Fitch: Indonesia's Slowing Credit Growth Lowers Bank Systemic Risks

Fitch Ratings says that slowing credit growth in the Indonesian banking system has helped to contain the build-up of systemic risks. In the agency's latest Macro-Prudential Risk Monitor (published on the 3 March, 2015), the macro-prudential risk indicator (MPI) for Indonesia was reduced to '2' from '3', a move to moderate risk from high. This change was primarily driven by the slowdown in real credit growth to below 5% in 2014 from a peak of nearly 20% in 2011.

Indonesia's slowing credit growth has been a function of the use of some macro-prudential tools, moderating economic growth and tighter funding conditions from higher interest rates. However, over the medium-term, credit growth in the country has the potential to be more rapid than some other markets given the relatively low level of private credit to GDP, which stood at 34% at end-2014. There is now more likelihood that lending growth may gradually strengthen during 2015 with the first interest rate cut earlier in the year, although this may be tempered by the consequences of higher US interest rates.

For Asia, rapid credit growth and rising leverage remains a risk concern, with Indonesia having been among six countries in the highest risk category. The other five - China, Hong Kong, Macao, Mongolia and Sri Lanka - remain in the highest category.

Credit growth has been slowing across the region, partly helped by a slowing China and the use of macro-prudential tools, with emerging Asia growth in 2014 lower than that in Latin America and Middle East & Africa. For some countries, however, real growth remains high. In China, for example, real credit growth remained high at 19% in 2014, although down from 37% in 2009.

Household debt growth has also been particularly strong in countries such as Thailand and Malaysia. Household debt to GDP ratios in these countries are high and this could be a source of risk for the banking system.

The MPI aims to identify the build-up of potential stress in banking systems due to a specific set of circumstances: rapid credit growth associated with bubbles in housing or equity markets, or appreciating real exchange rates, the latter sometimes associated with asset market bubbles. The focus of the report is therefore only one potential source of bank systemic stress.

The latest "Macro-Prudential Risk Monitor" is available at www.fitchratings.com