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Four Rate Cuts in Indonesia Have Done Little to Spur Lending

Four Rate Cuts in Indonesia Have Done Little to Spur Lending

(Bloomberg) -- Four interest-rate cuts in Indonesia this year have done little to drive down borrowing costs in Southeast Asia’s biggest economy, prompting policy makers to turn to other tools to spur lending.

Bank Indonesia cut its benchmark rate by 100 basis points to 5% from July to October, yet average rates for investment loans fell by just 18 basis points to 10.04%, according to data from Indonesia’s Financial Services Authority. Rates for working capital loans fell 17 basis points and were down just 4 basis points for consumer loans.

Businesses aren’t borrowing, choosing instead to shelve investment plans in an environment of slower global growth, trade disruptions and subdued domestic spending. As a result, loan growth has slowed to 6.5% in October from more than 13% a year earlier, complicating the central bank’s job as it tries to boost the economy.

“The banks can’t push credit if there’s no one to lend it to,” said Bharat Joshi, an investment director for Aberdeen Standard Investments Indonesia.

Four Rate Cuts in Indonesia Have Done Little to Spur Lending

Coordinating Minister for the Economy Airlangga Hartarto recently flagged concerns about the slow transmission of rate cuts, calling on banks to pass on the easing to customers more quickly.

Governor Perry Warjiyo said Thursday that while financial market rates have come down, they are “not optimum yet.” Speaking after the central bank left its benchmark rate unchanged for a second month, he said bank lending rates will fall even further next year.

Policy Tools

Bank Indonesia is using macroprudential tools in addition to rate cuts to help spur lending. It cut the reserve requirement ratio -- the proportion of funds lenders must hold in reserve -- twice this year to push cash into the economy. In September, it lowered the loan-to-value and financing-to-value ratios for property and down payment rules for motor vehicles.

“What we have done so far by cutting the rate and also by easing our macroprudential policy, that’s in order to boost the demand side for investment,” Senior Deputy Governor Destry Damayanti said in an interview earlier this month.

Sworn in for a second five-year term in October, President Joko Widodo has made clear that boosting investment is a priority. Among his key plans are an overhaul of the corporate tax regime and a change to labor rules.

Investment remains subdued though given the weak growth backdrop. The central bank sees growth of 5.1% this year, improving to 5.1%-5.5% in 2020.

Jeffrosenberg Tan, director and head of investment strategy at PT Sinarmas Sekuritas, said the infrastructure program is one reason banks have been slow to pass on interest rate cuts to customers. There’s been “intense competition” for funds from the government and state-owned enterprises, especially for infrastructure projects, he said.

“Like it or not, the short-term fix for the government is to increase liquidity domestically by borrowing more offshore through global bond placements,” he said. “This will free up domestic capital for the private sector.”

--With assistance from Tassia Sipahutar.

To contact the reporter on this story: Karlis Salna in Jakarta at ksalna@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Michael S. Arnold

©2019 Bloomberg L.P.