Bill Guerin, 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 0.24%.
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.]