Stimulating the Financial Industry

Kompas/Priyombodo (PRI)

A resident shows a message offering online loans in Tangerang, Banten, Thursday (23/9/2021).

The Financial Services Authority (OJK) has projected accelerated growth in the financial services sector in 2022, in line with the national economic growth target of 5.2 percent.

Lending growth is projected to increase from 5.2 percent in 2021 to around 7.5 percent, plus or minus 1 percent, in 2022. Nonbank financial institutions, such as finance, life insurance, general insurance and pension funds firms are also expected to book positive growth (Kompas, 21/1/2022).

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The OJK’s optimism is based on improvements in financial services industry indicators in 2021, such as the nonperforming loan (NPL) ratio and the capital adequacy ratio (CAR). The solvency ratio (RBC) of the life insurance and general insurance industries also showed improvement. In addition, the performances of the digital financial services sector, peer-to-peer lending and securities crowdfunding, have also been impressive.

This was mainly due to the high risk of credit default, which increased as a result of economic uncertainty, as well as due to the decline in demand for new loans from consumers and business actors as a result of a decline in demand for goods and services amid public mobility restrictions (PPKM).

The banking industry, as one of the engines of the national economy, experienced a contraction during the Covid-19 pandemic. This was mainly due to the high risk of credit default, which increased as a result of economic uncertainty, as well as due to the decline in demand for new loans from consumers and business actors as a result of a decline in demand for goods and services amid public mobility restrictions (PPKM).

An accommodative, countercyclical macroeconomic policy mix has helped restore banking’s intermediary function since the second half of 2021.

In general, the challenges faced by the financial services industry in 2022 will remain the same as last year, chiefly the spread of Covid-19. However, with the emergence of the more contagious Omicron variant, the government may be forced to reimpose mobility restrictions, which could result in another decline in the demand for goods and services.

KOMPAS/PRIYOMBODO

Meat traders receive payments using electronic money at Mayestik Market, South Jakarta, Thursday (18/10/2018).

In addition, interest rate hikes in the United States, which are expected to occur four times this year as part of the US Federal Reserve’s tapering policy, will also affect the country’s banking industry. Inevitably, developing countries like Indonesia will have to adjust, and this could trigger an increase in domestic interest rates at a time when Indonesia is working extra hard to spur the recovery of the national economy.

The accelerated monetary policy normalization in developed countries could also threaten the stability of the domestic financial services sector and the rupiah exchange rate, especially if it triggers capital flight abroad. However, as stated by President Joko “Jokowi” Widodo, the decline of Covid-19 cases in the second half of 2021 is an asset to accelerate the recovery in 2022.

With the acceleration of the vaccination program, plus the start of a booster vaccination program and the implementation of strict health protocols, the spread of Omicron will not be as bad as Delta and can be controlled. Its impact on the economy is also expected to be limited, so we are optimistic the economic recovery will continue. Cooperation among stakeholders is needed, especially for preparation and support, if the effort to control the spread of Omicron requires a policy change from time to time.

(This article was translated by Hendarsyah Tarmizi).