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View all search resultsLiquidity trap, confidence crisis amid monetary abundance
Japan’s Lost Decade offers a sobering lesson. The country suffered not from a lack of money, but from a collapse in growth expectations.
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Indonesia's Central Bank Governor Perry Warjiyo gestures to media members during a press conference on Jan. 15 at Bank Indonesia headquarters in Jakarta. (Reuters/Willy Kurniawan)
W
hen Indonesia’s monetary engines have been fully revved, interest rates lowered and government funds injected into state-owned banks, many expect the economy to accelerate.
Yet the ship barely moves. Liquidity is abundant, but the economy is idling. Money sits still, credit growth is weak, investment hesitant and household spending subdued. The question arises: are we heading toward, or already caught in, a liquidity trap?
As of August, credit growth stood at 7.56 percent year-on-year (yoy), down from 7.77 percent in June, according to Statistics Indonesia (BPS), far below the pace required to sustain solid expansion. Banks are awash with cash, yet borrowers remain reluctant.
It is a worrying picture: liquidity in excess, but productive lending and investment failing to follow. Both households and businesses seem stuck in wait-and-see mode, echoing the classic signs of a liquidity trap, monetary stimulus flowing, but transmission to the real sector jammed.
The problem is no longer supply, but confidence. Bintang Aulia Lutfi wrote in an op-ed article in The Jakarta Post on Sept. 25 that many banks prefer parking funds in safe assets to financing new ventures. The main questions would be: Why has credit demand weakened, and has monetary policy lost its bite?
On the demand side, households are still rebuilding purchasing power, while businesses delay expansion amid uncertainty. By August, Bank Indonesia reported micro, small and medium enterprises (MSME) credit grew only 1.6 percent and property loans 4.6 percent. These figures show that very few are eager take the credit momentum.
Policy actions, including a Rp 200 trillion (US$12.5 billion) liquidity injection by the government to banks, have been limited in impact due to the lack of demand. Gadjah Mada University economist Wisnu Setiadi Nugroho said although money is available, the multiplier effect remains constrained, if people are not willing to borrow and lend.
