Indonesia Commercial Banking Report

Key Issues

Indonesia is considered to be one of the most open markets for foreign investors in Asia Pacific, but also viewed as one of the least consolidated. This creates a difficult situation for potential investors. Fortunately, Indonesia's banks appear to be showing confidence. Strong economic growth is fuelling growth trends in lending, suggesting that the commercial sector will offer real opportunities for growth. Despite this, Indonesia's banks are still considered to be some of the weakest in the region. State banks and small private banks remain sensitive to credit risk.

However, investors need to be aware of several key economic issues which could shape the direction of Indonesia's banking industry. First, Indonesia's economic growth is substantially lower than in previous years and an economic recession appears likely in 2007. Much weaker-than-expected economic growth could accelerate capital flight and trigger the devaluation of the rupiah in the next 12 months.

Second, fuel subsidies remained a critical issue as global oil prices have continued to climb. This has placed an increasingly heavy burden on the budget.

And third, extreme unemployment levels could deter from Indonesia growth. In 2005, unemployment breached 10%, marking Indonesia's highest unemployment rate in modern times. This year the unemployment rate has continued to climb as manufacturing outputs have slowed. This needs to be monitored.

Changes To This Quarter's Commercial Banking Forecast

We have made a number of improvements to the commercial banking reports this quarter. In particular, we have collated information about banks' capital and bond portfolios.

We have looked at capital primarily because we wanted to produce a clearer picture of the banks' balance sheets and, in particular, the liabilities side. We are now much better able to quantify liabilities that are not deposits.

We collated information about the bond portfolios because we wanted to gain additional insights about the risks with which the banks are involved. Across all the countries that we have surveyed, the commercial banks are major investors in government securities. In some instances, the banks are large holders of bonds - by any standard. In other instances, the banks' holdings of securities represent a very substantial portion of their total assets.