Bloomberg News

Indonesia Sees Strength Among Banks: Southeast Asia

June 22, 2012

Crisis Survivor Indonesia Sees Banking Strength

People commute to work using motorcycles in Jakarta, Indonesia. Photographer: Dimas Ardian/Bloomberg

(Corrects fourth paragraph to say year since reserves quadrupled was 1998, in story originally published on June 20.)

Indonesia will strengthen banking supervision to ensure that lenders stay insulated from fallout from Europe’s crisis, the incoming head of the country’s new financial regulator said.

Commercial banks have about 154 trillion rupiah ($16 billion) of exposure to Europe, through channels including trade finance and money markets, a fraction of their more than 3,000 trillion rupiah in assets, Muliaman Hadad, a central bank deputy governor, said in an interview yesterday. Lending growth in Southeast Asia’s biggest economy was an annual 28 percent pace in May, underscoring domestic strength, he said.

“While we’re facing a crisis risk from Europe, the performance of our banking industry is shining,” Hadad said in his office at Bank Indonesia in Jakarta. “The industry, as the main engine for the economy, is still growing amid the turmoil in Europe.”

Hadad, 52, was a senior analyst at the central bank when the Asian financial crisis forced Indonesia, Thailand and South Korea to tap International Monetary Fund bailouts totaling about $100 billion as their currencies plummeted. As deputy governor, he has overseen lenders in an economy where foreign-exchange reserves have more than quadrupled since 1998, and growth has exceeded 6 percent since 2010 as investment surged.

Regulator’s Birth

Parliament late yesterday approved Hadad to head the board of a national financial regulator due to start operating in January 2013. The new regulator, known in the Indonesian language as Otoritas Jasa Keuangan, or OJK, will supervise capital markets, insurers, pension funds and other nonbank institutions next year and oversee commercial lenders starting in January 2014.

“This body will be positive for our financial market as it will combine all the regulators” from the banking and non- banking industries, said Edimon Ginting, a Jakarta-based senior economist at the Asian Development Bank. “So far, the banking industry is still controlling Indonesia’s financial market, and if all the regulators are in one body, the capital and bonds markets will improve,” helping increase sources of financing beyond banks for long-term infrastructure projects, he said.

Hadad, who has a master’s in public education from Harvard University and a doctorate in business and economics from Monash University in Melbourne, will lead a seven-member board that will include Nelson Tampubolon, a former director in the International Directorate at the central bank, Nurhaida, chairwoman of the Financial Market and Financial Institutions Supervisory Agency at the Ministry of Finance, and Rahmat Waluyanto, director general of debt management at the Ministry of Finance.

Board Tussle

The board was chosen by parliament after so-called fit-and- proper tests this month on the 14 people nominated by President Susilo Bambang Yudhoyono.

The selection of the agency’s board membership followed a months-long tussle between lawmakers and the government over the leadership of an agency set to take over regulation of a financial industry dominated by banks that are products of a restructuring in the aftermath of the 1997-98 Asian crisis.

A parliamentary committee, which started meeting in 2010, agreed in October last year to the government’s proposal for a board composition that excluded guaranteed slots for lawmakers to reduce the risk of political interference. Parliament had wanted two of its members in the mix. The World Bank and Moody’s Investors Service were among those calling for Indonesian financial regulators to be non-politicized.

Good Experience

“They have Muliaman as chairman, which is good because he has good experience to supervise the banking industry,” Ginting said. “I believe this body will be independent as all the people who will run this body are from the financial market, and this composition will create confidence in the market.”

Hadad said yesterday that countering corruption will be a priority. Indonesia spent 450 trillion rupiah to rescue lenders during the Asian financial crisis, when anger over corruption during Suharto’s regime helped topple the dictator in 1998.

Among the regulatory issues facing supervisors now is Singapore’s DBS Group Holdings Ltd.’s 66 trillion-rupiah takeover offer for PT Bank Danamon Indonesia. (BDMN) The purchase may be affected by the central bank’s consideration of restrictions on single-entity ownership of the country’s lenders.

Banks may be allowed to own as much as 90 percent of commercial lenders, Hadad told reporters in response to questions after giving a speech at a seminar in Jakarta today. Approval would be “very selective,” he said. The new ownership rules will be announced before July, he said.

Most Indonesian bank stocks gained in Jakarta trading today. Bank Danamon rose 0.9 percent to 5,800 rupiah as of 10.29 a.m. PT Bank Rakyat Indonesia (BBRI) jumped 0.8 percent to 6,000 rupiah and PT Bank Internasional Indonesia (BNII) gained 2.4 percent to 435 rupiah. The Jakarta Composite index advanced 0.7 percent.

‘No Loopholes’

“Due to the turmoil in Europe, business is not as usual,” Hadad said. “We have to make sure there are no loopholes in the supervision, to ensure investors feel certain they can do business in Indonesia.”

Policy makers have also confronted a tumbling currency. The rupiah has fallen about 4.4 percent this year, the worst performer in Asia after India’s rupee, as the escalating European crisis hurt exports and spurred outflows from emerging markets.

Bank Indonesia kept the benchmark interest rate at a record-low 5.75 percent for a fourth month in June, holding off from easing policy to support the weakening currency.

“Risk aversion is still happening,” Hadad said yesterday. “We can’t say that everything will be sorted out; we need to keep vigilant about what’s happening in Europe.”

Foreign Exchange

Bank Indonesia is preparing various instruments for hedging and to increase the supply of foreign exchange, Governor Darmin Nasution said June 15, without providing details. The central bank has prepared measures to anticipate a worsening of the Europe crisis, he said.

The central bank last month raised the rates on central bank bills and term deposits to absorb liquidity. It also started offering dollar term deposits this month to boost supply of the currency locally and stabilize the rupiah.

Group of 20 leaders are meeting in Los Cabos, Mexico, to try to agree on a response to the crisis. Yesterday they focused their response on stabilizing banks as the IMF raised its lending capacity to shield the rest of the world economy.

“Our condition will depend on how fast Europe can solve the crisis,” Hadad said. “So I agreed with G-20, that everyone asked Europe to resolve the crisis soon.”

Indonesia’s economy grew 6.46 percent last year, the fastest pace since before the Asian financial crisis, as rising investment and domestic spending countered a slowdown in export demand. The central bank expects lending to grow as much as 25 percent this year, Hadad said yesterday.

“Indonesia’s banking industry is still promising as we have a big market with higher economic growth potential,” Hadad said. “There’s no reason for us to be pessimistic.”

To contact the reporter on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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