Indonesia injects stimulus cash into state banks

We wrote recently about the departure of Indonesia's finance minister in the wake of anti-government protests. The new finance minister, Purbaya Yudhi Sadewa, wasted little time bringing in a new stimulus measure: the equivalent of about USD 12 billion for Indonesia's state-owned banks, which are expected to deploy that liquidity as economy-boosting loans to the private sector. (More stimulus measures are also coming, and the government has indicated the existing injection to the state banks could be topped up.)

So far, the pile of new government cash is parked at the central bank. (As our second chart shows; the financial system wasn't ready to handle such an influx.)

There could be a wider issue with this plan: the state banks were already not lending as much as they could, as our first chart shows -- credit growth has been rather subdued, despite robust deposit growth. Liquidity conditions remain ample, with the loan-to-deposit ratios (LDRs) of all state-owned banks still below pre-pandemic levels. Any meaningful pickup in credit activity will ultimately depend on stronger demand from households and corporates in Indonesia's rather sluggish economy.

The rationale for directing funds specifically to state rather than private lenders may lie in their relative stability. During the pandemic, their loan-to-deposit ratios fell less sharply than those of private-sector banks. (I.e., there was less of a pivot away from risk toward parking funds in government securities.)

Another possible motivation is to support their financial performance. State banks have been underperforming their private-sector peers -- with earnings shrinking even as the overall sector’s profits expand. Lower-cost liquidity could help turn that trend around.

Our charts include granular detail for the individual state banks involved, including Mandiri, BRI, BNI and BTN (a mortgage specialist).

We've also added two charts on SRBIs --- Bank Indonesia Rupiah Securities. These debt instruments were unveiled by the central bank two years ago; backed by government bonds, they are aimed at managing the yield curve and stabilizing the rupiah. Some observers had seen these instruments as draining liquidity from the banking system.

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