JAKARTA, Jan 31 (Reuters) - Two of Indonesia’s biggest banks have warned that a government strategy of frontloading bond issuance and selling more debt to retail investors is draining cash in Southeast Asia’s largest economy and risks undermining efforts to boost bank lending.
The government has sold more bonds than it targeted at every auction it has conducted so far this year and retail bond sales have been double the initial target.
Jahja Setiaatmadja, chief executive of Bank Central Asia, Indonesia’s largest bank by market value, told a banking forum late on Wednesday that the industry’s loan-to-funding ratio (LFR) “is already at a condition where we can’t be expansive” at 93 percent, above Bank Indonesia’s (BI) guidance of keeping it within 80-92 percent.
He said that with LFR at these levels and banks tied to the funding of infrastructure projects “we are worried that the availability of liquidity will be drained and now we’re facing competition with the government,” Setiaatmadja said.
Setiaatmadja also said assistance by banks in government bond sales to retail investors this year was in effect “canibalising” saving deposits and noted the bonds were marketed with a higher return than term deposits offered by banks.
The government has raised 101.9 trillion rupiah ($7.29 billion) in bond sales this year, excluding a $100 million private placement and U.S. dollar notes sold late last year for pre-2019 funding, according to Reuters calculations.
The increase in bond supply has already halted price appreciation at a time of strong foreign inflows, Trimegah Securities’ economist Fakhrul Fulvian said. The Jakarta-based brokerage said the government’s net bond sales so far in 2019 were the highest since at least 2010.
Suprajarto, chief executive of Indonesia’s biggest bank by assets, Bank Rakyat Indonesia, told Reuters the lender had also seen competition with the government for savings, but stressed it had a strategy to bump up savings growth this year.
Luky Alfirman, the finance ministry’s head of financing and risk management, said there was nothing extraordinary in its 2019 bond strategy, noting bond sales were always frontloaded.
Finance Minister Sri Mulyani Indrawati said on Tuesday the bond strategy would adapt to local market conditions and take into account U.S. interest rate rises. But she said that should not deepen competition with the private sector due to a projection of a smaller budget deficit for the whole year.
The government has forecast a 1.8 percent-of-GDP budget deficit for 2019, below 2.2 percent last year.
Savings in banks have been growing at a much slower pace than credit, a trend BI expects to continue this year. BI has said loan growth would likely stay in a range of 10-12 percent, while savings growth was seen at 8-10 percent.
Despite BI’s 175 basis-point rate hikes last year to halt capital outflows, loan growth has been accelerating.
BI said in order to protect economic growth it had relaxed reserve requirement rules and increased the frequency of its term repo auctions to provide liquidity. ($1 = 14,020.0000 rupiah) (Reporting by Bernadette Christina Munthe and Maikel Jefriando Additional reporting by Cindy Silviana Writing by Gayatri Suroyo Editing by Ed Davies and Kim Coghill)