Indonesia: Monetary and macropru for growth
- Slower growth and stable Rupiah gave room for BI to deliver another 25bps cut last week
- ..and loosened Loan-to-Value ratio for both property and automotive loan to support lending growth
- BI expanded the definition of banks’ source of fund to give banks wider room for credit expansion
- We now expect policy rate to be 5.0% at end-19 with another 25bps cut likely in 4Q19
Policy rate cut and macro prudential easing
Bank Indonesia cut rates for a third consecutive time last week to 5.25% (Deposit Facility to 4.5% and Lending Facility to 6.0%), resulting in a total of 75bps cut this year. BI also announced macro prudential easing by expanding the scope of banks’ source of fund in the Macroprudential Intermediation Ratio (MIR) and loosened the loan-to-value (LTV) and financing-to-value (FTV) for property and automotive loans (effective on December 2nd).
The deceleration in economic growth momentum and weak monetary easing passthrough to the private sector is worrying. While we pencil in another cut in 4Q by 25bps, we think that risks are tilted towards even more easing if economic activity does not pick up early next year.
Bank Indonesia expanded the definition of banks’ source of fund in the Macroprudential Intermediation Ratio (MIR) and Shariah MIR to include loan/financing component received by banks which will give banks wider room to extend credits. Currently, BI requires banks to keep the MIR on 84%-94% range, while penalizing banks outside of this range with higher reserve, to support lending growth.
The new definition of bank’s source of fund will include loan/financing with at least one-year maturity, excluding interbank loan. According to BI, this new definition would add an additional IDR128tn liquidity available for loans.
The new formula (including loan received in the denominator:
In addition to change in MIR, BI also announced relaxation on loan-to-value (LTV) for property financing by 5% and motor vehicle financing-to-value (FTV) ratio by 5%-10%. Additional incentive of 5% is also given for both property and green automotive financing. See Table 1-3 for details on the changes on LTV and Table 4-6 for FTV.
LTV relaxation would be more effective for smaller houses or first home buyers and less for second home buyer or larger-sized house (>70m2). Yet, the extent to which this LTV relaxation would increase lending growth would also be constrained by weaker domestic demand environment.
We think FTV relaxation is timely to support automobile sales which has decelerated since end of last year. Motor vehicle, in particular has recorded negative sales growth since Nov18 while motor cycle since May19.
Impact of previous LTV easing
To gauge the impact of the current LTV relaxation on lending growth, we look at the past round of LTV easing in Aug18. During this period, first home buyer’s (for larger-sized house >70m2) LTV was relaxed from 15% down payment to zero. For apartment, from 15% for larger (>70m2) and 10% and mid-size apartment (22-70m2) to zero. In addition, new regulation allows consumer to take up to five mortgages to encourage investment in the property sectors.
As we can see from the chart below, housing mortgage and real estate loan stayed relatively flat after the LTV relaxation during this period. Construction growth, mainly linked to infrastructure development, was not impacted by LTV
Softer growth momentum in 2H19
GDP growth is likely to soften in 2H19 compared to 1H19 (DBSf growth 5.0% in 2019). Several real sector indicators (cement sales, PMI, credit growth, negative growth capital and raw material imports) pointing to higher chance of growth deceleration in 2H19. The impact of monetary easing, including previous 50bps policy rate cut earlier this year, has not been completely reflected in the money supply or credit growth.
We see further risk to growth is tilted to the downside, which could result in more monetary and macroprudential easing further to 2020.
Indonesia: Surfacing economic weakness
Indonesia: Another pre-emptive rate cut
Indonesia: Rate cuts in the horizon
Indonesia: Easing some pressure
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