The financial sector, namely banking, capital market, money market and bond market, is generally still experiencing growth during the pandemic, in both developed and developing countries.
By
UMAR JUORO
·7 menit baca
Kompas/Priyombodo
Aerial photo of the Jakarta city landscape on the implementation of large-scale social restrictions (PSBB), Saturday (11/4/2020). There are eight sectors that remain active during the PSBB, apart from government.
The financial sector, namely banking, capital market, money market and bond market, is generally still experiencing growth during the pandemic, in both developed and developing countries.
Financial companies continue to perform well, despite experiencing a relative slowdown compared to before the pandemic. However, the real sector has generally suffered a heavy blow due to the cessation of production activities during lockdowns and a sharp fall in demand. As a result, unemployment has risen sharply in all countries as if these two sectors were separate, in turn leading to greater income inequality.
Growth in the financial sector has been facilitated by central bank policies that offer very low interest rates, even zero percent in several countries, corporate asset purchases (quantitative easing) and central bank deficit financing. Risk in the financial sector is therefore artificially low, with the central bank always ready to support liquidity needs.
Separate
However, growth in the financial sector has had little to do with the real sector, as if they were developing separately. The financial sector could also fall rapidly without adequate support from the real sector.
If real sector growth follows economic laws like the classical laws of physics, and demand equals supply and investment drives growth, then the financial sector is increasingly following the principles of quantum money and quantum finance. Currency values and stock prices can jump quickly, transactions can occur without a real economic basis, and value can appear and disappear quickly, like particles in quantum physics that exist in several places at the same time. All this can happen and be tracked electronically.
The rupiah value is being increasingly determined by capital inflows and outflows.
In Indonesia, the rupiah value has been relatively stable during the pandemic, even though the real sector has been dealt a blow to prompt a high increase in layoffs. The rupiah value is being increasingly determined by capital inflows and outflows. The greater the capital entering the capital and bond markets, coupled with the inflow of dollars for government debt, the more the rupiah strengthens. Conversely, capital outflows cause the rupiah to weaken. The capital market and the (government) bond market are not developing as poorly as previously thought.
Officers prepare rupiahs at the currency exchange place of PT Ayu Masagung, Kwitang, Central Jakarta, Tuesday (31/3/2020).
Even though the capital market index has remained negative from the beginning of the year until now (year to date/ytd), there have been significant improvements. Likewise, the yield on government bonds has been stable.
Bank credit growth is still hovering around 3 percent, although it has experienced a significant slowdown. Third-party funds continue to grow at the relatively high rate of around 8 percent. Liquidity among large systemic banks is more than sufficient and nonperforming loans (NPLs), or bad credit, are being maintained at around 3 percent. However, certain banks with small capital are experiencing liquidity difficulties and their NPLs have tended to surge. Likewise, many financial institutions with small capital, such as those that finance automotive vehicles, are experiencing problems because they are directly linked to the collapse of certain real sectors.
The government’s policies are providing much support to the financial sector, and have received positive responses from financial actors. The government has placed funds of Rp 30 trillion at state-owned banks, as well as possibly BPDs (regionally owned banks) and large private banks. This fund is intended to support the restructuring at banks to help their consumers and those of intermediary banks that are experiencing difficulties.
The Financial Services Authority (OJK) announced that by easing regulations, it would be possible to restructure Rp 769 trillion in loans during the pandemic, more than half of which are loans for micro, small and medium enterprises (MSMEs). This policy of course helps the real sector as banking customers, but there is a high risk of bad credit if economic recovery is slow.
Bank Indonesia (BI) is also allowed to buy bonds on the primary market and share the burden with the government over debt repayments and interest in mitigating the Covid-19 health crisis, respectively Rp 397 trillion (reverse repo rate) and Rp 177 trillion (1 percent reduction to the reverse repo rate). This burden sharing policy is a separate burden for BI, because it has added low-yielding assets to its books.
According to the BI books, the central bank’s main revenue comes from placing funds in securities, especially the US Treasury at very low interest rates. Much of BI’s surplus is derived from converting dollars to rupiah (exchange rate). If it has to finance the growing government deficit, BI will have to print money. Of course, this step will affect inflation and BI\'s credibility in the long term. However, the government bonds must be tradable and marketable so that they can function to strengthening the monetary policy in synergy with the fiscal policy.
The central bank must also be able to roll back these financing measures (deficit financing) to prudent practices so they do not cause public finances to become cirrhotic.
A government regulation was also issued to allow the Deposit Insurance Corporation (LPS) to provide liquidity assistance, even capital injection, to problematic banks. In general, banks with problems in both liquidity and capital (solvency) were already weak even before the pandemic. Therefore, this LPS facility should be used as a last resort, with the OJK undertaking prior measures to consolidate banks.
With more than 100 banks, bank consolidation is sorely needed. This measure is also intended to avoid future misuse (moral hazard) and accountability problems with LPS intervention.
Meanwhile, the real sector has collapsed as a result of the temporary halt to business activities during the large-scale social restrictions (PSBB) and during the current PSBB transition phase, production and distribution activities remain hampered as the daily tally of Covid-19 infections continues to increase. Moreover, demand has experienced a very large decline the very same reason. Many companies are experiencing liquidity problems (cash flow) and unclear business prospects. Mass layoffs are therefore inevitable.
Support has been given through tax incentives for the real sector. Expanding these tax incentives is still possible. The government is also providing liquidity assistance and equity participation to state-owned enterprises. However, this measure cannot be applied to private companies in the real sector due to regulatory and accountability terms. It can be facilitated only by banks with the support of the government and BI.
Domestic demand
Maintaining domestic demand is what can bridge the financial sector and the real sector. When the world economy contracts deeper than a domestic economy, the domestic market offers hope for the economy during the pandemic. Direct cash transfers, the preemployment card program, and social assistance for laid-off workers are ways to maintain demand among the low-income group. Reducing value-added tax and possibly subsidizing wages for workers to prevent layoffs in the labor-intensive industries need to be considered as other ways of maintaining demand and consumption. Governance and accountability are what need to be prepared and improved.
KOMPAS/PRAYOGI DWI SULISTYO
Umar Juoro
With the uncertainties of the efforts to control the COVID-19 health crisis, the economy is likely to be slow in recovering. Moreover, the chances of falling into a recession are great enough that the economy will take even longer to recover. Nevertheless, success in overcoming the Covid-19 outbreak remains the key determinant in how fast the economy will recover.
