Indonesia: A Policy Dilemma Looms

• Indonesia’s hopes of hitting double-digit credit growth in 2017 have all but faded, presenting a dilemma for policy makers trying to stimulate Southeast Asia’s biggest economy in the face of rising global interest rates.
• Despite eight interest rate cuts since the beginning of 2016, including back-to-back reductions in Aug 17 and Sep 17, demand for loans remains weak and economic growth continues to disappoint.
• While that gives policymakers reason to continue easing, they can’t ignore a depreciating currency as the Fed proceeds with its rate hikes.
• Loan growth dipped below 8% for a second straight month in Oct 17, according to Indonesia’s Financial Services Authority, or OJK.
• While loan growth is subdued, so too is inflation, which eased to 3.6% in Oct 17 and remains at the lower end of Bank Indonesia’s 3-5% target range.
• While that gives policy makers reason to continue easing, they can’t ignore a depreciating currency as the Federal Reserve proceeds with its rate hikes.
• Andry Asmoro, an economist at PT Bank Mandiri in Jakarta, said the lackluster credit growth had more to do with the fact that many banks are trying to reduce non-performing loans and manage asset quality. “They’re now very careful in disbursing loans to avoid new bad loans,” he said.
• After dropping to as low as 1.8% in Dec 13, the ratio of bank non-performing loans has steadily risen to more than 3% in 2016.

External Link : https://www.bloomberg.com/news/articles/2017-11-15/indonesia-rate-guide-policy-dilemma-looms-as-credit-growth-lags