Indonesian financial market keep sagging amid the various negative news from global and domestic - Photo: Special

JAKARTA (TheInsiderStories) – Indonesian bank industry is facing potential risk of outflows from the country’s stocks and bonds due to recent volatility of rupiah currency, which was mainly caused by the hike of the US Federal Reserve’s rate.

The rupiah had been traded near its weakest level in more than two years in the past week. It has lost nearly 5 percent since its high in January and traded at 13,943 per dollar on Friday (4/5), according to Jakarta Spot Dollar Rate.

Pressure on rupiah may hit banks’ performances, worsening nonperforming loans’ level and rising interest rates, particularly for banks with high level of foreign debts.

Last March, rating agency S&P said exchange rate of Rp15,000 per dollar was “the psychological level” at which companies with weak balance sheets could struggle with repayments and those with good cash flow might start restructure their debt proactively.

Looking back in 1998 Asia Financial Crisis, worst performance of rupiah certainly decreased demand for imported goods since its rate referred to U.S dollar.

One of the most ugly effects is the increase of banks’ existing debts, particularly those in U.S dollar currency. The value of debt that tends to swell will certainly also have an impact for the banking sector and the Indonesian economy.

The banks that provide foreign exchange loans will have large exposure to bad credit which will drain bank capital. In total, Indonesia’s foreign financial services debt has reached US$ 41.26 billion by April 2018.

Head of Indonesia Financial Services Authority (FSA) Wimboh Santoso said on Monday that Indonesia’s financial industry can withstand a stress test of the rupiah weakening up to Rp20,000 to the US dollar.

The authority claimed banks’ fundamentals are capable to maintain stability in the financial system, reflected by strong financial ratio such as Capital Adequacy Ratio (CAR).

Bank Financial Ratio on April 2018 (Source: Indonesia FSA)

However, as a measure for the prevention of a financial crisis due to a Systemically Important Bank’s financial stress, the FSA via its regulation No. 14/2017 obliges Systemically Important Banks to prepare and submit a plan for the solution of their financial problems (“Recovery Plan”) to the FSA. This obligation applies to all banks which qualify as Systemically Important Banks.

Currently, FSA has increased the number of systemically important banks to 15 from 11. FSA classified the country’s systemically important banks into five categories when deciding the size of the new capital surcharge.

Banks are included on the systemic list if they fulfill requirements pertaining to asset value, third-party funds and interconnectivity with other financial services, such as interbank loans and stocks ownership in other financial companies.