JAKARTA - After heavy government lobbying,
Indonesia's central bank (BI) has agreed to roll
back lending restrictions imposed on the banking
sector in the wake of the 1997-98 Asian financial
crisis and promote new bank lending targets for
small and medium-sized enterprises (SMEs).
Ten years since Indonesia's spectacular
financial implosion, the country's banks have by
and large recovered, with improved capital
adequacy, loan-to-deposit and nonperforming loan
ratios, which now account for 7% of total
outstanding credits. That's still
a high
ratio by international banking standards, but a
significant improvement on the over 60% to 70%
witnessed at the height of the country's financial
collapse.
Indonesian Vice President Jusuf
Kalla has frequently and openly carped that
over-cautious banks are holding back the economy.
In recent months he has publicly lobbied for them
to lend more aggressively - even to former big
corporate defaulters - to spur growth. He has been
particularly critical of banks parking their funds
in government-guaranteed short-term Bank Indonesia
Certificates (SBIs) rather than extending new
loans.
SBIs generate relatively risk-free
yields of up to 12%, slightly less than the
current average bank lending rate of 14%.
Estimates of the total amount of funds Indonesian
banks now have wrapped up in SBIs range anywhere
from Rp230 (US$25.2 billion) to Rp280 trillion.
The business-minded Kalla has championed
the cause of SMEs, which constitute the bulk of
Indonesia's corporate sector, representing 90% of
the country's total 44 million registered
companies, according to the Ministry for
Cooperatives and Small and Medium Enterprises.
Last year SMEs accounted for nearly 55% of gross
domestic product (GDP), pumping Rp1,480 trillion
into the local economy and providing 96% of the
country's estimated 80 million jobs.
As of
December 2006, an estimated Rp428 trillion ($47
billion) was out on loan to SMEs, a sum that
equates to more than half of the total outstanding
loans in the banking sector. But lending
restrictions to the sector have arguably held back
the expansions and upgrades Indonesia's SMEs
require to stay competitive, particularly in light
of China's emergence as the world's factory floor.
Since 2005, BI has severely restricted
lending to business sectors with higher than
average rates of non-performing loans (NPL),
defined as loans where monthly repayments have not
been made for more than three months. A case in
point is the textile industry, which as of 2004,
had an NPL ratio of 8%-9%, and where capacity
expansion has slowed to a trickle because of
companies' inability to secure new loans.
Amid an export boom propelled by the
anti-dumping tariffs imposed by Western countries
on Vietnam and China, domestic manufacturers have
since increased total textile and garment exports
by almost 10% last year, totaling $9.7 billion in
overseas revenues. Sector exports are expected to
increase to $10.5 billion this year and to $14
billion by 2010, industry analysts say.
Benny Soetrisno, head of the Indonesia
Textile Association, is upbeat about these
short-term prospects but contends that the
industry will need more than $5.19 billion in new
capital outlays to maximize the increased export
opportunities. But high interest rates and BI
restrictions on new lending to red-flagged
business sectors like textiles has hindered
expansions.
Policy lending That
may soon change, however. Kalla has recently
persuaded the central bank to ease its regulations
and encouraged commercial banks to lend more -
even to borrowers with a history of non-repayment.
Under the new rules, banks will be able to
evaluate new potential loans on a
project-by-project cashflow basis, including those
in so-called "sunset" industries like textiles and
for other long-term development projects.
BI governor Burhanuddin Abdullah recently
said in a statement that the revised rules were
designed to help the banking industry cope with
the challenge of providing financing to the "real
sector". He made the announcement directly after a
closed-door meeting with Kalla, several senior
ministers, Indonesian Chamber of Trade and
Industry (Kadin) chairman M S Hidayat and top
executives from several state-owned and private
banks.
Abdullah also said 3.5 million
different SMEs would be offered a total of Rp87.2
trillion ($9.6 billion) in loans over the course
of this year, a move toward policy-directed
lending. Average bank lending rates are now up
around 14%, and chairman of the Indonesian
Association of National Banks Agus Martowardojo
predicts rates could drop to 12.9% in 2007 from
last year's average of 14.9% due to a softening
economy.
The macroeconomic environment is
improving for borrowers, which in recent years
have faced prohibitively high interest rates on
loans due to runaway inflation rates. The
authorities have effectively reined in inflation,
which was down around 6.6% last year after
spiraling to over 17% in 2005. In March, it
dropped to an 11-month low of just .24%.
On the back of these softer inflation
figures and a strong trade surplus, consensus
forecasts were for the BI to cut its benchmark
interest rate by a quarter point to 8.75%. The BI
held the rate steady at 9% due to lingering
concerns about inflation in consumer goods, but
the governor told reporters he expects the rate to
fall to 8.5% by year-end.
With
unemployment running at near all-time highs,
Kalla's desire to pump more liquidity through the
financial system to the grassroots economy makes
political sense. The government's five-year
development plan announced in 2005 targets an
annual average GDP growth rate of 6.6% by 2009,
which if achieved is expected to slash current
poverty and unemployment rates by half to 8.2% and
5.1% respectively.
Most of the 5.8% GDP
growth accomplished last year stemmed from a boom
in global commodity prices rather than ramped-up
industrial production - indicating the Indonesian
economy is heading down rather than up the global
value-added chain. And current economic growth
levels are not enough to absorb the estimated 2.5
million new entrants to the national labor force.
The risk, of course, is that Kalla's bid
to pump up the economy through more bank lending
could amplify the non-performing loan problems
Indonesia's banks have only recently brought under
control. So, too, could the politicians' bid
undermine the more prudential risk-return lending
systems many banks have adopted since the 1997
crisis. Indeed, history shows that politics and
finance often mix to volatile effect in Southeast
Asia in general and Indonesia in particular.
Bill Guerin, a Jakarta
correspondent for Asia Times Online since 2000,
has been in Indonesia for more than 20 years,
mostly in journalism and editorial positions. He
specializes in Indonesian political, business and
economic analysis, and hosts a weekly television
political talk show, Face to Face,
broadcast on two Indonesia-based satellite
channels. He can be reached at
softsell@prima.net.id.
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