political transition and implication for financial institutions...2 jakarta 20 july 2016 political...
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Jakarta20 July 2016
Political Transition and Implication for Financial Institutions
Presented at 1st Asian Financial Leaders ProgramPrasetiya Mulya Executive Learning Institute
Winang Budoyo([email protected])Chief EconomistPT Bank CIMB Niaga Tbk
Fiscal Sector
Indonesia’s Political and Economic Transition
Before 1998Bank Indonesia (BI) was part of cabinet
Since 1999, BI is an independent Central Bank
1 Jan 2014, Separation of bank’s supervision from BI to FSA (OJK)
4.7
-13.1
0.8
4.93.8
6.3
4.6
6.5
4.85.0
GDP Growth (% yoy)
BIMacroprudential
FSA (OJK)Microprudential
2002,Establishment of The Corruption Eradication Commission (KPK)
Asian Financial
Crisis
Global Financial
Crisis
Global Commodity Supercycle
China Slowdown
2004,SBY was elected as President through the first direct election.
2009,SBY was re-elected as President
5
Indonesia’s Economic Team
CABINET
Darmin Nasution(Coordinating Minister for Economic Affairs)
Bambang P.S. Brodjonegoro
(Minister of Finance)
Thomas Lembong(Minister of Trade)
Rini Soemarno(Minister of State
Owned Enterprise)
Agus DW Martowardojo(Governor of Bank Indonesia)
Muliaman D. Hadad(Chairman of Board of Commissioners of the
Financial Services Authority)
BIMacroprudential
FSA (OJK)Microprudential
6
Jokowi’s Key Initiaves
1.Food self-sufficiency2.Energy self-sufficiency3.Maritime-based economy4. Accelerating Infrastructure
5.Public welfare
6.Cleaner government &bureaucracy reform
Jokowi’s Initiatives geared to fix the domestic problems
Positive Impacts
Source: Harvard Kennedy School, “The Sum is Greater than the Parts” & Jokowi’s Nawa Cita
1. Lower dependency on imported foods2. Less dependency on imported oil3. Land-interconnection to solve the fragmentation4. The development of highways, railroads, seaports, and
airports5. Rollout of health-care (Indonesia Sehat), public education
(Indonesia Pintar), and housing improvement6. Improvement on Investment Climate
Reducing the binding constraints
Indonesia’s binding constraints
1. It is a collection of disconnected local and regional markets rather than an integrated single market
2. Dependent on commodities and old industries instead of high value-added products in the global supply chain
Jokowi’s Focus areas
Key initiatives of the new administration would be on food, maritime, andenergy sectors through accelerated budget disbursement and licenses.
Infrastructure: accelerating the development of highways (i.e. Trans-Javahighway), railroads, seaports, and airport
Public welfare: accelerating the rollout of the universal health coverage scheme(Jaminan Kesehatan National – JKN), public education, and housing improvement
Cleaner government = bureaucracy reform: Jokowi's popularity withvoters is very much due to his ability to negotiate with the rank and file, persuadingofficials to deliver better services to the public as well as avoid the abuse of power andmisuse of public funds.
Source: CSI and CIMB Niaga
Jokowi’s focus areasJokowi offers pledges of better welfare, infrastructure, and cleaner government
8
Fiscal Policy: Budget Re-AllocationAllocation of Energy Subsidy Spending to Education, Infrastructure and Regional Development for Sustainable Economic Growth
2016 Budget Allocation Plan Compared to 2015 Revised Budget
Energy-12%
Education+4%
Infrastructure+8%
Transfer to Regional+17.5%
Source: Ministry of Finance
Monetary Sector
1998
835%
690% 689%582% 552% 510%
432%
Korea Singapore Taiwan Malaysia Thailand Hong Kong Indonesia
In 1993, the World Bank published a book entitled “The East Asian Miracle”. The story was an apparently compelling one, of eight nations – Japan, Korea, Hong Kong, Singapore, Taiwan, Indonesia, Malaysia, and Thailand. These countries had grown faster than other regions of the world: 2x as fast as the rest of East Asia. 3x as fast as Latin America and South Asia. 25x faster than Sub-Saharan and Africa. More than 2x as fast as the OECD economies, or the United States.
GDP Growth of Selected Countries since 1970 – 1996 (prior to the crisis)
345%
145%110%
81%53% 36% 27%
Hong Kong Malaysia Singapore Taiwan Indonesia Thailand Korea
Stock Indices growth of Selected Countries since 1990-1996 (prior to the crisis)
Source: Arwin Rasyid
Beginning in summer of 1997, the economic picture of the Asian Miracle began rapidly change. Initiated by two rounds of currency depreciation. First round was a precipitous drop in the value of Thai Baht, Malaysian Ringgit, Philippine Peso, and Indonesian Rupiah. Second round began with downward pressures hitting Taiwan Dollar, South Korea Won, Brazilian Real, Singaporean Dollar, and Hong Kong Dollar….
