Indonesia reforms a step in the right direction, but hurdles remain: Reports

Police outside the Indonesian Parliament, Oct 5, 2020.
OCTOBER 06, 2020 - 11:57 AM

ONGOING reforms in Indonesia could support smaller banks and make it easier for foreign companies to do business, observers suggest.

This week’s passage of an omnibus law on job creation looks to relax import licensing rules, lower labour costs, and develop new industry investment frameworks.

“The reform package - if implemented well - could move Indonesia towards a new regime of reduced policy uncertainties,” said Citi analyst Helmi Arman in a report.

At the same time, Indonesia is also moving to loosen rules on short-term liquidity loans for banks, such as interest rates and what underlying assets count as collateral.

Still, watchers acknowledge that latest rule changes are no silver bullet.

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For the job package, Mr Helmi noted that, “in an environment where global capex is suppressed, the positive impact to FDI (foreign direct investment) inflows may not be seen immediately”. The anticipated pick-up may appear only from end-2021, he said.

Meanwhile, smaller Indonesian banks - which are more likely to face liquidity crunches - may not have access to emergency liquidity backstops that require applicants to still be solvent, Nomura analysts Euben Paracuelles and Rangga Cipta argued.

As the Covid-19 pandemic may have spurred an exodus of deposits from smaller banks to their safe-haven larger counterparts, they concluded: “Although banking system liquidity looks ample in aggregate terms, this is likely uneven and fragmented.”

Moody’s Investors Service also warned on Oct 6 that already-high credit costs will increase the most for Thailand, India and Indonesia banks during the pandemic-led downturn. Still, capitalisation is expected to strengthen in Indonesia, on the back of strong profitability, Moody’s analysts added in a report on Asia-Pacific banks.