bank indonesia, financial stability review no. 11 september 2008

ii

Publisher : Bank Indonesia Jl. MH Thamrin No.2, Jakarta Indonesia

The preparation of the Financial

Stability Review (FSR) is one of the avenues

through which Bank Indonesia achieves its mission to safeguard the stability of the Indonesian Rupiah by maintaining monetary and financial system stability for sustainable national economic development. FSR is published biannually with the objectives: To improve public insight in terms of understanding financial system stability. To evaluate potential risks to financial system stability. To analyze the developments of and issues within the financial system. To offer policy recommendations to promote and maintain financial system stability.

Information and Orders: This edition is published in September 2008 and is based on data and information available as of June 2008, unless stated otherwise. The PDF format is downloadable from: http://www.bi.go.id For inquiries, comments and feedback please contact:

Bank Indonesia Directorate of Banking Research and Regulation Financial System Stability Bureau Jl.MH Thamrin No.2, Jakarta, Indonesia Phone : (+62-21) 381 8902, 381 8075 Fax : (+62-21) 351 8629 Email : [email protected]

Financial Stability Review( No. 11, September 2008 )

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Table of Contents

Foreword Overview Chapter 1 The Macroeconomy and Real Sector

vi 3 9 9 12 16

Chapter 3

Financial Infrastructure and Risk Mitigation

Developments in the Payment System Payment System Developments Risk Assessment and Risk Mitigation Steps Towards CPSIPS Business Continuity Plan Crisis Management Protocol Chapter 4 Prospects of the Indonesian Financial System Economic Prospects and Risk Perception The Banking Industry Risk Profile: Level and Direction Prospects of the Indonesian Financial System Potential Vulnerabilities Articles Article 1 Market Liquidity Risk as Financial Stability Indicator: The Indonesian Case Article 2 Operational Risk in Indonesia: Advanced Measurement Approach Glossary

The Macroeconomy The Real Sector Box 1.1. Effect of Inflation on Bank Credit Growth and Quality Box 1.2. Energy and Food Security: Effects on Financial System Stability Chapter 2 Financial Sector

49 49 50 51 52 52 52

18 21 21 22 22 23 29 31 33 33 36 42 44

Structure of the Indonesian Financial System The Banking Industry Funding and Liquidity Risk Credit Growth and Credit Risk Market Risk Profitability and Capital Non-Bank Financial Institutions and Capital Market Finance Companies Capital Market Box 2.1. Bancassurance and Life Insurance Box 2.2. Development and Diversification of Mutual Fund Risk

57 57 58 59 60

63 79 93

iii

List of Tables and Figures

Tables1.1 2.1 2.2 2.3 2.4 2.5 3.1 3.2 3.3 3.4 4.1 4.2 Global Economic Indicators Financial Composition of Financial Institutions Performance of Finance Companies Funding Sources of Finance Companies Index Performance of Several Regional Stock Markets Sectoral Index Performance Settlement Value and Volume Growth in the BI-RTGS System Settlement Value and Volume Growth in the Clearing System Transactions of Card-Based Payment Tools (APMK) Compliance to CPSIPS by Bank Indonesia Projections of Several Economic Indicators Risk Perception of Indonesia 50 52 50 49 37 37 9 34 35 36

Graphs1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 57 57 1.15 1.16 1.17 1.18 GDP Growth of Industrial Countries GDP Growth of Several Emerging Markets Price Indices of Several Commodities Inflation in ASEAN-5 and Vietnam Inflation in Indonesia and the BI-rate Indonesian Real Interest Rate IDR/USD Exchange Rate Performance Global Stock Price Index Growth of Indonesian Exports Composition of Capital Inflow ROA and ROE of Public Listed Non-Financial Institutions DER and TL/TA of Public Listed Non-Financial Institutions Probability of Default (PD) of Public Listed Non-Financial Institutions Unemployment in ASEAN Growth of Wages and Inflation Household Assets Household Debt Growth of Household Credit Household Debt Assets of Financial Institutions Growth of Deposits Liquidity Gap Percentage Loans and Deposits Loan to Deposit Ratio Credit Growth by Bank Group Growth of Investment Loans, Working Capital Loans and Consumption Loans 2.8 2.9 2.10 2.11 2.12 2.13 Growth of Consumption Loans Growth of Property Loans Growth of Rupiah and Foreign-Denominated Loans Growth of MSM and Non-MSM Loans Undisbursed Loans Non Performing Loan 25 25 26 26 24 24 25 13 13 13 14 14 14 14 21 22 23 23 24 24 13 12 10 10 10 10 11 11 11 11 11 12

Box Tables : 2.1.1 Bancassurance Performance of Nine Banks 2.2.1 Composition of Mutual Funds prior to 2006 2.2.1 Composition of Mutual Funds post 2006 42 44 45

1.19 2.1 2.2 2.3 2.4 2.5 2.6 2.7

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2.14 2.15 2.16 2.17 2.18 2.19 2.20 2.21 2.22 2.23 2.24 2.25 2.26 2.27 2.28 2.29 2.30 2.31 2.32 2.33 2.34 2.35 2.36 2.37 2.38 2.39 2.40 2.41 2.42 2.43 2.44 2.45 2.46

Nominal NPL & Loan Loss Provisions Nominal NPL Growth by Bank Group Gross NPL Nominal NPL Growth by Economic Sector NPL Share based on Economic Sector Nominal NPL Growth based on Usage Type Gross NPL of Consumption Loans Nominal NPL of Rupiah and ForeignDenominated Credit Nominal NPL of Micro, Small, and Medium Loans Performance of Rupiah Interest Rate and Exchange Rate Lending Rate by Bank Group Rupiah Maturity Profile Foreign Exchange Maturity Profile SUN Portfolio of the Banking Industry NOP Performance Interest Rate Spread Interest Income Composition of 15 BB Interest Income Composition of the Banking Industry Spread between BI Interest Income and Cost of Interbank Call Money The Banking Industry P/L Risk Weighted Assets, Capital and CAR CAR Ratio of Bank Groups - June 2008 Stress Test on Various Scenarios Business Activities of Finance Companies Composition of Finance Companies Financing NPL Cash Flow of Finance Companies Funding Sources of Finance Companies Exposure of the Banking Industry Inflow of SUN-BI Certificates-Shares Total Inflow: SUN-BI Certificates-Shares Price Indices of Regional Stock Exchanges Share Capitalization by Sector

26 26 27 27 27 27 28 28 28 29 29 30 30 30 30 31 31

2.47 2.48 2.49 2.50 2.51 2.52 2.53 2.54 2.55 2.56 2.57 2.58 2.59 2.60 2.61 4.1 4.2

Share Price of Several Banks P/E Ratio of Bank Shares Efficiency of Sectoral Shares Capitalization Value and Share Issuance Value Yield Growth of Rupiah Investment Price of FR Series SUN SUN Ownership SUN Portfolio: Investment - Trade SUN Performance by Type Liquidity of SUN based on tenure Issuance and Position of Corporate Bonds Mutual Funds based on Type Mutual Funds: NAV Units Redemptions-Subscriptions-NAV Investment Manager: Customer & Funds Bank Risk Profile and its Future Direction Financial Stability Index

38 38 38 38 38 38 39 39 39 39 40 40 40 40 40 58 59

Graphs included in Boxes: 31 32 32 32 32 33 33 34 34 35 35 36 36 36 37 37 2.1.1 2.1.2 2.1.3 2.2.1 2.2.2 2.2.3 Investment of Insurance Companies Performance of Life Insurance Companies Profit of Life Insurance Companies Mutual Fund Performance (2005) NAV Movement (2004-2005) NAV Movement (2006-2008) 42 43 43 44 45 45 1.1.1 1.1.2 1.2.1 Credit Growth Estimation Model Credit Quality Estimation Model Inflation, Oil Prices and Farm Products 16 16 18

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Foreword

I happily welcome the publication of Financial Stability Report No. 11, September 2008. This report bears important weight as much development has ensued in the financial sector, both domestic and abroad, and therefore needing to be analyzed and communicated to serve the best interests of our stakeholders. It is our hope that readers will be able to gain much information on the recent developments in Indonesias financial sector and its resilience in the face of various shocks and risk pressures. In general, our analysis shows that the countrys financial sector resilience during the first half of 2008 has been well maintained. The banking industry, the financial sectors dominant industry, has been able to maintain relatively good performance as evident by fairly high profitability and capital levels, low non-performing loans, and well-maintained liquidity. However, such achievements are no reason for complacency as many challenges have recently surfaced within the financial sector-all of which demanding our prompt attention. A critical challenge is soaring credit growth. Occurring in a non-high inflation period, strong financial intermediation displayed by banks would have been a welcomed feat. However, with inflation pressures on the rise, it becomes our challenge to see todays strong credit growth not evolving into tomorrows problem loans. Also of our concern is that strong credit growth does not occur at the cost of liquidity in the banking system. Meanwhile, it is also important to pay close attention to the developments of the financial crisis in the United States and other countries in various parts of the world as caused by the subprime mortgage debacle. Our banking industrys non-exposure to subprime mortgage derivatives has avoided it from the crisis direct impacts. However, with the increasing degree of integration between international and domestic economies, it behooves us to carefully monitor the impacts of the global financial crisis to the banking and financial sector as a whole. Moving forward, with constantly growing challenges and uncertainties in the financial world, there is no option but to increase financial sector resilience, alertness, and prudence. Undoubtedly, all this will steer us away from the path of a crisis and enhance the financial sectors contribution to economic growth and thus achieving greater prosperity for the public.

Jakarta, September 2008 DEPUTY GOVERNOR

Muliaman D. Hadad

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Overview

Overview

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Overview

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Overview

Overview

During the first semester of 2008, the financial system stability was preserved amid intensifying pressures stemming from both the global and domestic economies. Meanwhile, the banking industry, Indonesias financial sector dominant industry, indicated favorable performance with well-managed liquidity as well as relatively high profitability and capital. Additionally, for the first time since the financial crisis in 1997/1998, loans expanded greatly to 31.6% (y-o-y) with a loan-to-deposit ratio of 76.6% by the end of June 2008. This strongly reflects that the intermediary function of banks has improved. Nevertheless, robust credit growth during this period of high inflation necessitates increased vigilance to prevent greater credit risk. Furthermore, as credit growth outpaced that of third party funds (deposits), increased liquidity risk and long-term capital pressures should be anticipated. Through accurate anticipatory and risk mitigation measures, financial and banking system resilience in future is expected to remain positive.