-79% -75% -69% -65% -65% -64% -60%-38%
Malaysia Thailand Philippines Indonesia Korea Singapore Hong Kong Japan
Governments have countered the weakness in their currencies by selling foreign exchange reserves and raising interest rates, which, in turn, slowed economic growth and made interest-bearing securities more attractive than equities…
The Change in Exchange Rates against USD for selected Asian Economies, Jan1997–Dec1998.
-86%
-58% -57% -48% -42%-24% -22%
Indonesian Rupiah Malaysian Ringgit Philippine Peso Thai Baht Japanese Yen South Korea Won Singaporean Dollar
-13% -11%-7% -6% -6%
-2% -1%
Indonesia Thailand Malaysia Hong Kong Korea Japan Singapore
The Change in Annual GDP during 1997 – 1998
The Change in Stock Market during Jan 1997 – Dec 1998.
Source: Arwin Rasyid
13
The causes of financial problems in The Asian Tigers economies are many and differ . Their fast economy growth achieved by opening their economies to FDIs, foreign good and services, capital flows, and were relying heavily on US Dollar market to absorb their exports. In order to attract FDIs and facilitate capital flows, their currency exchange rates were kept fairly close alignment with the US Dollar or a basket of currencies dominated by US Dollar….
The financial services sector in these countries had been developing rapidly and without sufficient regulations, oversight , and Government control
As capital markets were liberalized, banks in these countries could borrow abroad at relatively low rates of interest in USD and re-lend the funds domestically mostly in local currency
Over the past decade, foreign borrowing by these countries had shifted from Government to Private sector borrowing. In 1990s, a local bank mightborrow directly from a large New York money center bank
The financial crisis in Asia began in currency markets, but this exchange
rate instability was caused primarily inthe banking sectors of the countries in question..
The causes and structural factors contributing to the financial crisis:
Private-sector debt problems and poor loan quality
Rising external liabilities for borrowing countries
The close alignment between local currency and the USD
Weakening economic performance and balance-of-payments difficulties
Currency speculation
Technological changes in financial market, and
A lack of confidence of the governments to resolve their problems
The Banking Crisis
GCGIssues
Source: Arwin Rasyid
Initial Closed Merged Private & JV Nationalized State &
Regional
State Banks 7 3 4
Regional Development Banks 26 26
Private Banks 157 65 9 79 4
Closed in 1997 16 16
Nationalized in 1998 4 2 2
Audited in March 1999
Category A 73 1 72
Category B
Closed in March 1999 21 21
Eligible for recapitalization 9 7 2
Nationalized*) 7 7
Category C 17 17
Joint Venture Bank 32 2 30
Audited in March 1999
Category A 15 15
Category B 17 2 15
TOTAL 222 67 12 109 4 30
LOST REMAINING
BANK MERGERS, CLOSURES, AND SURVIVALS During The Crisis 1997-1999
Indonesia’s banking sector was devastated by the crisis that began in October 1997. The massive real depreciation of the rupiah, combined with sharp rise in interest rates and the refusal of creditors to roll-over loans, lead to insolvency of many Indonesian banks and businesses
Category A: those that did not need to be recapitalizedCategory B: those deemed to be potentially worth saving, but in need of recapitalizationCategory C: those that were to be liquidated
Note:
*) The seven banks nationalized (taken over) in 1999 were subsequently merged with Danamon, which had already been nationalized in 1998.
Source: Arwin Rasyid
106
222
143
12
67
1988 1997 1999
By types of banks…
The number of private-banks declined from 157 to 83 in 1999
79 Banks were closed / merged….
CLOSED
MERGED
527
63
11726
157
32
426
83
30
State Bank Reg Dev Bank Private Bank JV Bank
1988 1997 1999
October Package1988
Source: Arwin Rasyid
2012
Amending SPP - Holding Function and Bank Holding Company
Only allowed if the controlling shareholder (PSP) is Indonesian
Legal Entity
Source: Bank Indonesia Annual Banking Meeting 2012
Bank XYZ
Bank Holding Function
Should be established by individual, non-bank financial entity, and foreign controlling
shareholder
Bank Holding Company / Financial Holding Company
Bank A Bank B
Holding Function
Individual / Company / Bank
XYZ
Bank / Financial Holding Company
Bank A Bank B
18
Classification of Multiple License Rule
ClassificationNumber
of BanksExample of Banks
> IDR 30 Trilion 4 Bank Mandiri, BNI, BRI, BCA
IDR 5-30 Trilion 15CIMB Niaga, BTN, Danamon, BII, Bank Mega, Bank
NISP, Permata Bank, UOB Indonesia, BTPN
IDR 1-5 Trilion 39 Bank Kaltim, Bank DKI, DBS, Bukopin, Bank ANZ
IDR 100 Billion-1 Trillion 62Bank Artha Graha, Bank Ganesha, Bank Saudara,
Bank Maspion, Bank Mutiara, Bank Jasa Jakarta
