ADB warns Indonesia of over-reliance on banks

JAKARTA. The Asian Development Bank (ADB) is warning Indonesia on its over-reliance on banks for financing, urging development of the local bond market to avoid liquidity mismatches in developing long-term infrastructure projects.

“One of the things that is criticized with regard to bank lending is that it does not offer the longer maturity that is required, particularly for infrastructure financing,” ADB vice president of finance and risk management Thierry de Longuemar told reporters in Jakarta on Wednesday.

An over-reliance on loans to finance infrastructure would lead to liquidity mismatch, as banks normally finance long-term projects with short-term deposits, de Longuemar said, claiming that long-term bonds were a better choice. 

There has been strong appetite among global investors to invest in fast-growing bond markets in Southeast Asian economies, according to de Longuemar, who wanted Indonesia to tap investor interest to accelerate its infrastructure development.

De Longuemar said that a well-developed bond market would provide a less-expensive alternative source of funds for local corporations, most of which still depended on bank loans to support expansion. 

In Indonesia, executives frequently complain of the high cost of loans, as local banks charge higher interest rates than their peers in Southeast Asia. 

Local banks currently have an aggregate net interest margin (NIM) of 5.53 percent, almost twice as profitable as banks in other ASEAN member nations, and even more profitable than those in China and India, whose NIMs are between 2 to 3.5 percent. 

The disparity prompted an investigation by the Business Competition Supervisory Commission (KPPU), which alleged that large local banks were operating as an oligopoly to fix interest rates.

De Longuemar said that Indonesia could resolve its high interest rate predicament to attract more investors to the local government and corporate bond markets. “What’s happening in most countries is that it starts by being a banking-driven financing mechanism and gradually shifts to a market-driven mechanism, which creates some competition and enables corporations to access cheaper funds.”

Government bonds issued by Indonesia have been in high demand since two of the so-called big three ratings agencies, Fitch Ratings and Moody’s Investors Service, awarded investment-grade status to the nation’s sovereign debt paper. 

Despite concerns on soaring inflation, all bond auctions held by the government this year have been oversubscribed, indicating high investor confidence in Southeast Asia’s largest economy despite bleak prospects for the global economy. 

The government raised Rp 7.15 trillion (US$734 million) from its latest debt paper offering on March 13, with incoming bids topping Rp 14.1 trillion, almost twice its indicative target of Rp 7 trillion.

On Wednesday, the yield that premium investors demand to hold Indonesia’s 10-year bonds over two-year notes reached a nine month high. 

The gap between yields on the two- and 10-year bonds widened to 118 basis points as of 3:24 p.m. in Jakarta, compared with 115 on Tuesday, prices from the Inter Dealer Market Association showed, as quoted by Bloomberg.

(Satria Sambijantoro/The Jakarta Post)