1. SOURCES OF INSTABILITY 1.1. External VolatilityExternal volatility was the principle source of instability during the first semester of 2008. The ongoing impact of the subprime mortgage debacle in the U.S. raised volatility in global financial markets and triggered a global economic downturn. The situation was aggravated further by rising inflation coupled with soaring oil and commodity prices. Domestically, despite relatively high economic growth, inflationary pressures became a challenge. Such

pressures emerged a couple of months prior to the May2008 announcement of a hike in domestic fuel prices. To help overcome inflationary pressures, the BI rate was raised to 8.50% at the end of June 2008. As of September 2008 the BI rate reached 9.25%. Increasing volatility in global financial markets had undesirable impacts on the domestic bourse and undermined the price of Government Bonds (Surat Utang

Negara or SUN). Banks with large SUN ownership in theirtrading or available for sale portfolios, faced the challenge

3

Overview

of a relatively high loss potential due to the application of mark-to-market accounting. Meanwhile, the increasing price of fuel raised costs, slowed production activities and suppressed sales, therefore exacerbating the repayment capacity for bank loans. Consequently, non-performing loans (NPL) tended to increase. Moreover, efforts of raising interest rates to reduce inflation, if not applied prudentially, may further threaten the NPL ratio. Over time, this could trigger instability in the financial sector.

As a consequence, the repayment capacity of both household and corporate sectors deteriorated. Preventing a further increase in NPL will be particularly onerous should such conditions persist.

1.3. High credit growthDespite the sharp rise in loans during the first semester of 2008, maintaining bank and financial system stability remains pivotal in ensuring increased credit extension does not vitiate the economy. As the surge in

1.2. Real Sector Constraints as well as Energy and Food SecurityOne source of instability that requires immediate attention is the numerous constraints in the real sector, such as manpower problems and limited infrastructure. Data demonstrates that among ASEAN countries, unemployment in Indonesia is the second highest after the Philippines. High unemployment can be precarious, both in the context of financial as well as security stability. Meanwhile, limited infrastructure may impede financial and corporate sector development. Energy security is one issue of critical infrastructure that has been highlighted recently, including the supply of power. Any disruptions in the supply of electrical power will severely impede the corporate sector, which constitutes the majority of bank debtors, restricting production and loan repayment capacity. In addition to energy security, the issue of food security in the real sector is also closely associated with financial system stability. Soaring prices of essential commodities, including food, spurred further rises in inflation and weakened food security. Due to food price increases, household expenditure witnessed a corresponding rise to meet family requirements. In addition, the corporate sector was forced to spend more to answer the growing call for wage hikes by employees.

loans occurred during a period of high inflation, it is essential to manage the growth in order to avoid further compounding inflation. Thus, credit extension must remain prudent and prioritize productive loans. Consequently, any rise in potential credit risk as a result of over-expansive credit can be minimized. Moreover, as credit growth outpaced that of deposits, the possibility of intensifying liquidity risk and pressure on long-term bank capital should be anticipated.

1.4. Financial product innovationThe innovation of financial products has varied recently. Concomitantly, bank products have become harder to differentiate from the products of other financial institutions. In addition, the general public has become more familiar with various types of structured products and offshore products. This can be considered a sign of financial sector development. However, if financial institutions involved in issuing and marketing such products do not adhere to proper risk management, financial sector resilience may be disrupted, and in turn harming the consumer. Moreover, as financial products become more integrated, the difficulties faced by banks can rapidly transmit to the non-banking industry. Additionally, banks that become agents of non-banking products are exposed to greater reputation risk if issuers fail to pay.

4

Overview

2. RISK MITIGATIONSeveral risk-mitigation measures that have been and will be implemented to lessen potential instability, among others, include the following:

of surveillance methodology is an ongoing process to readily capture any signals of future problems.

2.3. Bank risk managementAs the largest industry in the financial sector, banks

2.1. Crisis Management Protocol and Financial InfrastructureExperience garnered from the 1997/1998 crisis provided valuable lessons. It became clear that procedure and mechanism clarity is imperative to deal with a crisis. Without clear procedures and mechanisms, various forms of moral hazard can emerge and crisis resolution may become protracted and costly. Therefore, a Crisis Management Protocol (CMP) is currently being prepared as a priority of the Financial System Stability Forum, whose members include units from the Ministry of Finance, Bank Indonesia and Deposit Insurance Corporation. It is expected that soon this crisis management protocol will be enacted as Law legislating the Prevention and Control of Financial Sector Crises. Another important facet of financial infrastructure to be bolstered is the payment system. Hitherto the payment system has performed well in terms of mitigating settlement and operational risks, however a more advanced economy, with the connatural development of banking and financial services therein, necessitates ongoing payment system strengthening.

play a vital role in maintaining financial system stability. Therefore, banks must continuously strive to internally improve their risk management capacity, for instance by continually attending education and training courses; including a risk-management certification program. Furthermore, by following the preparatory steps toward Basel II implementation, banks are indirectly strengthening their risk management capacity. Through effective risk management, banks are expected to be resilient should undetermined crises or shocks transpire.

2.4. Bank supervisionBank supervision determines the resilience of the banking system in particular and the financial sector in general. To improve bank supervision effectiveness, Bank Indonesia continues to enforce compliance to the 25 Basel Core Principles for Effective Bank Supervision, in which Basel II implementation is included. One aspect of bank supervision includes market liquidity surveillance. The implementation of such surveillance is inline with ongoing signals of tight liquidity in the global financial sector.

3. PROSPECTS OF FINANCIAL SYSTEM STABILITY 2.2. Financial system surveillanceIn line with greater financial sector complexity, effective financial system surveillance should be maintained. To this end, various methodologies and stress tests to gauge financial system risk and resilience have been developed. In addition, vibrant discussion among market players and academicians to hone surveillance process analysis is routinely conducted. The development Looking ahead, financial system stability is expected to be maintained in Indonesia. This prediction is based on the following key indicators. First, widespread awareness is emerging regarding the importance of maintaining financial system stability. Awareness does not solely lie with decision-makers and business players in the financial sector, but has also spread among academicians, observers and other parties. The general public witnessed and experienced

5

Overview

firsthand the adverse effects of the 1997/1998 financial crisis, which has subsequently heightened awareness and caution regarding any nascent issues that could trigger instability. Spreading social awareness and control is expected to positively affect financial system stability. Second, in the near future, Indonesia will have introduced a standardized crisis management protocol (CMP). The protocol is expected to serve as a guideline for all stakeholders to comprehensively understand and act in accordance with determined procedures during a crisis. This is also expected to bolster financial system stability.

Third, bank risk management has improved, which is further supported by Bank Indonesias efforts to strengthen bank supervision. Fourth, the quality of financial sector surveillance has improved. Meanwhile, the results of surveillance using stress tests indicate that banks, as the dominate force in the financial sector, are resilient to fluctuations in credit risk, interest rate risk, exchange rate risk and SUN price risk. Consequently, the stability of banks and the financial sector is expected to persist.

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Chapter 1 The Macroeconomy and the Real Sector


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8



Macroeconomic stability in Indonesia was well maintained throughout the first semester of 2008. However, increasing external pressures due to the global economic downturn coupled with escalating inflation attributable to soaring oil and food commodity prices, discouraged business players in the real sector from consuming as well as undertaking expansionary activities. Rising production costs together with weaker consumer purchasing power reduced profitability of the corporate sector. If such inauspicious conditions persist, domestic financial sector resilience may be threatened.

1. THE MACROECONOMYAn economic slowdown and intense inflationary pressures marred the international economy during the first semester of 2008. In 2007 global economic growth slowed by 0.1% to a level of 4.9%. Consequently, economic expansion in 2008 is expected at around 3.7%.Table 1.1 Global Economic Indicators% Category World Output: Advanced Economies Emerging & Developing Countries Consumer Price: Advanced Economies Emerging & Developing Countries1) LIBOR2) US Dollar Deposit Euro Deposit Yen Deposit Oil Price (USD) - average3) 2006 5.0 3.0 7.8 2.4 5.4 5.3 3.1 0.4 20.5 2007 4.9 2.7 7.9 2.2 6.4 5.3 4.3 0.9 10.7 Projection 2008 3.7 1.3 6.7 2.6 7.4 3.1 4.0 1.0 34.3 2009 3.8 1.3 6.6 2.0 5.7 3.4 3.6 0.8 (1.0)

Sluggish growth in developed countries, particularly the U.S., precipitated a global economic slowdown. The subprime mortgage crisis, which began in the U.S., forced the banking sector to tighten credit extension to the household sector, thus vitiating economic activities, particularly consumption. Subsequently, this led to a restriction of activities in the production sector, which provoked a rise in unemployment in the U.S. from 4.8% in December 2007 to 5.7% in June 2008. Economic activity in emerging market economies, such as China and India, remained relatively expansive. However, as the largest importer in the world any weakening in the U.S. has the potential to retard global economic growth, including emerging market economies whose general income is primarily dependant on export activities to the U.S and EU. Therefore, despite rapid growth during Q1 2008 in China and India of 10.6% and 8.8% respectively, these figures were down when

Source: World Economic Outlook - IMF April 2008

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Graph 1.1 GDP Growth in Industrial Countries%

Graph 1.3 Price Indices of Several Commodities1990 = 100 600 500Oil Tin Palm Oil Rice Aluminium Copper Gold Coffee Rubber

6.00 5.00 4.00 3.00 2.00 1.00 (1.00) (2.00) (3.00)Q1 Q2 Q3 Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 USA Germany Canada Japan UK

450 400 350 300

500 400 300 200 100 0 2000Source: BI

250 200 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008

2000Source: Bloomberg

2001

2002

2003

2004

2005

2006

2007

2008

Graph 1.2 GDP Growth in Several Emerging Markets%

Graph 1.4 Inflation in ASEAN-5 and Vietnamy.o.y % 25 Philippines Malaysia Singapore Indonesia Thailand Vietnam

12.00 9.00 6.00 3.00 (3.00) (6.00) (9.00)Q1 Q2 Q3 Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 Q1 Q2 Q3Q4 Indonesia Thailand China Singapore South Korea India

20 15 10 5 0 (5)Jan

Jun

Nov

Apr

Sep

Feb

Jul

Dec

May


2001

2002

2003

2004

2005

2006

2007

2008Source: CEIC

2005

2006

2007

2008

compared to the previous period, more specifically 11.7% and 9.7%. In addition to the downturn, intense inflationary pressures stemming from oil and food commodity price hikes also affected the global economy during the first semester of 2008. Limited supply amidst burgeoning demand for oil and food sparked price increases. By the end of June 2008, the global price of WTI oil (spot price) peaked at USD 141/barrel. Furthermore, in March 2008 the price of rice had risen 46% to USD151 per metric ton (MT) compared to September 2007. Increasing inflationary pressures due to soaring oil and food prices more severely affect emerging market economies due to their relatively large share of consumption of these products.