Category 1 Category 2 Category 3 Category 4
Core Capital Rp 100 billion-Rp 1 trillion Rp 1 trillion-Rp 5 trillion Rp 5 trillion-Rp 30 trillion >Rp 30 trillion
Productive credit targetsMinimum 55% including at least 20% allocated to Micro & SME
Minimum 60% including at least 20% allocated to Micro & SME
Minimum 65% including at least 20% allocated to Micro & SME
Minimum 70% including at least 20% allocated to Micro & SME
Foreign exchange activities
Only as a foreign exchange traders
Only as a foreign exchange traders & Plain vanilla
Only as a foreign exchange traders & full foreign exchange activity
Only as a foreign exchange traders & full foreign exchange activity
Network Expansion:
To other financial institutions
Not allowedMax 15% of core capital (domestic only)
Max 25% of core capital (domestic & foreign)
Max 35% of core capital (domestic & foreign)
To other syariah commercial banks
Not allowed Max 20% of core capital Max 30% of core capital Max 35% of core capital
Source: Bank Indonesia (BI), CIMB
Revised Structure Linked to Each Bank’s Health Level
Source: Bank Indonesia (BI), CIMB
Stock Ownership Based on Bank’s GCG and Composite Grade
Revised Ownership Limitation for Grade 3, 4, 5
Indonesia was one of the few developing countries in Asiawithout single-ownership limitation for banks, which helpedpromote investment inflow to the banking industry post-1998 monetary crisis
On 13 July 2012, Bank Indonesia (BI) published a newregulation on bank’s share holding structure and aligning itwith each bank’s Good Corporate Governance (GCG) scoreand Composite Rating
BI Regulation Num. 14 / 8 / PBI /2012 is classified as non –retroactive and will only affect future deals
Banks with composite and GCG rating of 1 and 2 will not beimpacted to this limitation, since they are considered strongin facing negative impediments from changes in businessenvironment and other external factors
Other exemption to this rule include Government-ownedfinancial institutions (SOEs) and distressed banks under thesupervision of Deposit Insurance Corporation
Existing banks with GCG level 3 or lower are given time toimprove health levels until end 2013. Failing to do so willresult in ownership adjustment within 5 years, before fullycomplying by January 2019
Grade Risk Level
1 Low
2 Low-Moderate
3 Moderate
4 Moderate-High
5 High
Type of OwnersPrevious
Maximum LimitRevised
Maximum Limit
Individuals / Families 99% 20%*
Non-financial Institutions
99%
30%
Financial Institution 40%
*) 25% for Sharia Banks
Number of bank has declined but still excessiveNumber of banks in 2005 was 131 banks, it then declined to 118 banks currently
Source: OJK
5
3437
26
18
11
4
39
27 26
1210
State Owned BanksForeign Exchange Commercial BanksNon-Foreign Exchange Commercial BanksRegional Development BanksJoint Venture BanksForeign Owned Banks
2005 Jan-16
Country Banking Structure Capital Regulation
Malaysia
Domestic Banking Groups RM 2 Billion (US$621 million)
Locally-incorporated Foreign Banks RM 300 Million (US$93million)
Stand-alone Investment Banks RM 500 Million (US$155 million)
Thailand
Universal Banking (Commercial Bank) Baht 5 billion (US$157 million)
Foreign-Owned Financial InstitutionSubsidiaries : Baht 4 billion (US$126 million)Full Branches: Baht 3 billion (US$95 million)
Restricted License Bank (Retail Bank) 250 million Baht (US$7.9 million)
Philippines
Universal Banking P 2.5 Billion (US$55.5 million)
Commercial Bank P 1.25 Billion (US$28 million)
Thrift Banka. Head Office at Metro Manila P 150 million (US$3.3 million)b. Head Office outside Metro Manila P 40 million (US$888 th)
Rural Bank and Koperasi
Singapore
Full Bank S$ 1.5 Billion (US$1,100m)
Wholesales Bank S$ 200 Million (US$147m)
Off-shore BankNet head office funds minimal S$ 10 million (US$7.3m) – including S$ 5m (US$3.7m) in term of asset approved by MAS
IndonesiaCommercial Bank Rp 3 trillion (new) / Rp 100 b (existing) or (US$330m or US$11m)
Rural Bank Rp 5 Billion (province) or US$550 th
Current Domestic Regulation on Market Access in ASEAN
Source: Halim Alamsyah, Bank Indonesia
Country Bank Ownerships by Individuals Bank ownerships by Corporations
Indonesia– No limits of ownerships by individuals
for banks with good credit health score
For banks with good credit health score:– No maximum limitation for ownership by a corporation– No regulation against a non financial company to own a bank– No limitation of ownership by non financial company– Affiliated Party may own a bank and there is no limitation of ownership
Singapore
– No limitation of ownership by individual owners, but authorization must be obtained from MAS for certain thresholds (5%, 12% and 20%)
– No maximum limitation for ownership by a corporation– No limitation of ownership by non financial company, but an authorization from MAS is
