Ahead The Curve, The Beginning Story

By Mukhamad Misbakhun, Member of Commission XI The House of Representatives of The Republic of Indonesia (DPR RI)

Jakarta – AS a Member of DPR RI of Commission XI who is a working partner of Bank Indonesia (BI), since becoming BI Governor in 2018, Perry Warjiyo conveyed something very specific as a key word policy, namely Ahead of the Curve. It’s magic words. It’s a kind of spell sentence which later became a guide for every monetary policy in the central bank.

Evidently, two weeks after being appointed as Governor of BI, the loan to value (LTV) policy was immediately changed. Policies that have a direct impact on advance payments, down payments, housing and automotive sector purchases are changing. In the property and automotive markets, there are new policies that are game changers for the stagnant growth in these sectors. Thus, once the LTV policy was changed, there would be a contribution from the movement of the real sector from these two sectors to macro-economic growth, which at that time was in urgently require of fresh blood in the form of policy changes.

Whereas, since 2014, when I returned to the DPR for the 2014-2019 period, I always voiced it to the then Governor of BI, Agus D.W. Martowardojo, to make changes to two things, namely lowering the BI Rate and changing the policy on LTV, so that the encouragement from the fiscal policy is combined with monetary policy will become a twin turbo booster driving economic growth. However, the then Governor of BI did not budge. No changes whatsoever. Political pressure from Commission XI of the DPR RI was not considered as a serious concern by the then Governor of BI at that time.

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In discussions with many former high level central bank officers, I received a lot of support regarding the need for BI to make changes to the LTV and BI Rate policies at that time. Until I come to a very personal conclusion about it, the source is political. Because the Governors of BI 2013-2018 were chosen from different presidential periods with different political interests, it is very possible to have different political agendas, even though BI according to the 1945 Constitution is an independent central bank institution. However, who knows what inside human heart.

Since the election of Perry Warjiyo, in 2018, after the LTV policy was completely dismantled, the down payment for houses and cars could be 0%, depending on the individual conditions of the financial institutions financial statements performance which facilitate financing the sector to consumers. Continuing that the BI Rate gradually decreases. Then, the term BI Rate changed to BI 7-day (Reverse) Repo Rate. This is a kind of interest rate reference of The Fed Funds Rate in the United States. However, the reduction in the BI 7-day (Reverse) Repo Rate did not drastically reduce the lending rate for bank loans. This is because our banking industry is very fond of net interest margins (NIM) which are still high because it is difficult to suppress cost efficiency so that it becomes a burden on debtors, which in the end the cost of funds becomes expensive.

The burden of the problem of expensive cost of funds is no longer on the side of macroprudential policy makers, but on the side of the industry which has not been able to build an efficient financial services industry and still uses high loan interest rates as a source of principal revenue. This has become one of the main diseases of our financial services industry so that its role as one of the drivers of macroeconomic growth can be measured as limitations. Less kick. Especially after the banking business players were engrossed in enjoying the instrument of Government Securities (SUN) as a new source of profitable income with minimum risk rather than distributing third party funds (DPK) into credit to the real sector.

It’s just a light story. A light story from magic words, ahead of the curve. Sim Salabim…abracadabra…

*) This article is the author’s personal view.