The impacts of inflationary pressures emanating from increasing oil and food prices were also experienced in Indonesia. Inflation in Indonesia (y-o-y) at the end of Semester-I 2008 was 11.03%, representing an increase of 5.26% compared to the same period in the previous year. Increasing inflationary pressures were anticipated by raising the BI rate to 8.50% in June 2008 (and subsequently to 9.0% in August 2008). However, the real interest rate in Indonesia remained generally more attractive than in that of other countries, therefore despite slight depreciation the rupiah stayed within the range of Rp9,257 per USD. Meanwhile, the Indonesian composite index, notwithstanding a slight decline due to volatility in the global equity market, remained attractive to investors.

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Graph 1.5 Inflation in Indonesia and the BI Rate% %35000 30000Singapore Hongkong New York

Graph 1.8 Global Stock Price Index35000Dow Jones Indonesia Nikkei

16

Inflation (y-o-y)

30000 25000 20000 15000 10000 5000 0

1625000

12

12

20000 15000

8

BI-rate

810000

4

4

5000 0 2006Source: Bloomberg

0 2005Sources: BPS & BI

0 2006 2007 2008

2007

2008

Graph 1.6 Real Interest Rate in IndonesiaPercent

quarter of 2007. Relatively robust export performance was also supported by diversification of export target countries to territories in Asia, particularly China and India. Consequently, this off set the challenges associated with weaker export performance due to the lacklustre U.S. economy.Graph 1.9 Indonesian ExportsMillions of USDNon-Oil and Gas Oil and Gas Total

4.00 2.00 (2.00) (4.00) (6.00) (8.00)Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Indonesia USA Singapore


2004

2005

2006

2007

2008

12,000 10,000

Graph 1.7 Rupiah Exchange Rate against the US Dollar9,500 9,400 9,300 9,200 9,100 9,000 8,900 8,800 8,7009,075 9,077 9,172 9,095 8,842 8,981 9,067 9,358 9,105 9,102 9,267 9,356 9,406 9,180 9,178 9,203 9,281 9,288

8,000 6,0009,600

4,000 2,000 0Jan Source: BI May Sep Jan May Sep Jan May

Monthly Average Quarterly Average Semester Average 9,238 9,109 9,039 8,968 9,181 9,210 9,259 9,257 9,258

9,500 9,400 9,300 9,200 9,100 9,000 8,900 8,800 8,700 8,600 8,500

2006

2007

2008

Strong exports and surging inflows of portfolio investment to Indonesia supported the surplus Balance of Payments (BoP), which in the second quarter of 2008 reached around USD1.3 billion. A healthier balance of

8,600 8,500

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10 11

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2008

On one hand, the spiralling prices of oil and primary commodities improved Indonesias export performance, which is predominantly based on natural resources. During the first quarter of 2008, Indonesias exports totalled USD34 billion, an increase of 29% compared to first

payments shored up reserves to around USD59.5 billion by the end of the second quarter of 2008; equal to five months imports and foreign debt repayments. Despite the surplus balance of payments, the Current Account ran a deficit due to increasing imports and

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declining exports. Lower export value was associated with modest export prices in the international market, yet imports continued to expand amidst strong consumption supported by macroeconomic stability. Consequently, the Indonesian economic growth persisted despite reeling slightly from the effects of the global slowdown. During Q1 and Q2 2008, economic growth reached 6.3% and 6.4% respectively; higher than that recorded in the previous year of 6.1% and 6.4%. In the near future, vulnerability risk pervading from the external sector is expected to remain high. This will stem from the ongoing impacts of the subprime mortgage debacle and relatively intense inflationary pressures due to soaring oil and food commodity prices. The global price of oil has fallen since mid July 2008, however, widespread uncertainty could quickly drive the oil price back up. Meanwhile, inflationary pressures originating from supply shocks and speculation in the commodity market are expected to develop if the supply of energy and food commodities in the international market does not increase.

market inflows (58%) compared to Foreign Direct Investment (42%).Graph 1.10 Composition of Capital Inflow%7061 FDI (in Indonesia) Portfolio Investment (investment) 59 55 45 39 41 58

60 50 40 30 20 10 0 2005Source: BI

42

2006

2007

Q1-2008

Limited inflow investment to the real sector together with the rising cost of credit caused by higher lending rates compounded by burgeoning operational costs due to the soaring oil price and high inflation forced business players to cut their costs and restrict business expansion. Several business players responded to the escalating oil price by raising their retail prices, however the higher retail prices and sales volume were less than the rise in production costs. Consequently, the margin of the corporate sector was eroded as indicated by the declining profitability (ROA

2. THE REAL SECTORDomestic macroeconomic fundamentals, which were well maintained amid escalating external risk, such as increasing inflationary pressures and sluggish global economic growth, encouraged players in the real sector to become more prudent in terms of business expansion and consumption. Additionally, concerns regarding the persistence of the ongoing subprime mortgage turmoil and the inability of the government budget to cope with food and energy price hikes also prompted investors to exercise more caution in investing. Investors tended to opt for short-term investments in the form of portfolio financial assets over direct investment in the real sector. As a result, portfolio capital inflows in Q1 2008 dominated capital

and ROE) of public listed non-financial corporations in Q4 2007 compared with the same period of the previous year. For its financing, the corporate sector was more likely to depend on internal funds. This is evidenced by theGraph 1.11 ROA & ROE of Non-Financial Public Listed Companies600 ROA (left) 500 400 300 200 100 0 -100Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

350 ROE (right) 300 250 200 150 100 50 0 -50 -100 2003 2004 2005 2006 2007

Source: BEI

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Graph 1.12 DER & LT/LA of Non-Financial Public Listed Companies%1.20 1.00

Graph 1.14 Unemployment in ASEAN142000 2003 2006 2008**)

12 100.80 0.60 0.40 0.20 DER 0.00Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

8 6 4 2Debt/TA

0 Indonesia Thailand Vietnam*) Philippines*) Malaysia Singapore

2005Source: BEI

2006

2007

Source: CEIC *) : Data 2008 belum tersedia **) : Data for Indonesia (February), Thailand (May), Malaysia and Singapore (March)

relatively stable debt-to-equity ratio (DER) and total liabilities to total asset ratio (TL/TA) in 2007 compared to 2006, when the sector was expanding. Such conditions are attributable to concerns of increasing domestic interest rates due to higher inflation. Corresponding to the decline in corporate performance, estimation results for the probability of default (PD) of public listed non-financial companiesGraph 1.13 Probability of Default (PD) for Public Listed Non-Financial CompaniesTotal 250210

indicated a slight increase. The total number of companies with a PD>0.5 increased marginally from 32 in December 2007 to 34 in December 2008. For banks this indicates higher credit risk in the future. The trend to limit corporate business expansion may lead to a reduction in employment opportunities. Moreover, surplus export performance, primarily the export of natural resources such as oil, rubber, nickel and tin, provided no significant additional employment. As a consequence, despite a slight reduction in the rate, unemployment in Indonesia remains the second highest in ASEAN after the Philippines. A sharp wage hike in the mining sector, following the escalating prices of mining sector commodities in the international market, did not significantly increase household income in Indonesia as only 1% of Indonesian

200

150 100

5010 3 0.2-0.3 3 0.3-0.4 3 0.4-0.5 1 0.5-0.6 3 0.6-0.7 1 0.7-0.8 0 0.8-0.9

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00.0-0.1 0.1-0.2 0.9-1.0

Probability of Default - December 2007

Graph 1.15 Wages and Inflation% 80Mining (non oil) Industry Hotel Inflation

Total 250 210 200

60 40

15020

100

0 -20 -40 20010.9-1.0Source: BI-DSM yang disarikan dari Laporan BPS

50 7 00.0-0.1 0.1-0.2 0.2-0.3 0.3-0.4

30 3 5 10.4-0.5

10.5-0.6

20.6-0.7

10.7-0.8

00.8-0.9

2002

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Probability of Default - December 2008

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workers are employed by the mining sector. A further 78.4% work in industries where wage hikes are below the inflation rate. In general, the condition of inflation outpacing wage increases reduced the real income of the household sector. Along with rising consumption costs due to inflation, the requirement for funds by households also increased. This has forced households to maximize their income in order to meet their consumption needs, rather than adding to their financial assets, such as by opening a giro, savings account or time deposit. This is reflected by the ratio of household assets to household disposable income that dropped 2.6% compared to the previous semester to 25.6% in June 2008. Meanwhile, pressures from higher consumption also led to increasing household credit

demand1. This is evidenced by the increasing ratio of household debt to household disposable income from 9.3% in December 2007 to 9.7% in June 2008. Expansive household credit was principally due to increasing property credit. The composition of property credit is only around 30% of total household credit, however, since 2003 it has increased. Credit risk from the household sector tended to decrease, as indicated by a lower NPL rate from 3.1% in December 2007 to 2.9% in June 2008. Nonetheless, persistent inflationary pressures without any corresponding rise in income could undermine the financial performance of the household sector.Graph 1.18 Household Credit Growth(y-o-y)% % Housing 100 80 60 40 100 80 60 40 20 Personal 0 0 -20 2003 2004 2005 2006 2007 2008

Graph 1.16 Household AssetsBank deposits per cent of household disposable income% %

40

Total HH deposits bank

40

20

30 Time Deposits Saving Deposits

30

-20 200220

20

* Based on banks on balance sheet Source: BI

10 Demand Deposits 0 2001Source: BI

10

0 2002 2003 2004 2005 2006 2007 2008%

Graph 1.19 Household DebtShare of total household debt%

Graph 1.17 Household DebtPer cent of household disposable income% %

80 60 40

Personal loans

80 60 40

8

820 20 Housing loans 0 2001Source: BI

6

6

0 2002 2003 2004 2005 2006 2007 2008

4

4

2

21 Kredit rumah tangga terdiri atas housing loan dan personal loan. Housing Loan meliputi: (i) Kredit perumahan & apartemen s.d. tipe 70, (ii) Kredit perumahan & apartemen > tipe 70, (iii) Ruko & Rukan. Personal loan meliputi: (i) Kartu kredit, dan (ii) Kredit personal lainnya.