required if ownership is above 5% and 20%. However, it is discussed to require authorization when the ownership is above 12%
Malaysia– Limitation of ownership by individual,
both an affiliated party or non-affiliated party is 10% max
– Limitation of ownership by a corporation both affiliated and non affiliated company is set on 20% maximum
– Non financial company is allowed to own a bank with maximum ownership 20%
Thailand– Limitation of ownership by both an
affiliated party or non-affiliated party is 5% max
– Non financial company is allowed to own a bank with maximum ownership 5%
Philippines – Limitation of ownership 40% max
– Affiliated parties may own a bank and there is no limitation of ownership.– Non financial company company is allowed to own a bank with the following:• Individual/Family max 20%• Corporation max 30%• Foreign ownership up to 40% is allowed with the consent from the President of the
Philippines
Market Access in Relations to Domestic Regulation -Ownership
Source: Halim Alamsyah, Bank Indonesia
Indonesia Malaysia Thailand Singapore Philippines
• Foreign, Local, and JV
• Foreign could own ≤
99%
• Single Presence Policy (majority shareholder is only able to have one bank)
• Rural Bank 0%
• Foreign, Local, and JV
• Limitation of ownerships:
– Commercial Bank ≤
30%
– Investment Bank ≤
70%
– Islamic Bank ≤ 70%
• Foreign, Local, and JV
• Foreign Bank could own Thai Bank:
– ≤ 25% (no need BOT approval)
– ≤ 49% (BOT approval)
– > 49% (MOF approval)
• Foreign, Local, and JV
• Foreigners could own ≤ 40% local bank
• Joint Venture could only occurred with local bank and the local bank that control the JV
• Individual could own ≤
5% from local bank
• Foreign ownerships limitation (voting stock) in Phil Banks:
– Commercial Bank ≤
40%
– Thrift Bank ≤ 60%
– Rural Bank 0%
Market Access in Domestic Regulation – Foreign Ownerships
Currently need special permission for foreigners
Source: Halim Alamsyah, Bank Indonesia
SINGAPORE
UOB Buana Indonesia OCBC NISP Danamon DBS Indonesia Bank Amin
99% 84% 67.4% 99% 80%
UOB Int'l Invst + UOB Limited OCBC Group Asia Fin. Ind DBS Spore Whishart Ltd
CHINA
ICBC Indonesia
90%
ICBC China
TAIWAN
Chinatrust Ind
99%
Chinatrust
MALAYSIA
CIMB NiagaBank Mestika
DharmaBumiputera Bank Maybank Indonesia
97.90% 80% 58% 97.35%
CIMB Group RHB Capt. Berhad ICB Finan Hold Maybank Group
JAPAN
Nusantara
ParahianganSumitomo Mitsui Resona Perdania Mizuho Ind
75.41% 99% 43% 99%
BTMU & Acom SMBC Resona Bank MCB Ltd.
AUSTRALIA
Commonw Ind Bank ANZ Indonesia
95% 99%
Commonwealth ANZ Group
INDIA
Swadesi Indomonex
76% 76%
Bank of India State BOI
USA
BTPN Sripartha
71.60% 40%
Texas Pacific Mercy Corps
NEDERLAND
Rabobank International Indonesia
56.94%
Rabobank Nederland
FRANCE
BNP Paribas Ind
99%
BNP Paribas SA
UNITED KINGDOM
SCB Indonesia Permata Akita B. Ekonomi
100% 45% 99% 99%
Standchard Bank Barclays HSBC
QATAR
QNB Kesawan
69.59%%
Qatar National Bank
Indonesia has the most liberal banking sector
Hanabank KEB IndWoori
Saudara
70% 99% 33%
Hana Bank KEBWoori
Saudara
SOUTH KOREA
Source: Bank Indonesia (BI), CIMB
2014
Function & Objectives
FSA
Consumer Protection
1 Roof for Financial Authority
Micro Prudential Policy Mix
Maintain Systemic Stability
Role in the Economic System
Financial System & Micro Prudential
Policy Mix(FSA)
Monetary & Macro
Prudential Policy Mix
(BI)
Fiscal Policy(MoF)
Source: State Law num. 21 / 2011, Tempo
Introduction to Financial Services Authority (FSA) on 1 Jan 2014Indonesia Selected an Unified Supervisory Model, which are also adopted by the United Kingdom and South Korea
FSA
Banking(integrated from
BI in 2014)Capital Market
Insurance Pension Fund
Multi – Finance Other Financial Services
Integrated in 2013
Source: State Law num. 21 / 2011, Media
Under one roof, the financial industry can expect clear business guidelines for each sectors that would not overlap anddevelop constructive yet healthy competition
More transparant and comprehensive data for non-bank financial institutions, which would enhance business activities andsustainable growth
Potential risk coming from the division of policy-makers for monetary purpose and financial sector purpose. Communication isdefinetly the key success factor
Establishment of the Financial Services AuthorityFSA is an Independent body that regulates and monitors the financial sector
Other Financial Services:
Pawnbrokers
Guarantor (e.g. IndonesiaDeposit Insurance Corp.)
Indonesia Eximbank
Financial Safety Netorganizations for social securityand health purposes
2015 - Current
29
Divergence of Monetary PolicyECB & BoJ are adopting a negative interest-rate strategy while the Fed is changing gearfor a tightening monetary policy. The moves raise questions about the Fed’s ability tofurther raise interest rates in the face of a rising dollar.
