The banking sector of Indonesia is expected to rebound in 2016 due to the lower primary reserve requirement ratio for rupiah deposits (6.5 percent), lower cost of funds as well as operational costs, rising credit volume (due to the lower interest rate environment) and improving purchasing power. The banking sector is also expected to feel the positive impact of the stimulus packages unveiled by the Indonesian government aimed at strengthening domestic businesses and improve the investment climate. And lastly, banks are to benefit from the government's push for infrastructure development.

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Contrary to earlier information, Indonesia's Financial Services Authority (OJK) is expected to somewhat limit investment opportunities for foreign investors in the country's banking sector. Nelson Tampubolon, Commissioner for Banking Supervision at the OJK, said foreigners will only be allowed to acquire a majority-stake in small Indonesian banks (categorized under the BUKU 1 system) provided that the foreigner purchases two (small) banks and merge these into one entity.

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Starting per 1 January 2016, Indonesian companies’ interest payments to lenders are no longer considered tax deductible in case the company’s debt amounts to over four times its equity. Indonesian Finance Minister Bambang Brodjonegoro said such a tighter regulation regarding corporate debt financing will make it less attractive for local companies to accumulate debt, while strengthening the company's equity structure.

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According to data from the Financial Services Authority (OJK), foreign banks operating in Indonesia have posted great profit growth in the January to May 2014 period. Combined, these foreign banks have recorded a 94.36 percentage point growth (year-on-year) in profit to IDR 3.79 trillion (USD $323.9 million) in the first five months of this year. The reason behind this jump in profit is the sharply depreciated rupiah exchange rate. Over the course of 2013, the rupiah fell over 25 percent against the US dollar.

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Indonesian stocks and the country's currency feel the negative impact of the further winding down of the Federal Reserve's bond-buying program (quantitative easing). Yesterday (29/01), it was announced that the Fed will cut the bond-buying program by USD $10 billion to USD $65 billion per month. Among market participants concern emerged about the stability of emerging economies amid the tapering as capital outflows are expected. After opening, the benchmark stock index of Indonesia (IHSG) immediately fell more than 1 percent.

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Despite Indonesia's macroeconomic conditions and liquidity experiencing a correction, Fitch Ratings believes that Indonesia's major banks are able to withstand a reasonably high degree of asset-quality stress, mainly due to the banks' strong standalone loss absorption cushions and likely support from highly rated foreign parent companies. Because of the banks' sound earnings buffers, they are expected to cope with the higher non-performing loans (NPLs) which are expected to emerge in the next one or two years ahead.

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The Rating and Investment Information Inc (R&I), a rating agency from Japan, kept Indonesia’s Sovereign Credit Rating at BBB- with a stable outlook. In their press release, R&I stated that the four key factors behind the decision are: (a) Indonesia’s capacity to achieve sustainable economic growth in the long term (at around six percent per year); (b) conservative fiscal management (causing a marginal fiscal deficit); (c) a sound banking sector; and (d) a low level of government debt.

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Today (31/12), the central bank of Indonesia (Bank Indonesia) officially transfers its authority to regulate and supervise the banking sector to the Financial Services Authority (Otoritas Jasa Keuangan, abbreviated OJK). Muliaman D. Hadad, Chairman of the Board of the OJK, said that all functions, duties as well as powers of regulation and banking supervision, licensing, inspection, investigation and consumer protection have been transferred to the 35 (regional) offices of the OJK.

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The government of Indonesia will release two additional fiscal policy packages at the end of November or start of December that both aim to heal Indonesia's current account deficit. The two packages constitute follow ups of the policy package that was released in August 2013. Previously, deputy minister of Finance, Bambang Brodjonegoro, announced that an additional package would be released in October. However, it turned out that the government needed some more time to prepare the two additional packages.

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On Thursday 14 November 2013, Agus Martowardojo, Governor of Indonesia's central bank (Bank Indonesia), delivered his end-of-the-year speech at the Annual Bankers’ Dinner. The meeting was attended by leaders from Indonesia's House of Representatives (DPR), economic ministers, leaders of the country's banking industry and business community, non-ministerial government agencies as well as a number of international institutions, thus representing a strategic forum in terms of the national economy.

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Bank Indonesia decided to raise the BI rate by 25 bps to the level of 7.50 percent, with the Lending Facility rate and Deposit Facility rate raised to 7.50 percent and 5.75 percent respectively. This policy was taken in light of the persistently large current account deficit amid widespread global uncertainty. Therefore, the decision was taken in order to ensure that the current account deficit is reduced to a more sound level and inflation in 2014 returns to around 4.5±1 percent, thereby supporting sustainable economic growth.

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Today (18/10), the Governor of Bank Indonesia and the Chairman of the Indonesian Financial Services Authority (OJK) signed an agreement concerning “cooperation and coordination to support task implementation at Bank Indonesia and OJK”. The agreement forms a basis for expediting and optimising coordination between both organisations in terms of their function, task and authority in light of the upcoming transfer of the banking regulation and supervision function from Bank Indonesia to OJK on 31 December 2013.

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Bank Indonesia amended its regulation concerning the Loan To Value (LTV) and Financing To Value (FTV) ratio for property credit and property-backed consumer loans. The LTV/FTV ratio is the ratio between the value of credit/financing that can be allocated by a bank and the corresponding value of collateral in the form of property when the loan is allocated. Property is real property that includes houses, vertical housing (apartments, flats, condominiums and penthouses), home offices and home stores.

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