Accelerating Economic Growth
Now is the right moment to further accelerate economic growth amid the improvements in the macroeconomic condition and the financial services sector.
This improvement is marked by economic growth of 5 percent to 5.1 percent in 2017, the stable exchange rate of the rupiah, low inflation, a US$11.8 billion trade surplus, a state budget (APBN) deficit of only 2.42 percent of gross domestic product (GDP) and the declining trend in interest rates.
Similarly, structural reforms have also succeeded in improving investor confidence. During 2017, confidence was seen in the substantial increase in capital inflows to the domestic capital market, resulting in a decline in the government bond yields. Furthermore, the composite stock price index (IHSG) continued to increase, increasing by 20 percent in 2017 and closing the year at 635.65, the highest level in history.
Financial sector optimism
In line with such an achievement, improvements in sovereign ratings also confirmed the country’s positive economic performance. The latest developments showed Standard and Poor\'s raising Indonesia\'s debt rating from BB + to BBB-. This means that three largest rating agencies have given investment grade status. Fitch Ratings even increased Indonesia\'s debt rating one point to BBB with stable outlook.
The World Bank also ranked Indonesia as one of the top improvers, increasing its ranking in the Ease of Doing Business Index 2018 over the last two years by 34 places to 72nd. The World Economic Forum also raised Indonesia\'s competitiveness index for 2017-2018 from 41st to 36th.
Economic growth in 2018 is targeted at 5.4 percent, and it is believed the financial services sector will be able to support this target, as indicated by the solid indicators of of capital and liquidity, or the controllable level of risk, in the sector.
Financial institutions’ capital was relatively strong as of December 2017. Banks’ capital adequacy ratio (CAR) reached 23.36 percent, while the risk-based capital (RBC) of the general insurance and life insurance industries were at a high of respectively 310 percent and 492 percent.
The hearing ratios (comparison between long-term debt and total capital) of finance companies were 2.97x, well below the threshold of 10x. This strong capital is supported the low level in gross non-performing loan (NPL) ratio of 2.59 percent (net 1.11 percent), which continues to show a downward trend. The non-performing financing (NPF) ratio for financing companies also dropped to 2.96 percent. Meanwhile, liquidity in the financial services sector was still adequate at Rp 626 trillion.
Furthermore, the intermediary function of financial services institutions continues to show positive growth. As of December 2017, bank loans grew 8.35 percent year on year (YOY), while third-party funds grew 9.35 percent YOY. In addition, accounts receivable financing of finance companies grew 7.05 percent YOY, while the premium incomes of the life insurance industry and general insurance companies respectively grew 35.10 percent and 6.52 percent.
Throughout 2017, capital market fundraising reached a total Rp 264 trillion, consisting of Rp 254 trillion in public offerings and Rp 10 trillion in investment products. In addition, 46 new issuers emerged on the stock market, an increase from 20 issuers in 2016.
Based on the above achievements and with the 5.4 percent economic growth target set by the government for 2018, the Financial Services Authority (OJK) is optimistic that financial services companies can play a greater role in financing development projects.
This optimism in spurring growth is also shown by financial services industry players as reflected in the 2018 Bank Business Plan (RBB), which targets expansion in credit and third-party funds by 12.23 percent and 11.16 percent, respectively.
Strategic policies
The OJK will continue to implement various policies aimed at maintaining the stability of the financial system while remaining committed to spurring growth. For this, the OJK will focus on several aspects to support financing for infrastructure projects and other priority sectors, such as accelerating industrialization programs, improving public welfare through improving public financing literacy and access, and maximizing the potential of the sharia economy.
A number of strategic policies have been prepared, such as supporting infrastructure and priority sector financing, as well as deepening financial markets through encouraging the expansion and utilization of more varied financing instruments such as perpetual bonds, green bonds and regional bonds, including issuing a regulation on the management of Tapera public housing savings through the Collective Investment Contract scheme.
The OJK will also simplify the process for professional investors to issue public offerings in the forms of debt and sukuk (Islamic bonds) and increase domestic investor access including the involvement of economic players, especially financial services institutions in the regions, by issuing a regulation for the establishment of regional securities companies, improving the permit issuance process and speeding up transaction settlements using technology, while eliminating the 10 percent margin requirement for hedging transactions.
Meanwhile, to encourage improvements and equity in public welfare, the OJK will develop the KUR Klaster, or the disbursement of microcredit for community businesses (KUR), accompanied by guidance and product marketing provided by core companies, namely state-owned enterprises (BUMNs), village-owned companies (BUMDes) and private companies.
The OJK will also expand the establishment of micro endowment banks in a number of areas, modeled on sharia microfinance institutions, and synergize with government programs, such as the Ultra Micro Credit (UMI), Prosperous Family Development Program (MEKAAR) and the non-cash Bansos (social assistance), through financial services institutions.
In response to the rapid developments in technology, the OJK also supports technological product innovations in the financial services sector (fintech) that meet the standards of good governance and consumer protection, and will issue a policy guideline – the Principles for Digital Financial Services Providers – which will cover the registration mechanism, licensing and the implementation of a regulatory sandbox, as well as a policy on crowd funding.
Amid the efforts to further spur economic growth, the OJK continues to strengthen the effectiveness of its oversight and regulatory capacity in the financial services sector by optimizing the use of technology in its supervision and licensing processes. With the positive performances of the economy and the financial services sector, the OJK sees that this is the right time for all industry players in financial services to build mutual optimism and be proactive in spurring growth and improving public welfare.
Wimboh Santoso
Board of Commissioners Chairman, Financial Services Authority (OJK)