Source: Bloomberg
Negative
Interest Rates
by ECB & BoJ
(More Dovish)
Tightening
Monetary policy
by The Fed
(Less Hawkish)
Thailand
LDR : 106.3%CAR : 16.5%Load to GDP : 104.3 %Deposit to GDP : 99.1%Loan growth : 5.6% YoY*Credit rating : BBB+
Malaysia
LDR : 87.7%CAR : 15.5 %Load to GDP : 122.9%Deposit to GDP : 156.8%Loan growth : 9.1% YoY*Credit rating : A
Philippines
LDR : 71.8%CAR : 16.5%Load to GDP : 39%Deposit to GDP : 52.6%Loan growth : 14.4% YoY*Credit rating : BBB
Indonesia
LDR : 88.5%CAR : 20.3%Load to GDP : 35.3%Deposit to GDP : 41%Loan growth : 10.4% YoY*Credit rating : BB+
Singapore
LDR : 85.5%CAR : 16%Load to GDP : 153.2%Deposit to GDP : 142.5%Loan growth : 0.5% YoY*Credit rating : AAA
Comparison of ASEAN-5 Banking Indicators
* S&P credit ratingSource: CEIC
31
ASEAN-5 Banking IndicatorsThe Government has been asking banks to reduce interest rates since 2015
Sources : CEIC
NIM, 2015 ROA, 2015
BOPO, 2015
81%
70%
54%
42% 40%
IND PHI THA SIN MAL
5.39%
3.28%2.60%
2.30%
1.50%
IND PHI THA MAL SIN
2.32%
1.49%1.30%
0.97%
0.54%
IND THA MAL SIN PHI
Loan per GDP, 2015
35.3% 39.0%
104.3%
122.9%
153.2%
IND PHI THA MAL SIN
32
Monetary Policy: Optimizing Space Easing, and StrengtheningTransmission
External
Domestic
Financing
Global StanceDovish
FFR, EU, and Japan
Oil Price Slump
Global Growth risk that
continues to weaken
China UncertaintyNT, Money
Market
Capital Inflows Fuel Price Export Fiscal
Exchange Rate InflationLimited
GDP, depends on DD
Corporate Risks
Credit
Interest RateTight Banking
Liquidity
Policy Responses
BI RateReserve
RequirementMacro
prudentialMoney
Circulation Coordination
Sources : Bank Indonesia
33
Bank Indonesia Policy Mix: 2015 - 2016Shift to More Accommodative Monetary Policies to Support Economic Growth
18 June 2015Loosening of Macro prudential Policy• Increase the Loan – to Value (LTV) ratio• Reduce down payments for automotive loans
14 January 2016• Cut BI Rate 25 bps to 7.25%• Cut DF & LF Rate at 5.25% & 7.75% respectively• BI lowers its monetary operation rates even further
ranging from 25 bps to 45 bps (O/N to 1Y)
17 March 2016• Cut BI Rate further by 25 bps to 6.75%• Cut DF & LF Rate to 4.75% & 7.25%
respectively
26 June 2015Reserve Req. Policy:
• RR – LDR RR – LFR• Accommodate bank’s SME loans in RR calculation
17 November 2015Lowering IDR Primary RR by 50 bps from 8.0% to
7.5%. Effective since 1 Dec 2015
18 February 2015• Cut BI Rate 25 bps to 7.00%• Cut DF & LF Rate to 5.00% & 7.50% respectively• BI Reduces the rupiah denominated primary
reserve requirement by 1%, from 7.5% to 6.5%, effective from 16 March 2016
• Room for monetary easing exists on the back of solid macroeconomic stability especially in terms of less intense inflationarypressures in 2016 as well as less uncertain global financial markets.
• The reduction of the BI Rate and primary reserve requirement is expected to strengthen efforts to boost the ongoing economic growth.
Sources : Bank Indonesia
34
BI continues the loose monetary policyBI Rate were cut for 3 months in a row (Jan-Mar 2016), on the back of the Fed’s less hawkish
Sources : Bank Indonesia
BI Rate and Reserves Requirements BI Rate, Lending Facility and Deposit Facility
6.50%
4.00%
6.75%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
Mar
-10
Jul-
10
No
v-1
0
Mar
-11
Jul-
11
No
v-1
1
Mar
-12
Jul-
12
No
v-1
2
Mar
-13
Jul-
13
No
v-1
3
Mar
-14
Jul-
14
No
v-1
4
Mar
-15
Jul-
15
No
v-1
5
Mar
-16
Primary RR Secondary RR BI Rate
6.75%
7.25%
4.75%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
Mar
-10
Jul-
10
No
v-1
0
Mar
-11
Jul-
11
No
v-1
1
Mar
-12
Jul-
12
No
v-1
2
Mar
-13
Jul-
13
No
v-1
3
Mar
-14
Jul-
14
No
v-1
4
Mar
-15
Jul-
15
No
v-1
5
Mar
-16
BI Rate Lending Facility Deposit FAcility
For 3 months in a row, (Jan-Mar 2016) BI cuts BI rate by 25bp each to 6.75% in the last meeting on 17 Mar 2016. BI acknowledges that US economy will be slower than previously predicted and the FFR hike is not expected until the second half of the year, with a lesser magnitude than previously (from 4 times to only 2 times).
