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Jakarta Post

Bracing for tight liquidity

  • Editorial Board

    The Jakarta Post

Jakarta   /   Mon, December 3, 2018   /   08:02 am
Bracing for tight liquidity Bank Indonesia (BI) has announced that its 2019 monetary policy will continue to focus on stability. (Shutterstock/File)

Bank Indonesia (BI) has announced that its 2019 monetary policy will continue to focus on stability, particularly in controlling inflation in the 3.5 plus 1 percent target range and maintaining a stable rupiah in accordance with foreign exchange fundamentals. This means the central bank will remain hawkish in anticipating the United States Federal Reserve’s plan to raise its policy rate three more times next year.

Even though BI governor Perry Warjiyo also indicated during the annual bankers meeting early last week that the central bank would maintain its accommodative macro-prudential policy to stimulate bank financing of economic activities, the business community should brace itself to face tighter liquidity and higher lending costs.

BI decided two weeks ago to raise its 7-Day Reverse Repo Rate by 25 basis points (bps) to 6 percent and to increase the deposit and lending rates by 25 bps to 5.25 and 6.75 percent, respectively. The decision reflects BI’s ongoing efforts to narrow the current account deficit, which reached 3.37 percent of gross domestic product in the third quarter, and to anticipate a hike in global policy rates in the next few months by strengthening the attractiveness of domestic financial markets to stem capital flight.

But to maintain the banking industry’s flexibility and distribution of liquidity, the central bank raised the average reserve requirement for conventional and sharia banks from 2 to 3 percent, and raised the macroprudential liquidity buffer from 2 to 4 percent for conventional and sharia banks.

Even now, banks’ competition over deposits has grown fiercer, with small- and mid-sized banks forced to significantly increase their deposit rates to put upward pressures on their funding costs, thereby causing a greater risk of non-performing loans (NPL). Further on down the road, these higher funding costs would put downward pressures on their margins and, consequently, their profitability. 

Fortunately, the latest BI data shows the capital adequacy ratio of the banking industry at 22.9 percent and the liquidity ratio at 19.2 percent in September, up from 18.3 percent in August. Banks were also maintaining a low NPL ratio of 2.7 percent (gross) and 1.2 percent (net). 

Yet, more encouraging is that credit growth accelerated from 12.1 percent year-on-year in August to 12.7 percent in September, while deposit growth ticked slightly downwards from 6.9 to 6.6 percent.

Most analysts shared BI’s projection that full-year credit growth would be around 12 percent. But since deposit growth was projected to slow to about 8 percent, liquidity was likely to be much tighter next year and credit expansion would, at best, stagnate at this year’s level. 

The central bank has indicated it will continue to monitor liquidity adequacy and distribution in the banking system in view of maintaining financial stability. The added good news is that the downward trend in global oil prices will help reduce the trade deficit and consequently, the current account deficit, to thereby reduce pressures on the rupiah exchange rate as well.