Sustaining the Momentum
    Category: Smart Investing 2016 By : Haryanto T. Budiman Read : 568 Date : Monday, June 20, 2016 - 03:21:43

    The Indonesian economy has performed well this year. The macro indicators such as the IDR-USD exchange rate and the yield of the 10-year sovereign bond are trending positively. With infrastructure development also gaining momentum, and the government committed to reform, investors have become more bullish on Indonesia.

    With the inflation environment relatively benign throughout 2015, Bank Indonesia began monetary easing in January. To ensure benefits were quickly felt within the country’s real economy, the central bank recently changed the definition of its benchmark rate to be in line with best practices—a move also well received by investors and analysts.

    To sustain this momentum, the government must consistently show progress with its reform agenda and infrastructure program while addressing fiscal challenges. It must also hold down inflation and provide coherent policy guidance to the banking sector in the midst of tighter liquidity to support loan growth.

    While infrastructure development has made good progress since the start of the year, it is essential that the funding required keeps being secured. However, this could prove challenging with tax collection targets being missed year-to-date. To address this, the government plans a complete overhaul of the country’s tax system, starting with a tax amnesty program. If successfully implemented, this new system could increase and sustain tax revenue in the future.

    While inflation has been benign for the past few months, the lack of credible data or conflicting data between different ministries will be a significant challenge in combating inflation. Curbing inflation is a multi-year effort and requires a complete understanding and, potentially, a massive overhaul of the current supply chain. Short-term, however, if food shortages are identified in the upcoming festive season, then imports could very well be the only viable solution, and may have an impact.

    In banking, despite 2015’s lackluster loan growth, the loan-to-deposit ratio is already at 92%. When growth picks up, the risk is the banking sector will be unable to provide the needed financing due to limited liquidity.

    Monetary easing introduced by Bank Indonesia has resulted in lower bank deposit rates. A new regulation for pension funds and insurance companies to allocate between 20-50% of their assets in government bonds will result in institutional investors moving further money currently deposited in the banking system. To address this liquidity challenge, some banks are already in the process of issuing medium-term notes (MTN). Ironically, issuing such notes may further pressure liquidity whereby institutional clients can now opt to put their money in a higher return MTN rather than in lower yielding bank deposits.

    Thus, a tax amnesty is critical as the repatriated funds could provide the much needed liquidity. Unless addressed properly, the current push to lower loan rates and net interest margins in a tight liquidity environment could make banks super-selective in channeling loans, negatively affecting the overall loan growth. Furthermore, as Basel III will be implemented soon, additional capital injection will be required. Putting a restriction on foreign ownership in national banks should be avoided as it will prevent foreign capital and liquidity from coming—thus hurting growth overall.

    In any new policies introduced, there will be a lot of inter-dependencies and casual relationships that must be understood to avoid any negative side effects. Sustaining the positive momentum will require alignment and collaboration amongst all stakeholders.