BI also cuts LF & DF by 25bp each to 7.25% and 4.75% respectively Last month BI reduced rupiah primary RR to 6.5% (effective on 16 Mar 2016) to reduce liquidity risk in the future A 1% reduction on IDR Primary RR to 6.5% will add rupiah liquidity by Rp34.4 trillion On a combination of a more dovish ECB & BoJ, a less hawkish Fed and stable rupiah, BI may cut IDR Primary RR further until
5%. While BI rate is likely to face 6.5% level until the end of 2016
35
BI Monetary Operation Rates (Term Structure) have declined in line with BI Rate cuts (75bp in 3 months) … but slower reaction from banking sector as tight liquidity hinders transmission of BI rate cut
6.25% 6.30% 6.40%
6.85%6.95%
7.10% 7.15%
5.50% 5.60%5.80%
6.20%
6.45%6.60%
6.75%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
1W 2W 1M 3M 6M 9M 1Y
TS Dec 2015 TS Mar 2016
LF rate, 7.25%
BI rate, 6.75%
DF rate, 4.75%
BI Monetary Operation Rates (Term Structure) Deposit Rates by Type of Bank
Sources : Bank Indonesia
36
Jan-Feb 2016 – After 25bp cut on BI Rate
Jan-Mar 2016, after 75bp cut on BI Rate
-0.01-0.04 -0.04
-0.09 -0.09
-0.18
-0.01
0.01
-0.39
0
-0.04 -0.04
0.06
-0.08
0
-0.29
-0.01 -0.01
-0.16
0.060.09
0.010.04
0.01
24
M
12
M
6M
3M
1M
Stat
e B
ank
BP
D
Pri
vate
Ban
k
Fore
ign
Ban
k
Co
mm
erci
al B
ank
Stat
e B
ank
BP
D
Pri
vate
Ban
k
Fore
ign
Ban
k
Co
mm
erci
al B
ank
Stat
e B
ank
BP
D
Pri
vate
Ban
k
Fore
ign
Ban
k
Co
mm
erci
al B
ank
Stat
e B
ank
BP
D
Pri
vate
Ban
k
Fore
ign
Ban
k
Deposit Rate Working Capital Lending Rate Investment Lending Rate Consumption Lending Rate
-0.19
0.050.18
-0.23-0.16
-0.11-0.03
-0.21
Working Cap Investment Consumption 1M 3M 6M 12M 24M
Lending Rate Deposit Rate
Sources : Bank Indonesia
37
Behavior of interest rates in the loose monetary policy
BI rate and IDR Deposit rates
Source: Bank Indonesia
BI Rate LPS Rate rDepo1 rWorkCap BI Rate LPS Rate rDepo1 rWorkCap
Dec-08 9.25 10.00 10.75 15.22 -25 0 + + 74.6
Jan-09 8.75 10.00 10.52 15.23 -75 0 + + 73.8
Feb-09 8.25 9.00 9.89 15.08 -125 -100 -63 -15 73.5
Mar-09 7.75 8.25 9.42 14.99 -175 -175 -110 -24 73.1
Apr-09 7.50 7.75 9.04 14.82 -200 -225 -148 -41 72.9
May-09 7.25 7.75 8.77 14.68 -225 -225 -175 -55 73.2
Jun-09 7.00 7.50 8.52 14.52 -250 -250 -200 -71 73.2
Jul-09 6.75 7.25 8.31 14.45 -275 -275 -221 -78 74.1
Aug-09 6.50 7.25 7.94 14.30 -300 -275 -258 -93 74.0
Sep-09 6.50 7.00 7.43 14.17 -300 -309 -106 73.6
Oct-09 6.50 7.00 7.38 14.09 -314 -114 73.9
Nov-09 6.50 7.00 7.16 13.96 -336 -127 73.7
Dec-09 6.50 7.00 6.87 13.69 -365 -154 72.9
MonthInterest Rate Level (%) Accummulation (in bp)
LDR (%)
BI Rate LPS Rate rDepo1 rWorkCap BI Rate LPS Rate rDepo1 rWorkCap
Oct-11 6.50 7.00 6.75 12.36 -25 -25 -8 -8 81.9
Nov-11 6.35 6.75 6.56 12.31 -40 -50 -27 -12 81.9
Dec-11 6.00 6.50 6.35 12.16 -75 -75 -48 -23 79.6
Jan-12 6.00 6.50 6.26 12.14 -75 -75 -57 -25 79.4
Feb-12 5.75 6.00 5.97 12.02 -100 -125 -86 -37 80.2
Mar-12 5.75 5.50 5.66 12.01 -175 -117 -38 80.8
Apr-12 5.75 5.50 5.42 11.86 -141 -53 82.2
May-12 5.75 5.50 5.35 11.78 -148 -61 82.6
Accummulation (in bp)LDR (%)Month
Interest Rate Level (%)
38
Then OJK came with new ruleLower caps on deposit rates for BUKU 3 and 4
OJK lowers cap on deposit rate for BUKU 3 to 100bp and BUKU 4 to 75bp above BI rate OJK also wants loan rates to be single digit at the end of 2016. OJK’s view: lower loan rates will be compensated by higher loan volume
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
Oct
-14
Nov
-14
Dec
-14
Jan-
15
Feb-
15
Mar
-15
Apr-
15
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb-
16
Mar
-16
Max Deposit Rate Buku 3 Max Deposit Rate Buku 4
LPS Rate BI Rate
Sources : CEIC
39Sources : Bank Indonesia
BI Rate as Policy Rate
BI Rate as Policy Rate BI rate is policy rate that shows
monetary policy’s stance in responding to the inflation expectation
BI Rate is the anchor rate for money market rates that can influence banking sector’s interest rates
Challenge Transmission of monetary policy
is not effectively implemented, because of:1. Huge incoming flow post GFC
2008 has pushed down O/N Interbank rate to DF Rate. While BI Rate stayed at 12m market operation rate.