0 2001Source: BI

0 2002 2003 2004 2005 2006 2007 2008

14


The challenges currently facing the real sector are expected to remain in the future by reason of limited infrastructure and inauspicious economic conditions. With limited energy and increasingly expensive food products, the real sector will struggle to be more substantially

efficient. In the short term, efforts to be more efficient might be traded off against growth, however, in the longer term it will benefit business (going concern) and real sector security. This, in turn, will positively affect financial system stability as a whole.

15


Box 1.1

Effect of Inflation on Growth and the Quality of Bank Credit

The global economy is suffering from high inflation due to soaring global prices of oil and food commodities. In addition, a shift in the usage of grains for bio-fuel as an alternative energy is viewed as a contributing factor to the increase in food prices. Inflation in the U.S, England and European Union surged to 3%. Furthermore, China and India, which represent the strongest demand for energy and food, endured inflation of 8% (March 2008) and 7.3% (April 2008). Inflation in Vietnam was 21% (April 2008), whereas in Japan, which had previously suffered from perennial deflation, inflation reached 1.2% in March 2008. Inflation in Indonesia was 11.03% in June 2008 y-o-y. A fundamental question that arises is how such inflation might affect growth and the credit quality of domestic banks? To answer this question, an econometric analysis was conducted using the Two Stage Least Square (TSLS) approach as follows: 1. Estimation Model of Credit Growth (Credit Growth) IPI = 17,56 + 0,85 IPIt-1 0,24dinflasit-1 + IPI,t IPI,t = 0,49 IPI,t-1 + vt creditgrw = -10,57 + 0,95creditgrw t-1 2,39dbir t-4 0,00004dexrate t-2 2,21lnoilt-2 + 0,19^IPI t-2Graph Box 1.1.1 Credit Growth Estimation Model32 28 24 20 16 12 8 2004 2005 2006 2007 2008 Loans Growth Loans Growth (Baseline)

2. Estimation Model of Credit Quality (Non-Performing

Loan or NPL)IPI = 17,56 + 0,85 IPIt-1 0,24dinflasit-1 + IPI,t IPI,t = 0,49 IPI,t-1 + vt NPL = 5,89 + 0,86NPL t-1 + 0,01creditgrw t-1 + 0,56dbir t-3 + 0,19lnoilt-3 0,05^IPI t-3 dinflasi : change in inflation (y-o-y) from month t to month t-1 dbir : change in BI rate from month t to month t-1. month t-1 lnoil IPI : lognormal of normal and global oil price (USCRWTIC) : Industrial Production Index Empirical tests using the approach outlined above for monthly sample data from March 2004 to March 2008 indicated that inflation significantly affects growth and credit quality (NPL). However, the inflation effect is indirect as it is transmitted through economic growth with an Industrial Production Index (IPI) proxy. Furthermore, by adding IPI, the BI rate, exchange rate and future oil price, simulation results indicated that for every 1% increase in inflation, credit growth would decline by around 0.12% and NPL would increase by approximately 0.02%.Graph Box 1.1.2 Credit Quality Estimation Model10 9 8 7 6 5 4 2004 2005 2006 2007 2008 NPL NPL (Baseline)

dexrate : change in exchange rate from month t to

16


Thus, it is important to maintain stability by balancing the need to raise the interest rate in order to manage inflation on the one hand, and the need to maintain credit growth and prevent a

degeneration in credit quality (increasing NPL) on the other. By striking such a balance, banking and financial system stability are expected to be maintained.

17


Box 1.2

Energy and Food Security: Effect on Financial System Stability

The world is currently facing a potential oil and food crisis due to limited oil and food supply and strong demand. Soaring food and oil prices, principally since the final quarter of 2007, have become a global phenomenon that has been transmitted to Indonesia. The Government of Indonesia reluctantly had to raise the price of fuel of 28.7% at the end of May 2008 in order to maintain the State Budget. Rising oil and food prices are also considered a contributing factor of high inflation in Indonesia.Graph Box 1.2.1. Inflation, Oil Price and Farm Products600 500 400 300 200 100 0 Oil Price (USD, left axis) Agriculture Price (USD, left axis) Domestic Inflation (%, right axis) 20 18 16 14 12 10 8 6 4 2 01 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr

Supply pangan & energi (minyak bumi, electricity) Output Gap Demand pangan & energi (minyak bumi, electricity) Domestic Inflationary Pressure

HH B/S Corporate B/S

Probability of Default - Bank - NBFI - Financial Market

Stability Financial System

Persistently high prices of food and oil as well as limited electrical supply will place more pressure on domestic financial system stability in Indonesia. The government has to undertake measures to ensure sufficient domestic food supply and limit rice exports. There should be no problems on the supply side as production of unprocessed rice in Indonesia in 2008 is estimated to reach 59.88 million tons; equal to 34.94 million tons of rice, and public rice consumption is 3233 million tons. Production of corn and soy are estimated to reach 14.85 million tons and 723.54 thousand tons of dry grains respectively; an increase of 11.79% and 22.11% compared to production in 2007. However, the prolonged distribution channel incurs high economic costs, which limits coverage and supply continuity. The government also has to anticipate the possibility that food producers in Indonesia prefer to export their products, as prices on the global market are currently more attractive. This could reduce domestic stocks. To deal with limited energy supply, in the short run the government is expected to roll out energy saving programs, whereas in the long run, new alternative energy sources should be sought. The government and the banking industry recently implemented a program of Food and Energy Security Credit (Kredit Ketahanan Pangan dan Energi or KKP-E) with the aim to finance a food security program and the development of plant material to be used as bio-fuels in order to meet the need for alternative energy and catalyze farm development. Both programs are expected to help bolster food security and deal with energy scarcity.

2003

2004

2005

2006

2007

2008

Source: BI, Bloomberg, Datastream

The prohibitive prices of oil and coal, which represent the raw materials of the State Electricity Company (PLN), along with inadequate infrastructure for electricity generators resulted in inadequate electrical supply. Consequently, Indonesia is currently also facing an electrical crisis. In general, this has undermined the business sector, which subsequently disrupts financial sector resilience. The impact of energy and food price increases on financial system stability can be described as follows:

18

Chapter 2 Financial Sector


19



20



Compared to the previous semester, the Indonesian financial sector continued to grow apace throughout Semester-I 2008 despite inauspicious economic conditions. Meanwhile, even though banks remain as the dominant force of the financial sector, non-bank financial institutions and the capital market continue to grow. With strong capital, banks remained resilient to fluctuations in risk, including credit risk, liquidity risk, interest rate risk, exchange rate risk and SUN price depreciation risk. In the future, such resilience must be built upon, not only by increasing capital alone but also through enhancing the quality of risk management.

2.1. STRUCTURE OF THE INDONESIAN FINANCIAL SYSTEMThe Indonesian financial system comprises of commercial banks and rural banks (BPR), as well as nonbank financial institutions such as insurance companies, pension funds, finance companies, securities and pawnshops. Compared to the previous edition of FSR (FSR No. 10, March 2008), the structure of the financial system has not changed significantly. In 2007 the total assets of each financial institution grew by an average of 17% compared to 2006, however, their share remained relatively constant. Banks continue to dominate the sector with 79% of total assets, whereas the 15 major banks command the majority (70%) of total bank assets. The growth in total assets of financial institutions is9% 1% 8% 1% 2006

Graph 2.1 Assets of Financial Institutions% total aset sektor keuangan

3%

5%

4% 0%

79%

Bank Umum Komersial Dana Pensiun Pegadaian 2007 3% 5%

Bank Perkreditan Rakyat PerusahaanPembiayaan

Perusahaan Asuransi Persahaan Sekuritas

3% 0%

79%

welcome news because it demonstrates financial sectorSumber: BI dan sumber lainnya

21


expansion in Indonesia as well as a diversifying number of available investment options. However, the integration of financial products must be supplemented with adequate regulation and supervision to minimize potential risk that may derail financial stability.

by individuals. Based on the amount of savings, major depositors (whom represent only 2.6% of the total number of deposit accounts held at banks) account for 77% of total deposits. This imbalance may place pressures on liquidity particularly in cases of sudden withdrawals of large amounts. Nonetheless, with good liquidity management

2.2 THE BANKING INDUSTRY 2.2.1 Funding and Liquidity Risk

banks are expected to avoid such potential risk.

