Investment and the Role of Banks

SUPRIYANTO

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On Sunday (14/7/2019) evening, Joko “Jokowi” Widodo and Ma\'ruf Amin, as the winners of the 2019 presidential election, disclosed their five main economic goals for Indonesia in their victory speech.

The five goals can be summarized as follows: 1) continuing infrastructure development for better connectivity between large infrastructure and economic development centers in the regions, including rural areas; 2) developing human resources (HR) by improving child health care starting from before birth and by improving vocational training; 3) inviting investment for job creation; 4) reforming the bureaucracy and changing the bureaucratic mindset as reflected in the speed of service to create an adaptive, productive, innovative and competitive Indonesia ("4Tif") and 5) devising a state budget that is focused and targeted.

These five goals were disclosed after an acknowledgement that the global environment is full of changes, full of risks, full of complexity and full of surprises. Of these five goals, this paper tries to highlight investment, which cannot be separated from the role of Indonesia’s banking industry. Data from Bank Indonesia (BI) as of May 2019 show that bank loans totaled Rp 5,451.8 trillion, with total deposits of Rp 5,483.7 trillion. Banking deposits have been growing at a slower pace than credit, especially entering 2018.

Aggressiveness development of large infrastructure has spurred credit growth but not deposit growth. As a result, the credit-to-deposit ratio (LDR) is above the upper limit of 92 percent. In May 2019, lending growth reached 11 percent year on year (yoy), while deposit growth was 6.7 percent yoy. This is the highest level since 2011, when it was 26 percent yoy for credit and 21 percent yoy for deposit growth. With the present performance of the banking sector, it seems the savings and credit gap is widening, so that domestic banks cannot optimally support investment.

Improved business climate

Investment is an important domestic component of the gross domestic product (GDP), in addition to household spending and government expenditure. In the aftermath of the commodity boom, household spending became the biggest contributor to the GDP, accounting for around 56 percent of the total. Amid rising global uncertainty due to the US-China trade war, Indonesia\'s exports are increasingly under pressure as a contributor to the GDP. Therefore, hopes rest now with investment as the second-largest economic contributor after household spending.

How to attract investment, including foreign investment? There are two driving forces for investment that are known as push factors and pull factors. Push factors are external factors that support the entry of foreign investment into Indonesia. This factor is relatively difficult to control by the government, because it is very dependent on the global economy. Meanwhile, the government can increasingly intervene in the pull factors to boost the attractiveness of investment in Indonesia.

One of the indicators of the strength of the pull factor is the World Bank survey on the ease of doing business (EODB). In 2014, Indonesia was ranked 120^th of 189 countries in the EODB, and by 2018, it had risen to the 73^rd rank. Several indicators boost this ranking, including the ease of getting credit with the highest increase, followed by the permission to start a business, optaining a building permit, getting electricity and paying taxes.

However, behind these achievements, it seems the hard work to improve the EODB ranking must continue, since neighboring countries competing with Indonesia are ranked higher, such as Vietnam (69^th of 189 countries), Thailand (27^th), Malaysia (15^th) and Singapore (2^nd). All countries need investment to encourage economic growth and create jobs.

Among the indicators assessed in the EODB are access to credit. Compared to competing ASEAN countries, Indonesia’s ranking for this assessment is the lowest, namely 44^th, while the others rank 32^nd and higher.

Preparedness of banks

Amid the spirit of encouraging investment as a driving force for the economy, there are several obstacles in the Indonesian banking sector, namely: 1) tight liquidity and 2) a high cost of financing in Indonesia.

To overcome the tight liquidity, BI has lowered the averaging-primary reserve requirement (GWM) and signaled a decline in interest rates. However, that is not enough, because the growth of public deposits continues to slow down. BI data of May 2019 show savings growth of 6.7 percent yoy, a far cry from the highest rate of 21 percent seen 2012. Deposits are strongly influenced by people\'s income. Over the same period, economic growth slowed from 6.03 percent yoy in 2012 to 5.07 percent yoy in the first quarter of 2019.

Entering 2019, BI deposit data shows there is a shift of funds from giro checks to deposits. This shift is not a positive signal, because it can be an indication of uncertainty of business actors, who then delay their production. The possibility of this delay is due to various political activities in 2019. As a result, corporate credit activities slow down, while banks (especially state-owned banks) focus on safe projects related to the government.

According to the BI data from May, working capital loans grew by 10 percent yoy, while credit growth for the construction sector rose 20 percent yoy. Meanwhile, investment loans grew 14.6 percent yoy and loans for the electricity, gas and water supply sector grew 36.8 percent yoy. Total loans in May were up 11 percent yoy. In this 2012-2019 period, the highest credit growth was 21.2 percent yoy reached in May 2012. It has since fallen to 3.98 percent yoy, as of May 2019.

There is a struggle for funds between the public private sector and the non-public private sector known as crowding out. With regard to the President\'s speech, there is a possibility of banks starting to shift their credit allocations related to priorities in the construction of connecting infrastructure, not large infrastructure, so the allocations to the non-public private sector is possibly greater, of course, including financing private investment.

The second obstacle is the high cost of borrowing in Indonesia. There are four factors considered by banks in determining interest rates, namely: 1) overhead costs; 2) risk premium; 3) profit margin; 4) cost of funds. Among those four factors, only the cost of funds can be influenced by monetary policy. When BI lowers the benchmark interest rate, the cost of funds tends to fall, but in practice, because competition for obtaining deposits is very tight, banks usually offer high spreads from the benchmark interest rate, especially for deposits with large nominal.

Meanwhile, the three other factors depend on the state of the banking industry and how banks see risks in the economy. These three factors reflect inefficiency in the Indonesian banking sector. To be more efficient, banks must use technology. Moreover, with the increase in digital banking, migration to digital banking has become an obligation.

Equally important is that, in the future, a bank is needed that is creative in channeling nontraditional loans, such as loans for filmmakers or loans to other creative industries. Therefore, a bank with HR that understand the creative business is needed. Several large banks rely on independent HR firms to meet their HR needs. Of course, the HR teaching curriculum also needs to be adapted to international standards that can foster reactivity and adaptiveness to very rapid global changes. It is hoped that Indonesia has a banking industry that is able to respond well to the "4Tif" as stated by President Jokowi.

Lana Soelistianingsih, Lecturer at the Economics and Business School of the University of Indonesia