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 Rp 154 trillion ($16.4 billion) of exposure to Europe, through channels including trade finance and money markets, a fraction of their more than Rp 3,000 trillion 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 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 2008, and growth has exceeded 6 percent since 2010 as investment surged.
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.
The creation of the agency followed a months-long tussle between lawmakers and the government over its leadership. The World Bank and Moody’s Investors Service were among those calling for Indonesian financial regulators to be non-politicized.
Hadad said yesterday that countering corruption will be a priority. Indonesia spent Rp 450 trillion 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’ Rp 66 trillion takeover offer for Bank Danamon Indonesia. The purchase may be affected by the central bank’s consideration of restrictions on single-entity ownership of the country’s lenders.
“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.”
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.”