DepositsAt the end of Semester-I 2008 total deposits had reached Rp1,553.4 trillion. After experiencing negative growth at the beginning of the year, deposits rebounded during the second quarter in line with rising interest rates. As a result, reported growth in Semester-I was 2.82%, which falls below that of the same period the previous year, namely 5.19%. The increase affected all components of deposits with savings recording the most impressive growth at 4.29%, followed by time deposits and giro accounts with 3.05% and 0.87% respectively.Graph 2.2 Performance of DepositsRp triliun 700 630

Liquidity AdequacyDeposits, as the primary source of bank funding, slumped at the beginning of the year, but did not affect the intermediary function of banks. At the end of SemesterI 2008, credit growth (including channeling) reached 13.8%, far outpacing that of deposits. This indicates that banks funded their loan disbursements from other sources than deposits, one of which was by converting their liquid assets. During Semester-I 2008 a more than 20% decline was recorded in the number of liquid assets.2 This was primarily attributable to a decrease in bank placements at Bank Indonesia, principally in the form of BI Certificates (SBI). Conversely, short-term liabilities rose by 3% in line with deposit growth. The simultaneous occurrence of declining liquid assets coupled with rising short-term liabilities caused the ratio of liquid assets to non-core deposits3 to decrease compared to the end of December 2007. However, with the liquid asset ratio still above 100%, bank liquidity remains relatively secure.

560 490

420

350 Des '07 Giro Tabungan Feb '08 Deposito Aprl '08 Jun '08

The liquidity gap, which is defined as the difference between available liquidity and required liquidity, remained

In general, the structure of deposits remained imbalanced. At the end of Semester-I 2008, deposits remained concentrated around short-term funding (up to 3 months) with a share of 93.4%. Individual savings and major depositors also continued to dominate. Based on ownership, the majority of deposits (55.7%) were owned

positive at the end of Semester-I 2008.4 This provides a

2. Liquid assets comprise of cash and placements at BI (checking accounts, SBI and Fasbi). 3. Non-core deposit (NCD) assumption is 30% current and savings accounts, plus 10% term deposits of up to 3 months. 4. Available liquidity includes bank placements at BI (excluding current accounts) and bonds to be traded, available for sale, and owned to maturity, in the form of Government Bonds or Corporate Bonds. Liquidity required comprises of deposits that can be withdrawn anytime (non-core deposits), credit commitment, inter bank net liability and offshore loans.

22


Graph 2.3 Liquidity Gap PercentageRp triliun 900 750 600 126,20% 450 300 121,00% 150 0Des Mar Jun Likuiditas yg tersedia Kebutuhan Likuiditas

bank money market to fulfill their short-term liquidity requirement. Whereas banks with excess liquidity will% 135Gap

assume a placing position to generate profit. Therefore, the resulting interest rate is a result of market mechanisms

132,20%

130

that reflect market liquidity conditions.125

In order to reduce distortion on the overnight (O/N) PUAB rate, at the beginning of 2008 Bank Indonesia announced a number of monetary policy operational

120

115 2007 Industri 2008

improvements aimed at maintaining O/N PUAB interest rate stability. As a result, the interest rate is less volatile and more consistent with the BI policy rate.

general indication that the liquidity required by banks can still be met by the liquidity available. However, consistent with the ratio of liquid assets to non-core deposits, the ratio of available liquidity to required liquidity also declined when compared to year-end 2007. Overall, this indicates that bank liquidity is becoming tighter. Consequently, banks must exercise greater caution and be more selective when extending credit to avoid intensifying pressure on liquidity.Grafik 2.4 Performance of Loans and Deposits (y-o-y)% 35 30 25

Based on observations, since the announcement of said improvements up to the end of Semester-I 2008, O/N PUAB interest rate volatility has eased and subsequent shifts have correlated more closely to the BI rate. Furthermore, the spread between the lowest and highest O/N transaction interest rate is narrowing.

2.2.2. Credit Growth and Credit Risk

Credit GrowthAs was mentioned in Chapter 1, during Semester-I 2008 the global and domestic economies were beset with burgeoning inflationary pressures, particularly due to the soaring global oil and food commodity prices. GlobalKredit

financial markets continued to fluctuate wildly and were plagued with widespread uncertainty due to the ongoing

20

negative fallout stemming from the subprime mortgage15 10 5 2005 DPK

debacle. Nevertheless, the domestic economy faired relatively better than the international economy. At a time

2006

2007

2008

when the global economy experienced a marked downturn, the Indonesian economy maintained in excess

Inter-Bank Money Market (PUAB)PUAB represents the activity of funding loans between banks in order to manage short-term liquidity (overcoming mismatch). Banks running a liquidity deficit will consequently assume a taking position on the inter-

of 6% growth during the reporting period. Domestic banks reported no direct losses attributable to the subprime mortgage turmoil because no investments were made in subprime mortgage instruments. As a result, during the reporting semester credit expanded rapidly by 13.8% y-t-

23


d (31.6% y-o-y).5 Strong credit growth was also driven by the banks desire to hit their profit targets at a time when the opportunity to arbitrate the interest rates of SBI and PUAB had diminished. Another important factor that bolstered such impressive credit growth was the enactment of wide-reaching bank legislation over the last 2-3 years aimed at promoting the intermediation function post minicrisis in 2004/2005 that resulted in slow bank credit extension in 2006 (14.1% y-o-y).Graph 2.5 Loan to Deposit RatioRp Triliun 1.600 1.500 1.400 1.300 1.200 1.100 1.000 900 800 700 600 500 2005 DPK (kr) 2006 2007 2008 Jun LDR (kn) Kredit (kr) % 78 76 74 72 70 68 66 64 62 60

June 2008, whereas the share of credit in productive assets grew from 58.4% to 63.4% during the same period, which is its largest share since the crisis. Due to the deceleration in deposit growth, banks opted to convert their SBI in order to fund the expansion in credit. As a result, SBI fell 40% compared to its position at the end of December 2007 to Rp98 trillion.Graph 2.7 Growth in Investment Loans, Working Capital Loans and Consumption Loans% 50 45 40 35 30 25 20 15 10 5 0 2004 2005 2006 2007 2008 Jun Investasi Modal Kerja Konsumsi

Grafik 2.6 Credit Growth by Bank Group% 60,0 50,0 40,0 30,0 20,0 10,0 0,0 -10,0 -20,0 -30,0 2002 PERSERO CAMPURAN 2003 2004 DEVISA ASING 2005 2006 2007 BPD 2008 Jun

Graph 2.8 Growth in Consumption Loans (y-o-y)% 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 0,0 2002 KPR Kartu Kredit Lainnya*)

2003

2004

2005

2006

2007

2008 Jun

NON DEVISA INDUSTRI

During Semester-I 2008, the majority of credit was extended for productive purposes. This was reflected by a

Credit growth in Semester-I 2008 was not entirely funded by deposits. Deposits grew at a mere 2.8% y-t-d (14.7% y-o-y), which was far below the expansion in credit. As a result, the loans to deposit ratio (LDR) rose from 69.2% at the end of December 2007 to 76.6% at the end of5. September 2008 data (temporary figures from the Commercial Bank Daily Report LHBU) even shows a higher credit growth, namely 35% y-o-y.

rise in working capital loans and investment loans by Rp73.7 trillion (36.1% y-o-y) and Rp27.1 trillion (28.5% y-o-y) respectively. By economic sector, credit was primarily absorbed by the manufacturing and trade sectors; accounting for 19.4% and 16.8% respectively of the expansion in total bank loans. Meanwhile, four sectors also enjoyed above average y-o-y credit growth, namely

24


trade (32.1%), services (40.5%), construction (38.9%) and utilities (60.1%). Consumption loans also increased significantly (Rp45.6 trillion or 31.5% y-o-y). Consumption loans consist of mortgages (KPR), credit cards and others (vehicle loans, multipurpose loans, etc). Others contributed 52.3% of total consumption loan disbursements in Semester-I 2008; up 29% y-o-y. The key driver of such trends was the hike in fuel prices that was not offset by a corresponding rise in income. As a result, demand for loans to purchase motorcycles increased as such vehicles are considered more fuel efficient and nimble than other means of transportation.Grafik 2.9 Growth in Property Credit (y-o-y)% 70,0 60,0 50,0 40,0 Konstruksi Real Estate KPR

Graph 2.10 Growth of Rupiah and Foreign Exchange Loans% 40,0 30,0 20,0 10,0 0,0 -10,0 -20,0 -30,0 -40,0 2002 2003 2004 2005 2006 Kredit Rupiah Kredit Valas 2007 2008 Jun

loans only grew by Rp10.6 trillion (28% y-o-y), compared to rupiah-denominated loans that experienced 34.6% growth during the same period. Notwithstanding, the share of foreign exchange loans in total bank loans remained relatively steady at 21%.Graph 2.11 Growth of MSM loans and non-MSM loans(y-o-y) 40 35 30 Kredit MKM Kredit Non MKM

30,0 20,0

25 20

10,0 0,0

15 10

-10,0 2003 2004 2005 2006 2007 2008

5 2004 2005

Total Kredit

2006

2007

2008

Jun

Property loans also require closer monitoring due to significant growth during the reporting period, namely 37.6% (y-o-y) to Rp180.4 trillion or 15.7% of total bank loans. As such, the growth rate of property loans exceeded the growth rate of bank loans as a whole. The rise in property loans was principally supported by growth in mortgages and construction loans of 63.5% and 23.7% respectively, whereas the remainder was made up by real estate loans. Mortgages continued to dominate total property credit with share of 62.5%. A stronger rupiah during the reporting semester discouraged debtors from withdrawing foreign currency denominated loans. Consequently, foreign-denominated Micro, Small and Medium (MSM) loans expanded by 29.9% (y-o-y), which was exceeded by the growth of corporate non-MSM loans, namely 36.9%. The majority (59%) of MSM loans were for consumption purposes. As a result, the overall share of consumption loans reached 51.6% of total MSM loans. Should it persist, this condition will require additional monitoring in the near future considering that excess credit extension to non-productive sectors could trigger inflation. With high credit growth, undisbursed bank loans (UL) increased slightly by Rp17.1 trillion to Rp225.5 trillion, or 18.9% of total bank credit by the end of June 2008.

