Indonesia’s new finance minister wants to immediately flood the economy with roughly US$12 billion in cash to jump-start lending, proving his commitment to President Prabowo Subianto’s growth agenda barely three days into the job.
The government will transfer half of the 400 trillion rupiah in cash reserves that it holds with the central bank to state-owned lenders, Finance Minister Purbaya Yudhi Sadewa told lawmakers in a hearing on Wednesday. He added on Thursday that the cash injection would be done “soon” and deployed all at once to banks.
A cash injection of this scale from the finance ministry is unprecedented, underlining Purbaya’s quest for a quick fix to what he said was a “drought” in the financial system that’s choked activity in Southeast Asia’s largest economy.
The reserve pile has accumulated due to past underspending, and some should be tapped to support the economy, the new finance chief said on Wednesday. “My job here is to rev up the monetary and fiscal engines,” he said, adding that he has asked the central bank not to absorb the fresh liquidity.
“From a liquidity perspective, the move to deploy idle funds bodes well for money velocity,” Radhika Rao, senior economist at DBS Bank, wrote in a research note.
“This liquidity infusion adds to broader set of measures to jumpstart economic activity,” said Rao, citing the central bank’s interest rate cuts, and various government stimulus measures.
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Jakarta’s benchmark stock index climbed a second day, with financials the best performers on Thursday. Recent selling pressure by global funds over political uncertainty had made banking shares a laggard given the sector’s high concentration of ownership by foreigners.
The Indonesian rupiah was little changed while government bonds edged higher with the yield curve steepening in anticipation the cash will be put into shorter-tenored debt. Markets remain jittery with the rupiah holding most of its 1% decline, and stocks paring about half of their almost 4% decline, since Sri Mulyani Indrawati was replaced as finance minister earlier this week.
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Purbaya, who was sworn in as finance minister on Monday after the surprise ouster of veteran Indrawati is pursuing a sharp shift in how the government manages its cash. His predecessor preferred to keep the reserves on standby to help with government financing when interest rates were too high.
The government’s cash reserves, known as SAL, “has not been transferred to banks before at such a large scale,” said Maybank Securities Pte. economist Brian Lee.
The finance ministry earlier this year placed 16 trillion rupiah of the SAL with state banks to get them to extend cheap lending for village cooperatives, with some funds earmarked for low-cost housing. And in Indrawati’s final days as finance chief, it revamped a burden-sharing arrangement with the central bank to shoulder the debt costs of both programs.
“Withdrawing a substantial amount of funds from the SAL may, at the margin, reduce fiscal flexibility given the SAL’s role as a contingency fund for plugging fiscal deficit shortfalls,” Lee said. “That said, there remains a sizable 230 trillion rupiah in the SAL even after the transfer, equivalent to about 1% of GDP.”
Indonesia’s finance chief told banks not to use the additional funds to buy government debt, but instead to boost lending, which is growing at its slowest pace in three years.
“The goal is for banks to have more free cash on hand, and banks should not put it anywhere else but in loans,” Purbaya said late Wednesday. “We are forcing the market mechanism to work.”
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Indonesia Cuts Rate as Loan Growth Hits Three-Year Low
Purbaya has pledged to spur economic growth beyond 6% in the “not-too-distant future” to hit the president’s 8% target. He said the weakness in the economy is caused by inadequate liquidity, given slow government spending and sluggish money supply growth, despite recent rate cuts by the central bank.
The new fund transfer shouldn’t be inflationary, he said. Inflation stood at 2.31% in August, within the central bank’s 1.5%-3.5% target range.
“Inflation occurs when economic growth exceeds potential growth, which is 6.5% or more, so we are still far from any inflation risk,” he said.
To boost spending, Purbaya said his ministry will monitor budget absorption more regularly, especially for programs with large allocations such as the free school meals.
Meanwhile, Bank Indonesia has cut its policy rate by 125 basis points since September, while reducing the returns and issuance of its rupiah securities.
While Purbaya’s initiative could help increase liquidity and bring down borrowing costs further, it remains to be seen whether it will be effective in spurring lending at a time when Indonesians’ credit appetite for remains weak.
“Companies have been cautious to invest due to the uncertain global and domestic environment. Households have been cautious with spending due to job worries,” Maybank’s Lee said.