2. Shallow financial market
40
The Old & New Monetary Policy Framework
BI will change its policy rate from BI rate into the 7d Repo rate on 19 August 2016
Prior to 19 Aug, BI rate is still the policy rate and BI will announce BI 7d Repo rate as part of the term structure
After 19 Aug, BI rate will be abolished
BI will set the policy corridor symmetrical at 150bp
7.50
7.25
7.00
6.75
6.50
6.25
6.00
5.75
5.50
5.25
5.00
4.75
4.50
Lending Facility Rate
12M BI Reference Rate = BI Rate
Lending Facility Rate
7D Reverse Repo Rate 7D Reverse Repo Rate
Deposit Facility Rate Deposit Facility Rate
%
19 AugCurrent Policy Framework New Policy Framework
75 bps
75 bps
After 19 Aug, BI Rate is no longer the policy rate
After 19 Aug, this is the new policy rate
Sources : Bank Indonesia
41
Transmission of monetary easing, through the interest ratechannel, improved (Jan-Apr 2016)
BI rate 75bps
GWM150 bps
Monetary Policy
Deposit RateFaster
57 bps, ytd Apr 16
Credit RateSlower
22 bps, ytd Apr 16
Third Party FundWeak
April, 6.18% yoy
Credit GrowthWeak
April, 7.95%, yoy
Better Money Market Liquidity
NPL
Economic growth is
not solid yet
42Source: BI
Key Challenge: Vicious Circle of GDP and creditLag between GDP growth & loan growth was 1 quarter (2006), 2 quarter (2009), and
currently might be longer. To counter vicious circle, BI will use LTV aside from BI rate & RR
GDP Growth, Loan Growth & NPL
Loan Growth vs GDP Growth
Weak GDP
Higher NPL
Lower TPFWeak
Investment
Higher Lending
Standard
Lower Demand for Loan
Lower Supply of Loan
DECLINING LOANS
43
Monetary Policy Mix
Monetary Policy
Macro-prudential
Raise the floor on the Reserve Requirement - Loan to Funding Ratio (RR-LFR) from 78% to 80%, with the ceiling maintained at 92% (effective August 2016).
• Bank Indonesia (BI) cut its BI Rate by 25bp to 6.5%, while the 7-day reverse repo rate is also reduced to 5.25%. The Deposit Facility and Lending Facility rates were cut by 25bp each to 4.5% and 7%, respectively.
• BI said that the rate cut was to keep the growth momentum, and maintaining its FY16 growth forecast of 5.0-5.4%.
• Relaxing the loan-to-value ratio (LTV) and financing-to-value ratio (FTV) on housing loans/financing by 5%; • Relaxing partially prepaid loans/financing pursuant to regulations concerning phased loan/financing in line
with the construction progress of the associated property as a second loan/financing facility.
• To maintain economic growth momentum, on its meeting on 16 June 2016 BI also announced new policies:
BI Rate, Lending and Deposit Facility Rate
Meeting Date BI RateLending Facility
RateDeposit Facility
Rate
17-Dec-15 7.50% 8.00% 5.50%
14-Jan-16 7.25% 7.75% 5.25%
18-Feb-16 7.00% 7.50% 5.00%
17-Mar-16 6.75% 7.25% 4.75%
21-Apr-16 6.75% 7.25% 4.75%
19-May-16 6.75% 7.25% 4.75%
16-June-16 6.50% 7.00% 4.50%
Sources : Bank Indonesia
44
Intermediation of Banking Industry - Loan by Purposes & Sector
Loan Growth by Sectors (% yoy) Loan Growth by Purposes (% yoy)
Source: BI, Recent Development of Financial System Stability
Sectors related to Govt’s infra projects , construction & electricity sectors, posted double digit growth in 1Q16. However, these sectors have small contribution (only 6.8%) to the economy.