25


Graph 2.12 Undisbursed LoansRp triliun 260 240 220 200 180 160 140 120 2005 Undisbursed (kiri) Kredit (kanan) Rp triliun 1250 1150 1050 950 850 750 650 550 450 350 2006 2007 2008 Juni

As an aggregate no rise in NPL value was recorded, however, loan loss provisions swelled by Rp1.8 trillion. Accordingly, Net NPL declined from 1.9% at the end of 2007 to 1.7% at the end of June 2008. This represents the lowest level since the crisis. The rise in loan loss provisions illustrates one of the anticipatory measures taken by banks to mitigate the possibility of growing credit risk in the future. Rising inflation was one potential source of the rise in NPL.Graph 2.14 NPL & Loan Loss ProvisionsRp triliun 70,0 65,0 60,0 55,0 NPL (kiri) PPAP (kiri) Linear (PPAP (kiri))

Considering that the ratio of UL to total credit is usually steady in the 20-21% range, the low UL ratio approaching the end of Semester-1 only reinforces the shared belief that bank intermediation continued to run as normal.Graph 2.13 Non-Performing Loans% 10 9 8 7 6 5 4 3 2 1 2003 2004 2005 2006 2007 2008 Jun 35 30 NPL Net (kr) 55 50 45 40 Rp triliun 45 40 35 30 25 NPL Gross (kr) NPL Nominal (kn) Rp triliun 70 65 60 30,0 2003

50,0 45,0 40,0 35,0 2004 2005 2006 2007 2008 Jun

Graph 2.15 NPL Value by Bank Group6 5 4 3 2 1 2005 Swasta (kr) 2006 BPD 2007 Campuran 2008 Juni Asing

Credit RiskThe inauspicious macroeconomic conditions compared to the previous semester raised the possibility of heightened credit risk during the reporting semester. In reality the value of non-performing loans (NPL) at the end of Semester-I 2008 remained relatively steady compared to its position at the end of Semester-II 2007, namely Rp48.5 trillion. In January and March 2008 the value of NPL rose by Rp1.2 trillion and Rp1.7 trillion respectively, however write-offs and credit restructuring rendered these increases negligible by the end of Semester-I 2008. Moreover, the Gross NPL ratio declined from 4.6% to 4.1% due to the sharp increase in loans disbursed by banks.

20 15 10 5 2004 BUMN (kr)

During the reporting period, the NPL value of stateowned banks fell by Rp2.5 trillion mainly due to write-offs and credit restructuring. Fluctuations in the NPL value of the state-owned bank group significantly affected the banking industry as a whole due to its 50.8% share of total bank NPL value. With a declining NPL value for the state-owned bank group, instability stemming from bank credit risk was minimized.

26


Graph 2.16 Gross NPL% 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 BUMN Swasta BPD Campuran Asing Des-07 Jun-08

NPL ratios, only the industrial sector exceeded the banking industrys gross NPL. In terms of credit usage, during Semester-I 2008 the NPL value of investment loans declined by Rp2.3 trillion. Such a decline is beneficial for economic growth while simultaneously reducing risk to banks as, in general, those applying for investment loans are corporate debtors whom represent the primary engine of economic and business activities. The NPL value of working capital loans rose by Rp1.4 trillion, especially for non-individual debtors. As a

Based on economic sector, the industrial sector displayed the highest potential of triggering instability stemming from credit risk due to its dominant credit share (20.4%). Credit extended to the industrial sector was predominantly received by corporate debtors who represent core debtors of major banks and utilize investment loans and working capital loans denominated

result, the share of NPL value for working capital loans in the banking sector grew to 52.4%, thus persisting as the largest of NPL value.Graph 2.18 NPL Share by Economic Sector% 100 Gabungan Lainnya 80 Jasa Dunia Usaha Perdagangan

in rupiah and foreign exchange alike. In terms of NPL value, the industrial sector continues to prevail with 34.3% of total bank NPL. This is a slight reduction from its position at the end of 2007 (35.3%). As credit to the industrial sector expands, the gross NPL ratio of the sector declined from 7.1% to 6%. Two sectors experienced a rise in NPL value, namely the transportation sector due to hikes in the prices of fuel and spare parts, and the construction sector due to climbing raw material prices. However, in terms of gross60

40 Industri 20 Pertanian 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Jun

Gabungan Lainnya = Pertambangan, Listrik, Jasa Sosial, Konstruksi, Pengangkutan

Graph 2.19 NPL Value by UsageRp triliun

Konsumsi

Graph 2.17 NPL Share by Economic SectorRp triliun Lain-lain Jasa Sosial Jasa Dunia Usaha Pengangkutan Perdagangan Konstruksi Listrik Industri Pertambangan Pertanian -0,8 -0,5 -0,3 0,0 0,3 0,5 0,8 1,0

Investasi

Modal Kerja

-3,0

-2,0

-1,0

0,0

1,0

2,0

In light of such developments, by the end of Semester-I 2008 the gross NPL ratio for investment loans dropped below 5%, namely 4.6%, for the first time.

27


Although the NPL value of working capital and consumption loans increased, the amount of credit extended grew significantly, thus reducing their gross NPL ratio to 3.5% and 2.9% respectively. The rise in NPL value of consumption loans mainly emanated from mortgages (Rp0.4 trillion), followed by credit cards (Rp0.3 trillion) and miscellaneous credit. Credit cards witnessed the highest gross NPL ratio of 11.6% followed by mortgages and miscellaneous at 2.8% and 1.7% respectively.Graph 2.20 Gross NPL of Consumption Loans% 14,0 12,0 10,0 8,0 6,0 4,0 2,0 0,0 2001 KPR Kartu Kredit Lainnya

remained low at just 2.8%. The gross NPL ratio of construction and real estate credit recorded 4.4% and 3.3% respectively. The relatively low NPL of property credit contributed positively to banking and financial system stability. Rupiah appreciation coupled with credit write-offs and restructuring boosted the quality of foreign currency denominated credit, therefore, the NPL value slumped by Rp2.1 trillion during the reporting period. Gross NPL of foreign denominated credit also declined, from 4.2% to 3.9%. Consequently, potential instability arising from foreign exchange credit diminished. Conversely, the NPL value of rupiah denominated credit rose by Rp2 trillion. Notwithstanding, the NPL ratio declined slightly from 3.7% to 3.5%.Graph 2.22 MSM NPL Value

2002

2003

2004

2005

2006

2007

2008 Jun

50 45

21 19 17 15 13

During Semester-I 2008, the NPL value of mortgages rose slightly by Rp0.3 trillion to Rp5.8 trillion. However, the gross NPL ratio dropped from 3.6% to 3.2% due to expansive credit growth. The rise in NPL value of property credit was primarily attributable to mortgages and construction loans. Although mortgages accounted for the largest segment (62.5%) of property credit, gross NPLGraph 2.21 NPL Value of Rupiah and Foreign Currency Denominated LoansRp triliun 45 40 35 30 25 20 15 10 5 2002 2003 2004 2005 2006 2007 2008 Jun Kredit Rupiah Kredit Valas

40 35 30

11 25 20 15 2005 9 7 5 2006 2007 2008 Jun

The NPL value of micro, small and medium credit extended climbed rapidly by Rp2.2 trillion to RP19.78 trillion; accounting for 52.1% of total bank NPL value (excluding credit channeling). Based on loan utilization the rise in NPL value stemmed mainly from working capital loans (increased by Rp1.49 trillion). However, based on economic sector, most NPL value originates from the industrial sector (a rise of Rp0.83 trillion). The growth in NPL value of working capital loans reflects closely the recent inauspicious economic environment, which undermined credit quality. Nonetheless, robust micro, small and medium

28


credit growth reduced the gross NPL ratio from 3.5% to 3.4%.40 Des07 Mei08 %

Graph 2.24 Lending Rate by Bank GroupMar08 Jun08

2.2.3. Market RiskIncreasing market risk pressures stemming from global financial market fluctuations as well as unfavorable international and domestic economic performance tainted Semester-I 2008. The spiraling oil price throughout the reporting period forced the government to no longer be able to suppress domestic fuel price inflation. This further exacerbated the already high inflation. A tight monetary policy was adopted to overcome inflationary pressures by periodically raising the BI reference rate. During the reporting period, Bank Indonesia twice raised its BI rate, once in May 2008 and then again in June 2008 to a level of 8.5%. With the rising BI rate trend, banks rapidly followed suit by raising their own interest rates. Interest rates on 1month rupiah term deposits in June 2008 increased by 21 bps, whereas the rates on working capital, investment and consumer loans rose by 7 bps, 15 bps and 4 bps respectively. The increases affected banks by intensifying market risk, particularly interest rate risk. In terms of their maturity profile, towards the end of Semester-I 2008 banks generally continued to maintain a short position in the short term and increasingly a long position in the long term. With such a composition anGraph 2.23 Interest Rate and Exchange Rate% 22 KI (ki) 19 10500 16 13 10 8500 7 4 2002 2003 2004 2005 2006 2007 2008 Kurs (kn) Deposito 1 bln (ki) 7500 9500 KMK (ki) KK (ki) Rp 11500

30

20

10

0 KMK KI KK KMK KI KK KMK KI KK KMK KI KK KMK KI KK persero bpd busn asing&camp seluruh

interest rate rise could negatively affect banks as it potentially erodes profit and generates losses. This effect has not, hitherto, come to fruition because not all banks have adjusted their interest rates yet. In the future, however, if conditions persist and no appropriate mitigation strategy is adopted banks could begin to record losses. Simulations demonstrate that a 1% increase in the interest rate would result in one bank suffering a decline in CAR to below the benchmark 8%. During Semester-I 2008, as a result of global financial market volatility there were numerous occasions when the stock market and bonds market, especially government bonds (SUN) were threatened by excessive pressures. Because banks represent one of the primary investors in SUN, any depreciation in SUN price directly affects the banks profit/loss, although not enough to reduce its CAR to below 8%. Based on stress tests, a 25% decline in SUN price would berequired for bank CAR to fall below 8%. As an impact of the global financial crisis, pressure to the capital market and bond market (particularly the SUN market) was observed as occurring several times during semester I of 2008. As banks are one of the main investors in SUN, the drop of SUN price significantly affected the banks profits and loss. However, no case in which banks CAR dropped below 8% were reported. Based on stress tests, banks CAR can drop below 8% if the price of SUN falls by 25%.

