Don’t expect Bank Indonesia’s rate cut to boost bank lending growth soon, says Fitch

The rupiah could weaken further.

Indonesia’s central bank’s 25bps rate cut may have signalled a pro-growth monetary policy stance, but it won’t increase lenders significantly.

At least not yet, according to ratings agency Fitch. According to Fitch, the rate cut may expose the rupiah could be exposed to further weakening, which would be dangerous as it has already depreciated by over 10% since the beginning of 2015.

Fitch added that Indonesia’s external balances also remain a weakness compared to its peers, in part as a result of the country’s higher dependence on commodities.

“The current account deficit has narrowed substantially since the "Taper Tantrum" of 2013, when Indonesia's capital markets experienced a high degree of volatility. But low FDI inflows, large foreign ownership of government bonds and growing external debt mean the country remains vulnerable in the event of a renewed bout of foreign investor uncertainty,” Fitch said.

Meanwhile, Fitch says they are still unsure whether the central bank’s stance in favour of growth would come at stability’s expense.

Additionally, Fitch says the rate cut alone wouldn’t be able to pull Indonesia’s bank lending growth above the low teens in 2016.

“Bank asset quality and profitability should remain under pressure with NPLs rising further to 3.5% by end-2016, with weakness concentrated in the mining sector. Rising "special- mention" loans in 2015 confirm that asset quality pressures have already begun to rise,” Fitch said.