O

uch! This might have been people’s first impression on learning of Standard & Poor’s decision to lower its US debt rating from AAA to AA+ in August.

Even the US had to increase its debt ceiling from US$14.3 trillion to $16.7 trillion. But what supernatural power has been protecting Indonesia’s national banks against the US debt crisis?

At present, the ratio of US debt to its gross domestic product is 93.20 percent. What is an ideal ratio? In Europe, regulations were set down during the formation of the European Union.

The act, called the Maastricht Treaty, states that each European Union member state should have a state budget deficit that does not exceeding 3 percent of GDP and a debt to GDP ratio of no more than 60 percent.

In fact, many countries have debt to GDP ratios that exceed ideal levels, such as Japan (220.30 percent), Greece (142.80 percent), Italy (119 percent), Belgium (96.80 percent), Ireland (96.20 percent), Portugal (93 percent), Iceland (87.80 percent), Sri Lanka (85 percent), Canada (84 percent), Germany (83.20 percent), France (81.70 percent), Hungary (80.20 percent), United Kingdom (80 percent), Israel (77.90 percent), Egypt (73.80 percent), Austria (72.30 percent), India (69.20 percent), Brazil (66.10 percent), Mongolia (64.80 percent), the Netherlands (63.70 percent) and Spain (60.10 percent).

What about ASEAN countries? Indonesia is leading with a debt to GDP ratio of 26.90 percent and state budget deficit below 3 percent in 2010.

Please compare this with Thailand (44.10 percent), the Philippines (47.30 percent), Vietnam (52.80 percent), Malaysia (54.20 percent) and Singapore (97.20 percent).

So, what are the prospects for the US economy? It is quite true that there may be an economic bubble in some countries, including Indonesia.

Why? Because there will be a huge capital flight to their financial markets. The question is if the US economy will decline as happened after the subprime mortgage crisis in September 2008.

In my opinion, the US economy will remain strong enough to a certain extent to withstand the impacts of a debt crisis. Please remember that downgrading of the US debt rating happened after 94 years.

This means that since 1917, the US has held an AAA debt rating. In other words, the US economy is firm enough for the time being.

Another international rating agency, Fitch Rating, stated earlier this year that its US’ AAA debt rating would remained unchanged as of Aug. 16. Its outlook for loans is also stable.

Another relieving fact is that US bonds remain “bestsellers”. On Aug. 19, the US government sold three-year tenor bonds worth $32 billion with a yield of 0.5 percent.

Even though this was their lowest offer ever, the interest of investors seemed so high that it was oversubscribed 3.29 times. It was the highest demand seen for US bonds since November 2009.

This was a sign that foreign investors have maintained their trust in the liquidity of US bonds.

Also worth paying attention to is how broad and deep the US financial market is and how liquid the US capital market is.

The US economy will be stronger when the results of quantitative easing begin to be felt. This policy is a monetary instrument to increase economic growth by buying banking financial assets. All this shows that the US economy remains big and steadfast.

Meanwhile, how is the Indonesian economy? It can be said that the Indonesian economy is becoming more fertile. In the second quarter of 2011, the national economy grew 6.5 percent.

That surpassed the US’ growth of 1.6 percent and that of ASEAN countries such as Vietnam (5.67 percent), the Philippines (4.90 percent), Malaysia (4 percent), Thailand (3 percent) and Singapore (0.9 percent).

Indonesia’s inflation stood at 4.79 percent as of August 2011 and rupiah exchange rate was Rp 8,700 against the US dollar. Bank Indonesia (BI) has forecast inflation to range between 3.5 and 5.5 percent next year, compared to between 4 and 6 percent this year.

So, what supernatural powers do our national banks have in facing the US and European debt crises?

To understand this, we need to look at the financial performance of our national banks as of the second quarter of 2011.

Indonesian banking statistics as of June 2011 (issued on Aug. 15, 2011) revealed that credit grew well by 22.96 percent from Rp 1,586.49 trillion as of June 2010, to Rp 1,950.73 trillion as of June 2011. The growth of third-party funds was also fertile at 16.32 percent, growing from Rp 2,096.04 trillion to Rp 2,438.01 trillion.

Such growth has helped the loan-to-deposit ratio (LDR) to increase from 75.31 percent to 79.67 percent. This has exceeded the minimum LDR requirement of 78 percent, set by the central bank to promote national credit.

Simply put, so far, Indonesia’s national banks have been able to serve their core function as financial intermediaries.

The profit increase of 21.71 percent from Rp 75.55 trillion to Rp 91.95 trillion could make the return on assets (ROA) increase slightly from 3 percent to 3.07 percent.

This means the quality of assets grew better. Meanwhile, the percentage of non-performing loans (NPL) also improved from 2.98 percent to 2.74 percent, far from the threshold of 5 percent.

This confirms that national banks can carry out credit risk management well.

The capital adequacy ratio (CAR) reached 17 percent as of June 2011. With such a high CAR, national banks can face any potential risks (for example market, credit and operational risks) even if they have financial exposure abroad.

This is one of the banks’ supernatural powers to weather global financial storms.

Unfortunately, the net interest margin (NIM) became grew from 5.76 percent as of May 2011 to 5.79 percent as of June 2011. This apparently was contrary to the efforts of the central bank, which has consistently appealed to national banks to keep their NIM low to create attractive credit rates.

To do so, BI issued a prime lending rate, effective as of March 31, 2011, to reduce the NIM. Please note here that the BI benchmark interest rate has remained higher, at 6.75 percent since February 2011, than the interest rates of the Philippines (4.50 percent), Thailand (3.25 percent), Malaysia (3 percent) and Singapore (0.02 percent).

Really, the increasing NIM is a big and serious challenge for BI to address in the near future.

A tiny NIM allows the business sector to enjoy an affordable credit rate and to grow.

To keep Indonesia’s economy safe from any potential global risks triggered by the recent US and European debt crises, the government and House of Representatives need to work together to endorse the Financial System Security Network bill as a foundation for crisis management protocol.

This will help improve our banks’ supernatural powers for years to come.

The writer is a former assistant to the vice president of BNI.