Many of the latest macroeconomic indicators suggest that we will have a sharp contraction in the last quarter. Tax revenue in June contracted by more than 9.3 percent. At the same time, motor vehicle sales, cement consumption and capital goods imports contracted by staggering numbers of 86 percent, 57 percent and 36 percent yoy, respectively. Based on those numbers, we predict a second-quarter domestic GDP contraction of more than 6 percent, the worst quarterly GDP growth since the first quarter of 1999.

Slowing economic activity is having a significant impact on the banking industry. Loan growth, as of May 20, decelerated to only 3.0 percent yoy, the lowest rate since June 2002, and it might continue to weaken in the months to come. Meanwhile, the nonperforming loan (NPL) ratio has exceeded 3 percent for the first time since August 2017. Conditions are likely to worsen if the economy does not recover soon.

The government, Financial Services Authority (OJK) and Bank Indonesia have taken a number of extraordinary measures to counter the economic impact of the pandemic on the banking industry. The government policy focuses on stimulus to increase loan issuance, while the OJK’s policy mostly focuses on loan quality and BI focuses on liquidity. The government has placed funds in regional development banks amounting Rp 11.5 trillion (US$791.32 million) to increase loans in provinces hit hard by the pandemic.

Previously, the government placed Rp 30 trillion in state-owned banks. The latest stimulus measures are given by guaranteeing up to 60 percent new working capital loans worth of Rp 100 trillion for labor intensive business. This loan guarantee is higher (80 percent of working capital loans) for priority sectors that have been impacted the most by the pandemic, such as tourism, hotel and restaurant, automotive, textiles and textiles products, electronics, processed wood, furniture and paper products.

The government expects this policy to create additional loans of Rp 100 trillion and prevent layoffs. Meanwhile, the OJK has relaxed rules for banks to manage asset quality.

Liquidity in the banking industry is quite ample, thanks to BI’s quantitative easing (QE) policy. Banks’ placement in BI’s open market operation or monetary policy instruments, which indicates how much banks have in fresh funds, amounted to Rp 449.1 trillion at the end of July, up by a significant Rp 268 trillion from the end of last year.

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