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Indonesia policy dilemma looms as credit growth lags

Indonesia’s hopes of hitting double-digit credit growth this year have all but faded, presenting a dilemma for policy-makers trying to stimulate Southeast Asia’s biggest economy in the face of rising global interest rates.

Despite eight interest-rate cuts since the beginning of 2016, including back-to-back reductions in August and September, demand for loans remains weak and economic growth continues to disappoint.

While that gives policy-makers reason to continue easing, they can’t ignore a depreciating currency as the Federal Reserve proceeds with its rate hikes. All 22 economists surveyed by Bloomberg predict Bank Indonesia will keep its benchmark rate unchanged at 4.25 percent on Thursday.

“The room for further policy loosening is diminishing,” said Aldian Taloputra, an economist at Standard Chartered Plc. in Jakarta. However, rate cuts can’t be ruled out in the first quarter of 2018 if inflation remains low and growth continues to disappoint, he added.

Here’s what to watch for in Bank Indonesia’s statement:

Bank loans

Loan growth dipped below 8 percent for a second straight month in October, according to Indonesia’s Financial Services Authority, or OJK.

Bank Indonesia, which had already lowered its estimate for credit expansion this year between 8 percent and 10 percent, from as much as 12 percent, now says its new target may be in doubt.

“The chance is narrowing. It might be around 8 percent at most,” Assistant Governor Dody Budi Waluyo said in a text message. “The demand for credit is relatively low, which is in line with the growth of the economy.”

At the same time, interbank rates are low, pointing to ample liquidity in the system.

Andry Asmoro, an economist at PT Bank Mandiri in Jakarta, said the lackluster credit growth had more to do with the fact that many banks are trying to reduce nonperforming loans and manage asset quality. “They’re now very careful in disbursing loans to avoid new bad loans,” he said.

After dropping to as low as 1.8 percent in December 2013, the ratio of bank nonperforming loans has steadily risen to more than 3 percent last year. That number may drop to below 2 percent next year, Financial Services Authority chief Heru Kristiyana said last week.

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