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Indonesia May Consider Selling Bank Stakes in Financial Revamp

Indonesia may consider cutting public stakes in banks and imposing lending quotas in an effort to channel more credit to industry, as policy makers prepare reform proposals for incoming President Joko Widodo.

Financial regulators and economic officials from the current administration will meet next week to forge a set of plans to address persistently high domestic borrowing costs and insufficient lending going to manufacturers, according to Edi Prio Pambudi, an assistant deputy minister at the Coordinating Ministry for Economic Affairs. He said quotas and privatizing state-owned banks are among the scenarios under discussion.

“Banking in Indonesia is still dominated by public banking not private banking,” Pambudi said in an interview in Jakarta yesterday. “The cost of financing is very expensive” and the country needs to reallocate the investment focus from primary commodities into manufacturing, he said.

At stake is boosting growth to the 7 percent target set by Jokowi, as the president-elect is known, a pace Southeast Asia’s largest economy hasn’t seen since the years before the 1997-98 Asian financial crisis. The incoming leader, running on a platform of concern for common people, won last month’s election, giving him a mandate to govern for five years from October.

Indonesian structural reform requires a “very, very brave” leader, Pambudi said.

External Debt

The country needs to ensure the flow of money will go into more productive sectors, as currently domestic banks prefer to allocate funds to agriculture and low-productive industries, he said. State-owned banks are under pressure to show profit to the government, and high interest rates at local lenders mean companies seek financing outside Indonesia, leading to rising external debt, he said.

Asked if privatizing public banks and imposing lending quotas are among the scenarios being considered, Pambudi said yes, without specifying how these would be implemented.

PT Bank Mandiri, Indonesia’s biggest lender by assets, is 60 percent-owned by the government. Others that are state-owned include PT Bank Rakyat Indonesia, the second-biggest bank, PT Bank Negara Indonesia and PT Bank Tabungan Negara.

Reducing the government’s stakes in banks won’t be enough unless it also prods bigger lenders to buy smaller ones, said Arief Wana, a director at PT Ashmore Asset Management Indonesia, which oversees the equivalent of about $423 million of Indonesian assets.

Bank Consolidation

“Consolidating state-owned banks will give a positive impact to the economy as it will boost lending growth, make our banks competitive, lending rates will decline,” Wana said. “It should boost purchasing power and give opportunities for local companies to get cheaper loans in the domestic market rather than go overseas or issue dollar bonds.”

Indonesia needs to focus on developing strategic industries that use its natural resources as raw materials, to reduce the pressure for imports, Pambudi said.

The country is the world’s largest exporter of power-station coal, palm oil and tin, yet a lack of manufacturing capacity has fueled a current-account deficit that is weighing on the rupiah.

Economic growth eased to the slowest since 2009 in the three months ended June 30, as exports and government spending fell, underscoring the challenge to Jokowi as he prepares to lead the world’s fourth-most populous nation.

Subsidies that keep local fuel prices low have spurred energy imports, straining the trade balance and tying up funds that could be used to build roads, bridges and railways. The current administration has had to cut 2014 budget spending by ministries to fund rising subsidy costs.

The country will seek to divert government funds to more productive uses, Pambudi said, calling an adjustment in the fuel subsidy system a “medicine” the economy needs. The amount Indonesia spends on subsidies in a year could be used to build 16 airports, he said.

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