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Executive column: We can have the best of both worlds: Deutsche Bank

Deutsche Bank AG Indonesia has seen the ups and downs of the country’s economy since it began operating here in 1969, with the bank’s lines of business covering corporate banking, securities, global transaction banking as well as asset and wealth management

The Jakarta Post
Mon, October 28, 2013

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Executive column: We can have the best of both worlds: Deutsche Bank

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em>Deutsche Bank AG Indonesia has seen the ups and downs of the country'€™s economy since it began operating here in 1969, with the bank'€™s lines of business covering corporate banking, securities, global transaction banking as well as asset and wealth management. The bank'€™s chief country officer, Suresh L. Narang, talked to The Jakarta Post'€™s Tassia Sipahutar about the latest development in the economy and banking consolidation. Below are excerpts of the interview.

Question: How has postponement of the US stimulus tapering affected your efforts to bring in foreign capital to Indonesia?

Answer:
Our business is partly volume driven. Temporarily, there might be a withdrawal from the bond market by foreign investors. But if the yields are right and attractive, they'€™ll come back again.

If you look at the behavior of Indonesian markets after the taper talks have started, two things have happened: the currency has depreciated from Rp 9,600 per US dollar to Rp 11,500 and the 10-year local currency bond yields that had fallen to 5.4 percent have now gone to above 8 percent.

There have been big corrections in local currency bond yields and local currency, but in my opinion, they are healthy corrections because if you have to keep attracting foreign investors to invest in local currency bonds, the yields have to be attractive enough relative to US yields and of course, relative to inflation.

So, will the country still be attractive to investors?

Indonesia is actually very strong. The question is the current account deficit. That'€™s the main issue facing Indonesia. Before depreciation, the currency was Rp 9,500. It was sucking in imports because imports were cheap. Now that the currency has corrected a bit, obviously imports will be more expensive. That'€™s the correcting mechanism.

Hopefully the weaker currency will lead to some reduction in imports, but I think we have a fundamental problem with the current account because the economy is growing at 6.4 percent and maybe prospectively less than 6 percent, but it is still growing.

But as long as investments don'€™t keep up with the economic expansion, given the investments gap, there will always be pressure on the current account. It may not be 4.4 percent, it may come down to 3 percent because partly the current account deficit is related to the level of economic growth.

So, if your economic growth is 6.4 percent or 5.8 percent, automatically some part of the current account deficit will reduce. Imports will come down, exports will increase because of the weaker currency. It'€™s not bad to have a current account deficit as it'€™s the result of economic growth.

As long as you have a fairly sustainable range of economic growth and a current account deficit that you can manage, it'€™s the best of both worlds. So, you have to keep yourself attractive to foreign investors; both foreign direct investment (FDI) and portfolio. These are the two challenges.

 Do you think the small- and mid-scale banks will be affected severely with the liquidity situation?


They'€™ll be affected, but not severely. We have a supervising mechanism at BI [Bank Indonesia] and the OJK [the Financial Services Authority]. They'€™re monitoring these banks now much more closely. Even if there'€™s competition for deposits, especially local currency deposits, I think these agencies know what is going on. They keep a very close tab on the health of these banks. And of course we have the LPS [the Deposit Insurance Corporation], which guarantees deposits of up to Rp 2 billion.

The central bank should keep a tab and should keep monitoring what are the deposit levels being offered by banks, but let the market determine because capital should always be correctly priced. It should be determined by the market. Deposits are nothing but capital for borrowers, so they should be correctly priced.

Is it somewhat dangerous to offer higher rates than those of the LPS?

It'€™s dangerous in the sense that deposits are higher than Rp 2 billion and they are not covered by the LPS. If the deposits are less than Rp 2 billion and you offer them high interest rates, higher than LPS, those are the risks depositors are taking.

But I don'€™t think we are in a situation where you'€™ll suddenly see a bank collapsing and therefore, you know, the government has to bail out the depositors'€™ funds. At least as of now, I don'€™t foresee that for the reasons I mentioned.

The central bank should be doing something about reducing the number of banks from 120. Indonesia doesn'€™t need 120 banks. I'€™m talking about banking consolidation, but not at the top. What needs to happen is in the tail. We have a very long tail here.

Eighty percent of banking assets are in 10 to 12 top banks and the remaining 20 percent are in the other 100 banks. That doesn'€™t make sense to have so many banks, given the size of the economy. It complicates supervision, you have to supervise so many banks.

If BI requires you to be a legal entity like a PT, will you do that?

If it is required, yes, we will do that, for sure because our business in Indonesia is very important to the group. It has a certain advantage and disadvantage. The advantage is of course you'€™re basically ring-fencing the operations of Deutsche Bank. So regardless of what is happening globally with us, we will be insulated because we have a PT.

The thing is, once you'€™re a PT, you miss out on the advantages of a global balance sheet. So in terms of limits, we have just local capital, not on the global balance sheet. That'€™s clearly a disadvantage.

 Which one'€™s better?

 I don'€™t think there'€™s an easy answer. Okay, what are the chances of the banks operating here, the parent company will run into severe problems and shake down the business in Indonesia. Part of that has been addressed with the CEMA [capital equivalency maintained assets] regulations, where BI has asked foreign bank branches to keep a certain amount of money, depending on the business models. So part of that ring-fencing is done through CEMA. So I would say even though we are not a PT, because of the CEMA regulations, we are in fact keeping a fairly large amount of capital here.

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