Indonesia’s central bank has paused its series of interest rate cuts to focus on encouraging banks to lower loan costs. However, businesses believe the real issue lies in government policies rather than bank practices. Despite efforts to stimulate the economy, companies are hesitant to invest, largely due to uncertainties in government policy one year into President Prabowo Subianto’s administration. Consumer spending is also low due to job insecurity.
Bank Indonesia (BI) decided to keep its policy rate at 4.75% instead of continuing with market expectations for a fourth cut. The bank has lowered its benchmark rate since last September but has seen minimal decrease in lending rates. This limited drop is mainly because depositors want higher returns, which, according to Governor Perry Warjiyo, has affected loan demand, as businesses favor internal funding over bank loans.
Shinta Kamdani, from the Indonesia Employers Association, emphasized that the investment climate is more crucial for businesses than borrowing costs. Many CEOs express concerns about Prabowo’s policies, including increased government control over various industries, reduced communication with business owners, and ineffective governmental programs. Some business leaders, fearing backlash, requested anonymity when sharing their opinions. A mining executive noted a stagnant trend in mineral exploration due to investment uncertainties.
Prabowo, who took office promising to continue pro-business policies from his predecessor, has enacted more stringent controls in key sectors like palm oil and tin, leading to fears of asset seizures. His government aims to boost growth from around 5% to 8% through various programs, which, however, have caused fiscal cutbacks for local governments. An automotive executive expressed worries that these cutbacks could lead to increased taxes that would hinder car sales.
Loan growth remains low at 7.7%, below the central bank’s target for 2025. To counteract declining business confidence, the government has initiated stimulus packages, yet there are still significant amounts of unapproved loans sitting with banks. BI plans to incentivize banks to lower lending rates by reducing reserve requirements starting December 1.
Businesses are waiting for more visible signs of recovery and lower loan rates before making significant investments. Meanwhile, consumer confidence is at its lowest since 2022, affecting spending habits. Many businesses, like Kopi Kila and Smitten by Pattern, have delayed expansion plans due to declining sales and high operating costs, illustrating the current economic struggle.
With information from Reuters
