Bandung (Admin). The year 2007 can be regarded as the year of banking awakening after the sluggish 2006. A number of key indicators, such as lending, profitability, and the handling of problem loans, have shown considerable improvement. The solid foundation this year should have been able to boost the industry's performance, but the soaring oil price that almost reached USD100 per barrel, added by the uncertain global financial market have made the hope less realistic.
The banking sector was still traumatized by the drop such as what happened in 2006. The lack of lending and higher problem loans can be frightening for 2008. Will 2008 be a good year or a bad year for the banking industry? It should depend on the ability of the Government and Bank Indonesia (BI) to minimize the impact of global risks on the domestic economy.
Deputy Governor of Bank Indonesia Muliaman D Hadad during Infobank's workshop of Outlook 2008 explained that until September 2007, the banking sector was experiencing significant performance growth with some indicators exceeded the estimates. Lending position as of the end of September 2007 reached Rp 956.7 trillion, or growing 21.5% compared to the same period in the previous year. At the same time, TPF grew 16.4%, a condition that caused LDR to jump to 68.3%. Meanwhile, gross NPL ratio (before deducting provisions) fell from 6.31% to 5.75%.
Considering the good performance in 2007, BI has estimated that in 2008 lending will grow around 22-24% and gross NPL ratio will improve to around 5-5.5%. However, Muliaman admitted that these predictions lie in the assumption that oil price fluctuations do not make significant impact on the domestic economy.
Suppose oil price remains volatile, the economy will certainly be affected. Until now, there has been no sign of oil price volatility to subside. This condition will worsen if the impact of other risk factors, such as the down-turn of global financial market, slower growth of US economy, and China's inflationary increase, are bigger than expected.
The internal factors must be overlooked. Rising inflation, especially import inflation, and negative sentiment towards fiscal sustainability associated with high oil prices could generate a nightmare. The concern over a gloomy 2008 has shown some indication when PT Pertamina raised the industrial fuel prices, which as of 15th November 2007, rose 10% on average over the prices set on 1 November 2007.
The Chairman of Indonesian Footwear Association Haryanto explained that the average fuel price increase of 5% has increased production costs by 30 U.S. cents per pair of shoes. The rising production costs have forced corporations to either suspend expansion or reduce production and, in turn, reduce the demand for loans. Another consequence is lower corporate profit. Ultimately such condition will reduce repayment capability, leading to higher NPL.
Solutions
According to the capital and financial markets observer Kahlil Rowter, if oil price volatility lasts more than three months, manufacturers that use imported raw materials will not withstand the heightening burden. They will then pass the price increase onto consumers, a factor that will trigger inflation. Of course all these concerns are still potential, they may be prevented if effective measured are put in place.
Monetary observer Iman Sugema suggested BI to immediately lower BI Rate to push down loan interest rates since lower loan interest will reduce production costs.
(FDT source: http://kompas.com/ver1/Ekonomi/0711/20/090020.htm)
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