Executive Views: Deepening Market Instruments  

Financial Service Agency announced the regulator can force Indonesian banks to consolidate, merging or other steps to maintain financial stability amid the COVID-19, it said yesterday (04/22) - Photo by FSA Office

JAKARTA (TheInsiderStories) – Indonesia currently draws the interest of global investors along with China and India, after S&P upgraded Indonesia’s rating to investment grade, an improvement of global competitiveness index rank to 36, as well as most recently a jump of 19 points in the ease of doing business performance to 72.

Having said that, Indonesia financial market is yet to fully taking advantage of the interest, due in part the limited size of the country’s market. In order to gain the insight of what the authorities will do to improve the trading in the stock exchange as well as the outlook of the financial market in general, TheInsiderStories interviews Chairman of Indonesia Financial Service Authority (FSA) Wimboh Santoso.

Below is the excerpt of the interview:

Q: How do you see financial market outlook next year?

If we look at the data, we can say that we are more optimistic about the outlook from stable to positive next year and we will pass the inflection point. From the banking sector, we expect lending growth at around 10-12 percent next year, following better outlook from global economy growth and our trading partners’ economy like China and India. Term of Trade (export to import ratio) will continue to grow at around 6.9 percent and commodity price is expected to have positive outlook and it will push loan, particularly in commercial loans.

Credit risk will also improve as we already see the bottoming-out in 2016. Currently, the gross non-performing loan (NPL) improves to 2.93 per cent from 3.18 per cent previously, and is expected to continue to improve to around 2 per cent next year. The restructuring process of companies on the impact of the commodity price loom is still undergoing and companies have ample liquidity to face the condition.

Q: What are forthcoming challenges for financial sector?

Next year, in June, we will hold general elections to elect local government heads (Governors and Regents) in 171 regions as well as preparation for national election 2019. However, the main challenge is the US central bank’s (The Fed) normalization that can trigger capital outflow. While, we remain optimistic, the Fed is likely to raise their rates twice next year, the hike will push credit default swap. We expect net foreign assets growth to remain stable at 17 per cent or around Rp1,788 trillion.

The other challenges is financial technology, e-commerce and cyber-crime which has been growing vast and need to be anticipated. Financial technology certainly will make the process easier and make services run faster. However, they indeed have savings, not to mention the additional fees, that will bring unintended risks such as fraud. We need to set the regulation proper to the characteristic of the business process. We are currently process license for 31 financial technology companies.

For your information, in the last decade (2007-2017), there are total Rp105.8 trillion loss estimated from fake investment from such institutions including from Pandawa group, First Travel, Dream Community, Talk Fusion, Mi1, Wein group, Compact, Crown Indonesia Makmur, Cakrabuana Sukses Indonesia, as well as Neo United Kingdom of God Sky Earth.

Q: Can you tell us about your assessment on the current condition of financial sector?

Since the central bank eases their monetary policy, the productive sector of the economy seems to be more attractive. Currently, BI 7-days reverse repo rate stood at 4.25 percent, while one-year tenure government bond yield stood at 5.72 per cent, therefore the spread is really competitive. The credit and deposit rates have decreased to 11.52 per cent and 6.34 per cent respectively, in the last 12 months (as per September, 17).

Banks’ lending grew by 7.86 per cent to Rp4,543.6 trillion compared to Rp4,377.2 trillion last year. Third party funds grew 11.69 per cent to Rp5,142.9 trillion from Rp4,836.8 trillion last year.

Meanwhile, the Indonesian Stock Exchange index rose 14 percent to date to 6038.1 from 5296.7. And funding from capital market reach Rp182.2 trillion from 108 listed companies, compared to last year of Rp195.4 trillion from 122 share issuers.

Q: On the Bank Business Plan, is it safe to say that the full year 2017 lending growth will be around 9-10 per cent?

There are some big paid off from state-owned companies, around Rp4 trillion for each state-owned company. Some of these companies have over liquidity, as they get billing payment from government for PSO (public service obligation) in PT Pertamina for example. So they paid off part of their loan in banks. So, don’t get it wrong, lending disbursement is already pass the target, there are many borrowers yet they have this over liquidity problem. Slowdown in lending growth is not always mean there are no borrowers.

Q: Are there any new funding instruments for the financial market?

We are developing these kinds of securitization models like medium term notes, perpetual bond, municipal bond, as well as studying scheme like blended financing, limited concession scheme and asset backed securitization for infrastructure fund.

We’ve seen asset backed securities (ABS) for infrastructure scheme launched by the toll operator PT Jasa Marga Tbk (IDX: JSMR) which has issued Rp2 trillion and PT Perusahaan Listrik Negara through issuing Rp4 trillion worth ABS. Also, ABS for housing launched by PT Sarana Multigriya Financing worth Rp2.7 trillion. We also working on limited participant mutual fund for Kertajati Airport development.

We need to develop these new instruments as infrastructure investment need is expected to rise to US$138.6 billion in 2025 from $57.3 billion in last year. Lending from banks to infrastructure projects rose to Rp544.9 trillion as September, 17, from Rp518.2 trillion in 2016, yet it simply will not enough.

Writing by Yosi Winosa, Email: yosi.winosa@theinsiderstories.com