Economic recovery in the second semester of 2020 depends highly on whether Indonesia can avoid a second wave of Covid-19 infections, so the estimates of economic growth vary greatly.
By
MIRZA ADITYASWARA
·7 minutes read
Kompas/AGUS SUSANTO
Multi-storey building project in the Cempaka Putih area, Central Jakarta, Sunday (28/6/2020). Bank Indonesia projects that the process of economic recovery will strengthen in the third quarter of 2020 along with the relaxation of large-scale social restrictions since mid-June 2020 and the policy stimulus launched.
It has been three months since Indonesia was hit by an economic crisis as a result of the Covid-19 pandemic.
Economic recovery in the second semester of 2020 depends highly on whether Indonesia can avoid a second wave of Covid-19 infections, so the estimates of economic growth vary greatly. The government estimates overall growth in 2020 to range from minus 0.4 percent to plus 2.3 percent, but the Organization for Economic Cooperation and Development (OECD) estimates the Indonesian economy to decline to between minus 2.8 percent to minus 3.9 percent. That is why the government is trying to accelerate the distribution of its stimulus package to minimize economic contraction.
The latest Global Financial Stability Report Update from the International Monetary Fund (IMF) reveals that financial asset prices recovered in May-June due to optimism over the positive effects of monetary easing and fiscal aid packages, but real sector conditions remained difficult.
The drastic decline in economic activities has impacted the quality of bank loans. Many debtors saw a decline in sales. For example, Indonesia’s car sales fell significantly this year from around 80,000 vehicles in January to only around 3,500 vehicles in May. It will take time for the real sector to recover because debtors need to restructure their debts.
Potential for loan restructuring
Even though the monetary policy has significantly reduced interest rates, debtors with moderate debt will face difficulties if sales fall dramatically. In the end, rather than not receiving an income, bankers will be prompted to restructure the loan. However, the capacity of banks to bear the burden of loan restructuring also has its limits. Too large a loss will reduce the ability of banks to sustain economic recovery. Maintaining balance between helping debtors and giving new breath to the banking sector is the focus of financial regulators during the ongoing Covid-19 crisis.
Health workers take swab samples from residents for the Covid-19 polymerase chain reaction (PCR) test on 8 May 2020 at Kebon Kembang Market in Bogor municipality, West Java. Workers from the Bogor municipal health office collected 175 samples from the market’s traders and employees during the mass Covid-19 testing program.
In early April, the US Federal Reserve urged banks to offer debt relief, be willing to extend new loans, and ensure that banking supervisors are accommodative. The IMF recommended temporary easing of the counter cyclical buffer rules and liquidity coverage ratio (LCR). However, the US banking authority warned that debt restructuring must be done carefully to avoid moral hazard.
In its Banking Sector Regulatory and Supervisory Response to Deal with Coronavirus Impact, the IMF also stressed caution and transparency in debtrestructuring. Even if bad loan support had not been provided, supervisors must have accurate information about which debtors had debts that were already in trouble before the pandemic, and which debtors were actually unable to repay their loans but would have good credit through restructuring.
The Financial Services Authority (OJK) in March issued POJK No. 11/2020, which basically relaxes the rules for loan restructuring during Covid-19. The temporary relaxation is to last until the end of March 2021.
Loans that meet the restructuring requirements can be categorized immediately as good credit; there is no need to establish a fee for bad loan support. But according to the OJK, banks must still apply the principle of prudence and risk management. The figures that the OJK announced show a significant amount of loans with the potential for restructuring.
On 27 May, the OJK said that loan restructuring could potentially reach Rp 1.308 quadrillion. This is equivalent to 23 percent of all loans, whereas before the pandemic, only 2.7 percent of all loans in Indonesia were bad loans. Of this amount, a potential Rp 552 trillion in small and medium enterprise (MSME) loans could be restructured, or 52 percent of the all MSME loans. Before the pandemic, only around 4 percent of MSME loans were bad loans. This is why the government has launched an interest subsidy scheme to help restructure MSME debtors. Hopefully, MSMEs will immediately receive the interest subsidy following the easing of the large-scale social restrictions (PSBB) and begin to recover.
Indonesian banks have a high capital adequacy ratio (CAR) at around 22 percent. In accordance with the international regulatory guidelines, the OJK has offered leeway relative to the banking capital rules. The rule on 2.5 percent capital conservation buffer has been delayed to March 2021. Despite relaxing the rule, several conservative banks have decided to pursue a strategy of caution by setting aside funding costs for non-performing loans (NPLs), because it is possible that by March 2021, restructured loans will again have problems. These conservative banks will record their interest income from restructured loans on a cash basis, not an accrual basis. The conservative banks have settled for a small profit this year, but next year they will have to make far greater funding costs for credit reserves if they are to make "real" profits rather than profits that look large, but are risky.
Easing liquidity
Because loan restructuring might disrupt the cash flow in banks, the OJK has temporarily eased the liquidity rules. The minimum LCR and net stable funding ratio (NSFR) rules have been lowered from 100 percent to 85 percent. In actual fact, banking liquidity at the national level is quite good, as reflected in the ratio of liquid assets to third-party funds (LA-TPF) of 25 percent. Usually the LA-TPF ratio is below 10 percent, which is considered risky. The liquidity of the money market is also reflected in the interbank overnight rate, which is hovering around the BI policy rate of 4.25 percent. BI has opened the rupiah liquidity flow through the Term Repo facility for banks that need liquidity, as long as the banks provide collateral in the form of Government Securities (SBN) or Bank Indonesia Securities (SBI/SDBI). Recently, the government also placed Rp 30 trillion in funding at state-owned banks. A scheme for placing government funds in regional development banks is also being prepared.
If banking liquidity is sufficient at the national level, why has it been reported that banks have liquidity problems? Banks that have liquidity problems during an economic crisis are usually banks that had problems with bad credit prior to the crisis. Prolonged NPLs will erode the CAR, so this must be resolved by old shareholders adding capital (equity), or finding new shareholders. So, the bank needs liquidity injection and capital injection. This is where strong coordination is needed between BI and the OJK. If the banks are still relatively healthy and are awaiting capital injection from new shareholders, but many deposits are still flowing out and the Term Repo facility has been used up, the banks may still be eligible for a short-term liquidity loan (PLJP) from BI.
The PLJP has a maximum three-month term, and the guarantee is a bank’s "good credit”. But BI certainly needs accurate information from the OJK that the banks are solvent and will be able to repay the PLJP. The central bank wants to send the message that PLJP is not easily accessible and that the banks must be managed prudently. However, the banks are complaining that the PLJP requirements are too stringent. This is where a solution is needed. If the PLJP requirements are seen as too strict, they can be relaxed as long as this does not create a moral hazard. Do not allow the task pass from BI as the lender of the last resort to state-owned banks or even the government.
DOK. PRIBADI
Mirza Adityaswara
If the shareholders cannot make the banks healthy, the OJK should not delay in handing over the banks to the Deposit Insurance Corporation (LPS). But do not also burden the LPS in distributing liquidity when the banks are still eligible to receive the PLJP. Law No. 2/2020 contains an article that provides legal protection for the Financial System Stability Committee (KSSK) on the condition that its officials do not hesitate in meeting their obligations to maintain the stability of the financial system. Of course, it is desirable that the auditing and legal apparatuses demonstrate empathy and assistance for the smooth running of the KSSK. Let us together take care of the large ship that is Indonesia, which is being rocked by the waves of the economic crisis caused by the Covid-19 epidemi.
Mirza Adityaswara, Economist; President Director, Indonesian Banking Development Institute (LPPI).
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