While two biggest contributors, trade & manufacture sectors (almost 40%), experienced a declining trend since early 2015. Investment loan growth retarded, while working capital loan and consumption loan slightly grew, mainly in trade and other
sectors.
12%9%7%
45
Credit Risk of Banking Industry
Development of Credit risk Credit Restructuring and Write Off
Source: BI, Recent Development of Financial System Stability
NPL (Gross) by Economic Sectors
Non Performing Loan of banking industry was recorded at 2.83% in March 2016 Trade, transportation and construction sectors
have a dominant contribution to NPL hike. In order to reduce NPL rise, banks continued to
apply special mention loan restructuring in trade, manufacture and business services sectors.
46
MSME credit growth was slightly dwindled to 6.2% yoy with retained risk level at 4.63%
MSME Credit Growth (% yoy) MSME Credit Risk
Source: BI, Recent Development of Financial System Stability
MSME NPL by Bank Categories
47Source: BI & Central Bureau of Statistics
2015 GDP Growth per ProvinceMain engines of growth –i.e. Java & Sumatera- have revived, while the commodity-driven provinces still face setbacks. Regions with local content products , such as Sulawesi (sea products), were benefited from Rupiah depreciation
48
GDP Growth and Loan Growth in 2015
Agriculture, Hunting & Forestry
3.1%
20.0%
1.9%
Fisheries
8.4%
14.9%
3.0%
Electricity, Gas Supply and Water Supply
1.6%
22.6%
2.3%
Construction
6.6%
17.4%
4.1%
Manufacturing Industry (Mfg)
4.2%
15.1%
2.5%
Wholesale and Retail Trade
2.5%
10.6%
3.5%
Transportation, Warehousing and Communication 8.5%
3.3%
3.8%
Financial Intermediaries 8.5%
-0.9%
0.6%
Real Estate, Business Services
5.8%
11.7%
2.6%
Accommodation, Food & Beverages Activity,
4.4%
16.7%
2.3%Govt Admin, Defense and Social Security
4.7%
17.4%
0.1%
Education Services
7.4%
22.3%
1.7%
Other Services
8.1%
-15.4%
3.4%
Health Services & Social Activity
7.1%
74.3%
0.7%
GDP 2015 Growth (yoy) 2015 Credit Growth (yoy) 2015 NPL Ratio Good Perfomance
Source: CBS, CEIC, Statistik Perbankan Indonesia
-5.1%
-4.6%
4.1%
Mining and Quarrying
49
GDP Growth, Loan Growth and NPL ratio in 2015
Loan Growth Rank NPL Ratio Rank GDP Growth Rank
1 Agricultures, Hunting and Forestry 20.0% 4 1.9% 3.1%
2 Fishery 14.9% 3.0% 6 8.4% 3
3 Mining and Quarrying -4.6% 4.1% 1 -5.1%4 Procesing Industry 15.1% 2.5% 4.2%
5 Electricity, Gas and Water 22.6% 2 2.3% 1.6%
6 Construction 17.4% 5 4.1% 2 6.6% 7
7 Wholesale and Retail Trade 10.6% 3.5% 4 2.5%8 Provision of accomodation and the provision of eating and drinking 16.7% 2.3% 4.4%
9 Transportation, Warehousing and Communications 3.3% 3.8% 3 8.5% 2
10 Financial intermediaries -0.9% 0.6% 8.5% 1
11 Real Estate, Business, Ownership, and Business Services 11.7% 2.6% 5.8% 8
12 Government administration, Defese and Compulsory social security 17.4% 0.1% 4.7%
13 Education Services 22.3% 3 1.7% 7.4% 5
14 Health Services and Social Activities 74.3% 1 0.7% 7.1% 6
15 Other Services -15.4% 3.4% 5 8.1% 4
10.4% 2.5% 4.8%
Sectors
TOTAL
Source: CBS, CEIC, Statistik Perbankan Indonesia
Conclusion Previous government focussed on stabilizing demand side in order to maintain people’s purchasing
power. Such policies were fuel and electricity subsidies and direct cash to the poor with intention to boost short term consumption. Somehow, there is no extra budget for a more productive spending, such as infrastructure, and therefore neglecting the supply side.
President Jokowi started his administration with key focus on infrastructure development. The government sets a high target for infrastructure projects, arguably focusing more on the supply side, somewhat neglecting the demand side of the economy. The next question is what should be taken to minimize the gap between the supply and demand sides?
One of the things that Indonesia needs at the moment is balance: 1) between monetary and fiscal policies; 2) between consumption and production; 3) as well as a balance between the financial and real sectors.
Bank Indonesia’s monetary policy has been supportive of the market, in particular the counter cyclical measures have helped to buffer a slowing economy growth. The question is how to balance between monetary policy and fiscal policy as there’s always time-lag for the latter.
Under current condition, Indonesia’s banking system is relatively stable and resilience. Hence, banks will focus on managing asset quality and liquidity. For loans, banks will focus on sectors related to Government’s infra projects, trading & manufacturing sectors. While from funding side, banks will be flushed with liquidity from Tax Amnesty program.
Thank You
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