T

he President'€™s National Economic Committee (KEN) says there are rising risks in the banking sector '€” similar to those that were apparent in the wake of the 1998 and 2008 financial crises '€” and has warned the central bank not to overdose on monetary tightening, as it could usher in more harm than good for the economy.

In its annual report released on Tuesday, the President'€™s economic advisory team noted that the economy had recently seen a surge in the banking pressure index (BPI), which measures the probability of systemic banking default in the economy.

'€œThe BPI has experienced an upward trend over the past few months, a reflection of increasing pressure in the banking system,'€ KEN, whose members comprise economists and politically powerful businesspeople, wrote in its report.

'€œA further economic slowdown could exert further strain on our banking system. Indonesia must be careful in its policy to slow down growth.'€

According to the report, Indonesia'€™s BPI has risen from -1.0 three years ago to 0.0 as of now.

A safe BPI level should be below 0.5. Indonesia breached this threshold during both the financial crises of 1998 and 2008, when the index stood at 1.6 and 1.0, respectively.

After enjoying years of cheap credit and strong loan growth, the banking sector is bracing for tighter liquidity and lower profit margins after Bank Indonesia (BI) raised its key interest rate by 175 basis points to 7.5 percent this year '€” its most aggressive monetary tightening in a decade.

Analysts have expressed their concerns that a higher BI rate, though intended to stabilize the economy, might also have negative repercussions, such as rising non-performing loans (NPL) that could pose a risk of insolvency among local lenders and, ultimately, systemic liquidation in the banking sector.

Besides posing a threat to banks, an overly intensive monetary policy could lead to possible overkill in economic growth, a situation that would be difficult to reverse if it materialized, according to KEN chairman Chairul Tanjung.

In his speech prior to the release of the report, Chairul said that the BI rate hike '€œmight be good in the short term but, if applied in a wrong dose, could harm the economy'€.

Nevertheless, KEN noted that fiscal policy, not monetary policy, should be sought as a solution to Indonesia'€™s fundamental problems. It compared the BI rate increase to a cold medicine, which was designed only to stabilize body temperature rather than treating and curing the real illness, namely the internal infection, within the body.

BI Governor Agus Martowardojo said that tight monetary policy was something that all Indonesians should accept for the sake of a more stable and sustainable economy in the long run.

'€œIf Bank Indonesia adjusts its policy rate, then it does so carefully, after conducting thorough studies so that it fully understands how it will impact the people,'€ he told reporters on Tuesday.

Agus acknowledged that the country'€™s banking industry had seen tighter liquidity recently but argued that overall, it was still in good shape despite the BI rate hike, as evinced by local banks'€™ high capital adequacy ratio (CAR) and low NPL levels.

National Banks Association (Perbanas) chairman Sigit Pramono said that signs of liquidity deterioration in the banking sector had indeed been apparent, adding that local lenders should be more prudent when expanding their credit.

'€œFor a bank, the threat from a lack of liquidity is similar to a heart attack '€” it can happen suddenly, at any given moment,'€ he said. '€œSome people perhaps think our banking system is good, but in this industry there'€™s no guarantee that a good situation now will be sustained through tomorrow.'€