to boost bank len lend­ing: not many pe peo­ple have a bank ac ac­count.

“There’re a lot of ba banks in In­done­sia, [bu [but] they’re only se serv­ing a small por­tion of the pop­u­la­tion,” No No­mura’s Paracuelles

Only about 36 per­cent of In­done­sian­sIn over the ageag of 15 re­ported hav­ingh an ac­count at a fi­nan­cial in­sti­tu­tion in 2014, with just 13 per­cent say­ingsayin they bor­rowed from a fi­nan­cial in­sti­tu­tion over the past year, ac­cord­ing to the World Bank’s Fi­nan­cial In­clu­sion sur­vey pub­lished in April. To be sure, the data show more than 56 per­cent have bor­rowed money over the past year, sug­gest­ing In­done­sians aren’t tap­ping banks.

Busi­nesses may not pick up the bor­row­ing slack. Softer eco­nomic con­di­tions are hurt­ing the credit qual­ity of In­done­sia’s com­pa­nies, Stan­dard & Poor’s said in a note Tues­day.

“Con­sumers and com­pa­nies will con­tinue to hold back spend­ing and in­vest­ment,” while await­ing more clar­ity on the new gov­ern­ment’s poli­cies, it said.

“Fur­ther de­pre­ci­a­tion of the ru­piah since the be­gin­ning of the year could worsen the un­cer­tainty, af­fect­ing con­sumer con­fi­dence and spend­ing at In­done­sian com­pa­nies,” it said, not­ing that fuel prices are also likely to rise ahead, which would dampen dis­pos­able in­come growth.

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