Interview: Alan Richards

What is your forecast for Indonesia’s banking sector, given the revised economic outlook? How will it impact lending over the next 18 months?

ALAN RICHARDS: With GDP forecasts suggesting a slowdown in the economy – with Bank Indonesia (BI), the central bank, putting it at 5.5-5.8% – and interest rates still rising to stave off inflationary pressures, it is clear that BI is focused on financial stability.

As a consequence, BI is targeting a slowdown in balance sheet growth for the industry as a whole, and we believe that the forecast of 15-17% in 2014 looks reasonable. It is also worth mentioning that local currency liquidity is expected to remain tight, and we are likely to see pressure in non-performing loan terms in sectors such as commodities. Overall, however, we remain optimistic for 2014, and the fundamental attractiveness of Indonesia’s economy remains unchanged.

How can Indonesia’s banking sector be brought up to developed market standards?

RICHARDS: It has to be said that the banking sector has made remarkable progress in the past decade, which is a compliment to the government, regulators and the market as a whole.

Indonesia is an active and responsible member of important international bodies such as G20, the World Bank, the Bank of International Settlements and so on. The regulators in Indonesia continue to work closely with their international counterparts on implementing global regulatory standards, such as Basel II, and work is now beginning on Basel III.

There are a large number of international and regional banks in the country, which is positive. I think this has helped drive both competition and standards for the benefit of consumers.

International banks have brought improvements to banking products and technology, and most importantly have helped in developing expertise and local talent. With corporate governance standards improving, capital markets will continue to develop and competition will drive continuously improving standards across the industry for the benefit of the economy and society as a whole.

Based on what we have seen the last few quarters, is the trade deficit a concern?

RICHARDS: Yes, it is a concern but it is not a surprise, given the resource-based nature of the economy. The government is clearly focused on trying to tackle the issue. The problem is structural and the long-term solution lies in improving infrastructure, and ensuring that the economy moves downstream and is better integrated.

Addressing the deficit will take time, but the government and Bank Indonesia have listened to market players. They have taken bold and decisive actions to control the deficit.

For example, back in November 2013, Bank Indonesia unexpectedly raised Rupiah interest rates. It reaffirmed that the central bank is well and truly aware that the current account deficit was foremost in investors’ minds, and that it would do whatever necessary to quell those concerns.

Infrastructure development has remained a critical challenge, including access to financing. What does it take to spur infrastructure spending?

RICHARDS: I think everyone is frustrated with the slow progress, but the Masterplan for Acceleration and Expansion of Indonesia’s Economic Development sets out an excellent blueprint.

If roll-out and implementation can be expedited in key areas such as roads and ports, the economy will benefit significantly. The land acquisition law passed in 2012 was another step in the right direction, and if we can create an environment where there is more regulatory and legal certainty, I am quite confident that the financing necessary to support infrastructure projects will become available.