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Jakarta Post

Loan demand to slow further this year as pandemic hits businesses

  • Riska Rahman

    The Jakarta Post

Jakarta   /   Mon, April 20, 2020   /   03:00 pm
Loan demand to slow further this year as pandemic hits businesses An employee moves packs of bank notes to the cash pool at Bank Mandiri in Jakarta in this undated photo. Slowing loan demand in the first quarter of this year is expected to continue up until the end of 2020 and can potentially drag down Indonesia’s economic growth as the COVID-19 pandemic hits business activities. (The Jakarta Post/Seto Wardhana )

Slowing loan demand in the first quarter of this year is expected to continue up until the end of 2020 and can potentially drag down Indonesia’s economic growth, as the COVID-19 pandemic hits business activities, economists have said.

The latest banking survey published on Thursday by Bank Indonesia (BI) showed that the weighted net balance of new loan demand in the first three months of this year had reached 23.7 percent, significantly lower than the figure in last year’s fourth quarter of 70.6 percent.

The weighted net balance is calculated by multiplying net balance — resulting from the percentage difference of respondents projecting an up and down — with each economic sector's weigh. A positive result indicates an expansion while a negative one reflects a contraction.

The slowdown in new loan demand happened across all segments of working capital, investment and consumption loans. However, the steepest decline occurred in consumption loans, which contracted 7.6 percent during the January to March period from 75.8 percent growth in 2019’s last quarter.

The shrinking consumption loan demand was caused by a contraction in unsecured loans, while demand for other types of consumption loans, like mortgage loan, automotive loans and credit cards, recorded a slowdown in growth, the survey result showed.

Center of Reform on Economics (Core) Indonesia economist Piter Abdullah told The Jakarta Post on Friday that the decline in consumption loans had been triggered by the government’s social restriction policy.

“This caused a decline in demand for non-food items, like cars and houses, as the policy limits the public’s mobility,” he said.

Although large-scale social restrictions (PSBB) officially started less than two weeks ago in Jakarta, President Joko “Jokowi” Widodo had urged the public in mid-March to work, study and pray from home to prevent the further spread of COVID-19.

His call prompted both small and large businesses and shopping malls to close their doors temporarily, while essential businesses like supermarkets and restaurants began serving only takeaway and delivery services.

Declining consumption loan demand is feared to spill over to cooler household spending, which accounts for more than half of Indonesia’s gross domestic product (GDP).

Bank Negara Indonesia (BNI) economist Ryan Kiryanto projected that consumers would still refrain from applying for new loans given the unfavorable economic situation.

“The PSBB policy is hindering people’s mobility and discouraging them from applying for new consumptive loans,” he explained. “Business players will also refrain from applying for new loans as they wait for the latest developments of the pandemic.”

The highly contagious pneumonia-like illness has infected more than 6,500 people in the country and caused at least 580 deaths as of Sunday afternoon, official data showed.

Fitch Solutions country risk and industry research projected in its note on Friday that Indonesia’s private consumption growth will slow to 1.2 percent this year from 5 percent last year because of mounting unemployment, as around 2.8 million people have lost their jobs so far due to severe disruptions to business activities.

It expected the country’s economic growth to slow to 2.8 percent this year, far lower than 5.02 percent achieved last year.

Finance Minister Sri Mulyani Indrawati said on March 18 that Indonesia’s economic growth might drop to 4.5 to 4.9 percent in this year’s first quarter as the coronavirus pandemic weakened economic activities. The government is also bracing for slower economic growth this year as it projected the country’s GDP growth to fall to a 21-year low of 2.3 percent under the baseline scenario and even contract to 0.4 percent under the worst-case scenario.

Despite the apparent decline in new loan demand, the central bank’s survey still reflected an optimism that demand will increase in the second quarter of this year due to relaxed loan disbursement policies, especially on working capital and small and medium enterprises (SMEs) loans.

Despite slowing economic activities in several major cities, the survey’s respondents were still optimistic that this year’s loan disbursement rate would continue to grow.

The Health Ministry had so far approved PSBB requests from at least 16 cities and regencies to curb the spread of COVID-19.

“Respondents project 2020’s loan growth to reach 5.5 percent year-on-year [yoy], lower than the previous survey of 9.4 percent and 2019’s loan growth realization of 6.1 percent,” the survey reads.

However, Ryan was of the view that this year’s loan growth would reach 5 percent this year as he expected the pandemic to continue beyond the first half of 2020.

Piter projected an even lower growth projection of 2 to 4 percent this year, saying that the pandemic would continue to the third quarter, causing loan supply and demand to further decline until at least September.

“If this happens, the economy will slowly recover in the fourth quarter and the loan disbursement rate will rebound in 2021.”