JAKARTA (ANN/THE JAKARTA POST) – President Joko “Jokowi” Widodo has urged banks in Indonesia to proactively extend loans to businesses, aiming to stimulate increased money circulation and bolster economic growth amid global uncertainty. However, analysts contend that sluggish government spending is also a contributing factor.
Addressing the annual Bank Indonesia (BI) meeting on Wednesday night, Jokowi posed a rhetorical question about whether an excessive influx of funds into government and BI-issued bonds might be diverting resources from the real sector, including households and non-financial businesses.
Expressing concern over reports of dwindling cash circulation among businesses, the president recommended that banks prioritise lending, especially to micro, small, and medium enterprises (MSMEs), instead of investing in bonds.
“I heard from a lot of business players that cash circulation is drying up,” said the president, while acknowledging that being prudent is important for banks, before continuing to say: “but don’t be too careful”.
Jokowi began his speech by saying that Indonesia and many other countries must face the fact that ongoing wars such as those in Ukraine and Gaza are likely to be prolonged, implying that global economic uncertainty and supply disruption in many parts of the world will persist next year.
This year, Indonesia’s economic growth is expected to hover at five per cent, below the 5.3 per cent target set in the state budget, partly because of the aforementioned reasons.
BI Governor Perry Warjiyo also conveyed a similar view that he does not support banks buying too many bonds and urged lenders to disburse more loans, especially when the central bank had accorded more than enough liquidity in the financial sector.
“Our message for banks is, when liquidity has been augmented, like the president said, please channel it for loans, too,” Perry told reporters on the sidelines of the same event.
The central bank has its own reasons for its actions, saying that “liquidity in the economy has remained ample” and the government has maintained an expansionary fiscal policy, including through fuel subsidies to get inflation under control.
Next year, Indonesia is projected to grow by up to 5.5 per cent, with the central bank expecting support from higher state civil apparatus (ASN) salary and the general election, among other factors.
It also plans to keep its benchmark interest rate unchanged throughout next year, as the central bank will focus its monetary policy on stability of the rupiah amid prolonged uncertainty.
BI also detailed that loan disbursement has only grown by 8.99 per cent year-on-year (yoy) in October, while this year it aims for lending growth to hover between nine and 11 per cent yoy.
MSME lending grew by 8.36 per cent yoy, predominantly because of by the subsidised microcredit program (KUR), BI said.
Meanwhile, realisation on the KUR has only reached 73.54 per cent as of November 20 from a IDR297 trillion (USD19.10 billion) target this year, as quoted from Antara. This was lower than the 86.59 per cent realised in KUR lending in the same period of last year, which had a higher target of IDR373 trillion.
However, analysts said banks could not sacrifice prudence just to achieve loan disbursement targets as they would end up being the ones to blame when the system fails.
Amid a political year, it is probable that businesses are taking the “wait and see” approach, and therefore money circulation may seem to be lessen, spelling the need for demand to be induced by government spending.
Private lender BCA chief economist David Sumual said on Thursday that the pace of government spending played an important role in money circulation seeing as it is the main driver of demand.
“(Low) liquidity (in the real sector) was actually caused by slow government spending,” David said, pointing to an analogy that state spending is like a locomotive and others would follow where it went.
The government has only realised 76.68 per cent of its spending target until October, according to the latest Finance Ministry data. Regional spending, meanwhile, fell even lower at just 64 per cent of its target in the same period, less than two months before the year closes.
Loan supply was ready, but the demands were simply not there because the locomotive had not yet arrived, he emphasised.
He hoped state spending would be stronger in November and December, as seasonal patterns take place, but said that this was “less effective” and recommended that the government increase spending as soon as possible so the multiplier effect can ripple sooner.
Moreover, he also repeated that banks can only follow borrowers, and each has its own capacity to be considered.
“We need to be careful too, including with MSMEs. If we exceed their capacity (to borrow), that would create bad loans,” David said.
“Banks will just follow the trade, follow the business. If the business is good, it’s on the move, we will finance them. No one needs to instruct to lend, banks will finance them,” he said.
Private lender Bank Permata chief economist Josua Pardede told the Post on Thursday that government bonds make up less than 20 per cent of the Indonesian financial market’s liquidity pool.
While bonds did offer a higher return than time deposits, he said they have not led to liquidity crowding out, adding that this has not disrupted the role of banks in giving loans.
He also opined that higher interest on government bonds would not be a significant problem when the government could spend its budget effectively, as the money could then be channelled back to the real sector.
