January's Slowing Credit Growth in Line with Bank Indonesia's Directive
Credit growth in Indonesia's banking sector slowed in January 2014 to a growth pace of 20.9 percent (year-on-year), down from 21.4 percent (yoy) in the previous month. Total disbursed credit in January 2014 stood at IDR 3,287 trillion (USD 285 billion). The slowing pace of credit disbursement in Southeast Asia's largest economy is in accordance with the central bank's target to reduce credit growth in the banking sector to between 15 and 17 percent (yoy), said Agus Martowardojo, Governor of Bank Indonesia.
Slowing credit growth in Indonesia is partly due to the country's slowing economic expansion (gross domestic product growth fell to 5.78 percent in 2013, from 6.23 percent in 2012). Amid last year's external uncertainty (brought on by the looming end of US quantitative easing) and internal financial troubles (due to the country's record high current account deficit and high inflation), large capital outflows resulted in an unstable financial environment (and a sharply depreciating rupiah exchange rate). Through monetary tightening, Bank Indonesia managed to improve this condition. It gradually raised its benchmark interest rate (BI rate) from 5.75 percent to 7.50 percent between June and November 2013. Although this measure implied further slowing economic growth, improvement in Indonesia's economic fundamentals since the end of 2013 has made global investors more confident about Indonesia, evidenced by capital inflows since the start of the year.
Not unimportantly, inflation has to be taken into account when discussing real credit growth. In 2013, inflation accelerated sharply in Indonesia after the government had increased prices of subsidized fuels in June 2013. Since September 2013, however, inflation has been under control and is showing an easing trend. According to Statistics Indonesia, inflation moderated to 7.75 percent (yoy) in February 2014 from 8.22 percent (yoy) a month earlier. Inflation in 2014 is targeted at 4.5 percent (yoy), a normal pace for Indonesia.