29


Graph 2.25 Rupiah Maturity ProfileRp triliun 600 450 300 150 0 (150) (300) (450) (600) sd 1 bln 1 - 3 bln 3 - 6 bulan 6 - 12 bln > 12 bln Des06 Apr08 Jun08 Des07 Mei08

Graph 2.27 SUN Portfolio of the Banking IndustryHTM Rp127,3T (45,7%)

Trading, Rp18,5T (6,6%)

Jun08

AFS, Rp133T ( 47,7%)

Sumber : LBU

Graph 2.26 Foreign Exchange Maturity ProfileUSD miliar 10 5 0 (5) Des06 Apr08 Jun08 Des07 Mei08

Graph 2.28 Net Open Position (Overall)% 20 19,2% 16 14,7% 12 15,3% 15,3% 14,2% 17,5% 17,1%

8

(10) (15) sd 1 bln 1 - 3 bln 3 - 6 bulan

4

06 - 12 bln > 12 bln

Des

Jun

Des

Mar

Apr

Mei

Jun

2006BUSN bank asing

2007bank campuran SELURUH BPD PDN Tertinggi

2008bank persero

Based on calculations, during Semester-I 2008 the SUN price dropped by an average 15%. As a result, banks suffered losses of around Rp1.3 trillion through a process of marking to market based on current SUN ownership in the trading portfolio (6.6% of total bank SUN). Meanwhile unrealized losses recorded on the balance sheet stemming from ownership of available for sale (AFS) SUN totaled approximately Rp7.4 trillion. The losses encouraged banks to switch SUN from their trading portfolio to AFS, which was evidenced by the diminishing share of trading SUN from 10% at the end of the last semester to 6.6% in the reporting semester. In addition to interest rate risk and SUN depreciation risk, banks were also exposed to exchange rate risk. In general during the reporting period, the exchange rate remained relatively stable. Banks, on average, had a

relatively low net open position (NOP), which is limited by regulations (maximum 20% of capital). At the end of June 2008, average bank NOP was 4.33%. The highest NOP was the foreign bank branches group with 7.45%. Based on stress tests, one banks CAR had the potential to drop below 8% should the rupiah depreciate by Rp3,000. With such information gained from stress tests, banks are expected to promptly adjust their portfolio to avoid losses. Such measures may include hedging and other appropriate risk mitigating steps. If the interest rate trend persists, which has risen since May 2008 in line with the increasing BI rate, it could trigger another depreciation in SUN price and intensify exchange rate volatility that could exacerbate bank market risk. It is important to note that adequate capital was the key element that enabled banks to overcome market risk

30


pressures. This condition must be monitored closely in the future considering that recent developments have seen bank capital decrease with the increased credit extension. In the near future, with Basel II implementation, banks%

Graph 2.30 Interest Income Composition of 15 Big Banks6,4 6,5 6,5 6,5 7,1 5,4

61,5

58,4

58,4

62,3

must also provide capital charge for operational risk. Such could reduce CAR slightly and therefore making any shock occurring in the market potentially disruptive to financial sector resilience.Graph 2.29 Interest Rate Spread% 15% 8,9 9,2 8,2 7,927,8 4,3 29,0 27,3 7,8 21,4 9,9

63,4

68,1

21,6 7,8

19,0 7,4

6,2

Des'05

Jun'06 BI

Des'06 SSB

Jun'07 KREDIT

Des'07 LAINNYA

Jun-08

Graph 2.31 Interest Income Composition of Banks8,3 6,7

13

10 Dep 8 KMK Spread

63,1

59,2

60,1

63,5

64,7

68,9

22,0

22,9 8,7 Jun'06 SSB

21,4 10,4 Des'06

16,8 11,8 Jun'07 KREDIT

16,9 10,2 Des'07 LAINNYA

15,1 9,4 Jun-08

5

Jan Feb Mar Apr Mei Jun Jul Ags Sep Okt Nov Des Jan Feb Mar Apr Mei Jun 2007 2008

6,0 Des'05 BI

2.2.4. Profitability and Capital

from 64.7% (December 2007) to 68.9% (June 2008). Conversely, interest income gained from SBI and other securities/bonds fell during the first semester of 2008. Adjustment of the PUAB interest rate to a level approaching the BI rate did not significantly affect bank profitability. It was noted that several banks conducted arbitration by borrowing from PUAB and concurrently investing in SBI. However, since the PUAB interest rate adjustment, this strategy is no longer profitable. The declining opportunity for arbitration was reflected by a fall in net income between income from BI and the interest cost of interbank call money from Rp1.3 trillion during Semester-I 2007 to Rp1 trillion during the same period this past year. The reduction in interest income from arbitration was recovered by the steep rise in credit interest income, therefore, total interest income at the end of June 2008 improved to Rp92.1 trillion compared to Rp87 trillion during the same period in 2007.

ProfitabilityOne profitability indicator is net interest income (NII). During the reporting period, NII rose steeply from Rp8.9 trillion per month at the end of December 2007 to Rp9.6 trillion per month at the end of June 2008. This rise in NII was principally supported by growth in earning assets (particularly credit) that outpaced expansion in deposits, namely Rp83.6 trillion compared to Rp42.7 trillion. NII has also been bolstered since the beginning of 2008 by widening spread between the lending rate (working capital loans) and deposit savings rate (1-month term deposits). However, since the BI rate increase in May 2008 the spread has tended to stop widening. Income from credit interest continues to dominate the composition of interest income derived by banks. The increasing amount of credit extended by banks still drives a corresponding rise in interest income from credit, up

31


Graph 2.32 BI Interest Income and Cost of Interbank Call MoneyRp triliun 18,0 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2,0 0,0Jan Feb Mar Apr Mei Jun Jul Ags Sep Okt Nov Des Jan Feb Mar Apr Mei Jun Jul

increase of 23.6%. Consequently, bank CAR dropped from 19.3% to 16.4%. All bank groups suffered a decline in CAR, with the largest drop recorded for the non-major banks.Graph 2.34 Risk-weighted Assets, Capital and CAR1.500 1.250 1.000 750 22% 20% 18% 16% 14% 12% 10%

2007

2008

Graph 2.33 The Banking Industry P/LRp triliun 30 L/R Op 25 20 15 10 5 L/R Non Op L/R Sblm Pajak

500 250 -

Des Des Des Des Jun Des 2003 2004 2005 2006 2007 Modal

Jan

Feb

Mar Apr 2008 CAR (kanan)

Mei Jun

ATMR

Graph 2.35 CAR Ratio by Bank Group June 2008% 25,0 20,0

0 (5)Jan Feb Mar Apr Mei Jun Jan Feb Mar Apr Mei Jun

2007

200815,0

Although NII increased, bank profit/loss for the current year as per the end of Semester-I 2008 (Rp24.9 trillion) was slightly lower compared to the same period in

10,0

5,0 0,0

2007 (Rp25.2 trillion) thus reducing the return on assets (ROA) as well. This is due to the introduction of mark to market for bonds that placed pressures on profit/loss. It must be noted that nearly 93% of total losses due to marking to market were experienced by the state-owned bank group and foreign bank branches.

Bank Besar Jun'07

Bank Lainnya Des'07 Juni'08

Industri

Despite a slight decline, bank CAR in general remained relatively high compared to the minimum requirement of 8%. The ratio of core capital (Tier 1) to risk-weighted assets also remained high, namely 14.7%. Therefore, bank capital was adequate to absorb a plethora

CapitalThe lackluster increase in profits led to slow bank capital growth. Oppositely, expansive credit growth caused the number of risk-weighted assets to rise sharply. During the reporting period, capital witnessed just 5.1% growth whereas risk-weighted assets experienced an

of risks. However, there were several banks, especially medium to small banks, with marginal CAR (9% - 12%). Banks with marginal CAR are particularly vulnerable to any escalation in risk. Therefore, such banks are required to prepare concrete measures to strengthen their capital.

32


This is even more important considering that beginning at the end of 2010 banks will be required to maintain a minimum core capital of Rp100 billion. Other measures to reinforce capital include mergers and acquisitions, which should accelerate bank consolidation.

2.3. NON-BANK FINANCIAL INSTITUTIONS AND THE CAPITAL MARKETDuring Semester-I 2008, non-bank financial institutions and the capital markets continued to develop amidst mounting pressures emanating from global financial market fluctuations and a decline in economic conditions

Stress TestTo gauge potential instability as well as measure the resilience of bank capital in confronting pressures from various risk sources, stress tests were performed on 15 major banks using a balance sheet approach transmitted to bank profitability and capital. The scenarios used include: (i) a decline in credit quality by downgrading outstanding credit collectability by 10%; (ii) a 15% slump in SUN price; (iii) a 2% rise in the interest rate; and (iv) a Rp500 depreciation in the rupiah against the dollar to Rp9,725/ USD. Stress test results demonstrated that under the scenarios mentioned bank CAR falls, on average, by 0.4% (lowest 0.1% and highest 3.3%) from 18.8% to 18.4%. More positively, no banks suffered a decline in CAR to below the 10% threshold. It can therefore be concluded that potential instability in future will remain low considering that bank capital is adequate to absorb many risks such as credit risk, interest rate risk, exchange rate risk and SUN price depreciation risk.

compared to the previous semester. Vigilance must be improved to prevent shocks emerging in the domestic financial markets, whether originating from banks, nonbank financial institutions or the capital markets.

2.3.1. Finance CompaniesFinance companies are other financial institutions that provide many types of finance, including consumer loans, leasing, factoring and credit cards. In Semester-I 2008 (to May 08) financing from finance companies grew by 9.91% in line with corresponding increases in total assets and capital by 8.16% and 2.86% respectively. Optimism surrounding the future performance of financing encouraged finance companies to trim investments on bonds, including money market bonds, mutual funds and corporate bonds. The share of finance offered by finance companies was dominated by joint finance companies, whereas finance from national private finance companies grew by 10.8%. Intense financing by finance companies was primarily supported by the rise in financing offered by banks.

Grafik 2.36 Stress Testing various Scenarios% 30 25 20100 160 140 120

Graph 2.37 Business Activity of Finance CompaniesRp miliar

CAR AWAL CAR BARU

8,16% 9,91% 8,64%

2004 2005 2006 Des'07 Mei'08

15 10 5

80 60 40 20 2,86%

0 A B C D E F G H I J K L M N O

0 Aset Pembiayaan Pendanaan Modal

33


Finance company funding again concentrated on consumer financing with a share of 63.3%. National private finance companies further intensified their leasing activity, as reflected by the rise in share from 10.08% (December 2007) to 11.34% (May 2008). Conversely, joint finance companies tended to focus on consumer lending with its share expanding form 50.61% to 51.94%. This was primarily attributable to the appealing automotive sector as indicated by The Indonesian Automotive Industry Association (Gaikindo) report on vehicle sales during Semester-I 2008, which exceeded estimations, namely 290 thousand units and exports of 50 thousand units. In addition, a report from the Indonesian Motorcycle Association stated that national motorcycle sales during Semester-I 2008 increased by 2.5 million units. The rise in finance company funding was complemented by improved financing quality, as evidenced by a drop in NPL from 2.11% to 2.04%. The decline in NPL occurred chiefly on leasing, factoring and credit cards, whereas consumption NPL tended to increase. Based on level, the NPL of factoring remained the highest. Liquidity risk of national private finance companies and joint finance companies was well managed along with the high cash flow originating from funding activity.Graph 2.38 Funding Composition (Value) of Finance CompaniesPembiayaan (dalam ribuan Rp) 140.000.000.000

Table 2.1 Funding Composition of Finance CompaniesMay 08 Leasing Factoring Credit Cards Consumption Financing Dec 08 Leasing Factoring Credit Cards Consumption Financing Growth Dec 07 May 08 Dec 06 May 07 Total 33.74% 1.83% 1.13% 63.3% Total 33.88% 2.04% 1.34% 62.74% Total 9.91% 3.54% National Private 11.34% 3.23% 0.01% 85.42% National Private 10.08% 3.47% 0.02% 86.43% National Private 10.8% 6.11% Joint 45.28% 1% 1.78% 51.94% Joint 46.06% 1.24% 2.09% 50.61% Joint 9.33% 2.1%

Meanwhile the efficiency of finance company activity improved as reflected by a decline in the efficiency ratio of Operational Cost to Operational Income (BOPO) from 83% to 77%. Efficiency improvements occurred in line with refined management and better diversification of the finance portfolio. Finance company profitability was well maintained, as indicated by relatively steady ROA during 2008 (to May 08), whereas ROE increased slightly. In terms of funding, national private finance companies have increasingly relied on bank loans as their dominant source of funds because of the high issuance ofGraph 2.39 Financing NPLNPL (%) 18,00

120.000.000.000 100.000.000.000 80.000.000.000 60.000.000.000 40.000.000.000 20.000.000.000 0 Piutang pembiayaan Sewa Guna Usaha Anjak Piutang Kartu Kredit Pembiayaan Konsumen Total 118.355.953.837 39.933.499.739 2.169.138.644 1.332.143.310 74.921.172.144 Swasta Nasional 42.167.708.575 4.781.115.535 1.362.855.013 2.168.698 36.021.569.329 Patungan 74.899.783.532 33.918.088.509 752.117.596 1.329.974.612 38.899.602.815

16,00 14,00 12,00 10,00 8,00 6,00 4,00 2,00 0,00May'07 Dec'07 May'08

Sewa Guna Usaha2,71% 2,28% 2,18%

Anjak Piutang17,08% 11,59% 11,36%

Kartu Kredit4,10% 3,66% 2,82%

Pembiayaan Konsumen1,52% 1,68% 1,68%

34


Graph 2.40 Cash Flow of Finance CompaniesRp Miliar 3.000 2.500 2.000 1.500 1.000 500 0 -500 -1.000 -1.500 -2.000 -2.500 Arus kas neto dari aktivitas operasi Arus kas neto dari aktivitas investasi Arus kas neto dari aktivitas pendanaan Des 06 -1.281 -133 1.526 Mei 07 928 -65 -931 Des 07 1.184 -162 -811 Mei'08 -1.784 -103 2.596 10.000 8.000 6.000 2.000 4.000 0 -2.000 -4.000 -6.000 -8.000 Arus kas neto dari aktivitas operasi Arus kas neto dari aktivitas investasi Arus kas neto dari aktivitas pendanaan Des 06 -1.676 -87 3.022 Mei 07 -2.542 216 2.552 Des 07 -7.133 494 7.513 Mei'08 -4.057 845 2.873 Rp Miliar

stocks and bonds. Throughout Semester-I 2008, only one finance company conducted a IPO, namely Verena Oto Finance and one finance company carried out a rights issue, namely Sinarmas Multiartha. Meanwhile three finance companies (Tunas Financindo Sarana, Astra Sedaya Finance and Federal International Finance) issued bonds for refinancing. The rise in finance company loans to banks has the potential to intensify the risk exposure of banks. To limit this risk, banks tended to reduce channeling and joint financing. As a result, growth in channeling and joint financing by finance companies during the reporting period was far lower than growth during the same period in the previous year.Table 2.2 Performance of Finance CompaniesDec-06Asset Debt (Pinjaman/ Obligasi) Kewajiban Equity Profit Before Tax Profit After Tax ROA ROE BOPO Debt/Equity Kewajiban/Equity 75,473,577,190 89,854,653,702 19,033,828,384 4,203,131,242 3,133,199,549 0.04 0.22 0.89 3.97 4.72 79,283,278,757 92,882,835,571 20,603,991,915 2,470,102,063 1,863,858,093 0.02 0.12 0.81 3.85 4.51 90,319,642,214 24,553,803,262 5,763,866,446 4,379,780,690 0.05 0.23 0.83 3.68 4.19 98,124,081,115 102,726,729,294 111,356,359,313 26,290,092,836 3,381,269,222 2,587,493,663 0.02 0.13 0.77 3.73 4.24

Graph 2.41 Finance Companies Source of FundsRp Ribuan 100.000.000.000 80.000.000.000 60.000.000.000 40.000.000.000 20.000.000.000 0 Des'06 Mei'07 Dec'07 Mei'08

Pinjaman Bank Domestik

Surat Berharga yg Diterbitkan

Total Sumber Dana*

*Total Sumber Dana : SSB. Pinjaman Subordinasi dan Total Pinjaman Dalam dan Luar Negeri

Based on the group of 15 finance companies with the largest foreign exchange loans, most are joint finance companies that tended to focus on leasing activities. Expansive rupiah financing and foreign exchange loans

Mei-07

Dec-07

May-07

have triggered potential exchange rate risk. Finance companies which are subsidiaries of banks have majority of their funds sourced from rupiah denominated loans from domestic banks which results to relatively low probabilities of risk transfer from exchange rate risk. In 2008 (to May 2008) 25 finance companies were affiliated with banks and 10 were subsidiaries of domestic banks. From a business point of view, five finance companies belong to banks that concentrate their funding

108,888,482,086 113,486,827,486

127,260,532,556 137,646,452,149

35


Graph 2.42 The Banking Industrys ExposureRp Ribuan 90.000.000.000 80.000.000.000 70.000.000.000 60.000.000.000 50.000.000.000 40.000.000.000 30.000.000.000 20.000.000.000 10.000.000.000 0 Des'06 Mei'07 Des'07 Mei'08 Channelling Joint Financing

stock exchange, short-term profit taking by foreign investors was one contributing factor that precipitated a price bubble.Graph 2.43 Inflow of SUN-SBI-SharesRp triliun 30 20

10 0

Table 2.3 Finance Companies Source of FundsSemester I'07SN Pinjaman Bank Surat Berharga yg Diterbitkan Total Sumber Dana Patungan Pinjaman Bank Surat Berharga yg Diterbitkan Total Sumber Dana Total Pinjaman Bank Domestik Surat Berharga yg Diterbitkan Total Sumber Dana 8.29% 26.55% 13.67% -4.21% 10.06% 0.95% 0.73% 19.32% 4.81%

-10 Saham SBIAgs Sep Okt Nov

SUNDes Jan Feb Mar Apr Mei Jun

Semester I'0815.86% 6.78% 11.25%

-20

Jun

Jul

2007

2008

Graph 2.44 Total Inflow: SBI-SUN-SharesRp triliun 40 Total Inflows 30 20 10

6.96% 2.89% 6.70% 10.55% 4.82% 7.95%

0 -10 -20

activity on leasing. In 2008 (to May 2008) financing performed well, as reflected by increasing ROA and ROE.

-30

Jun

Jul

Ags

Sep

Okt

Nov

Des

Jan

Feb

Mar

Apr

Mei

Jun

2007

2008

Stock Market2.3.2. Capital MarketThroughout the reporting period, global stock exchanges continued on their bearish trends due to widespread expectations of escalating global inflationary pressures, which are forecasted to aggravate already poor US economic prospects as a result of the subprime mortgage crisis. The bourses of emerging market countries in Asia also deteriorated, the most severe being the Chinese exchange index SIASA, which witnessed a 47% decline. In the domestic stock market, the Jakarta Composite Index slumped 14.5% to 2,349.11 (June 2008). During the first semester of 2008 the JSX Composite recorded both its highest level ever as well as its lowest at 2,180.09 (9th

Foreign Investor PortfolioSemester-I 2008 was marked by increasing inflationary pressures which, in turn, raised the domestic interest rate. As a result, short-term capital inflows from foreign investors surged, namely on SUN and SBI by Rp8.4 trillion and Rp4.7 trillion respectively. Net stock purchased amounted to Rp5.4 trillion. On one side, the surge in capital inflows from foreign investors reflected stronger confidence in the domestic financial sector. However on the other side, the Indonesian financial sector became more vulnerable to the possibility of sudden reversal. On the

36


April 2008) and 2,830.26 (9th June 2008) respectively. The average for the semester was 2,485.47. The index tumble affected nearly all sectoral indices, especially indices sensitive to the interest rate, namely the construction and financial sectors which declined 33% and 22% respectively. Sectoral indices sensitive to the exchange rate also deteriorated significantly, namely the infrastructure sector (plummeting 25%) and the miscellaneous industrial sector (

bank indonesia, financial stability review no. 11 september 2008

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