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INDONESIAN COMMERCIAL NEWSLETTER
February 2010

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TIME TO BANKROLL MANUFACTURING SECTOR


Credits for the manufacturing sector shrinking

Credits for the manufacturing industry continued to shrink throughout 2009 when increasing credits began to flow to other sectors notably in the second half of that   year. In December 2008 total bank credits for the manufacturing industry reached Rp 271 trillion. A year later or in December, 2009, the outstanding credits for the sector fell to only Rp 247 trillion.  On the contrary, total outstanding credits of all banks in the country   rose from Rp 1,002 trillion in December 2008 to Rp 1,437 trillion in December 2009.

Meanwhile, the outstanding credits for the trade sector rose from Rp 113 trillion in December 2004 to Rp 301 trillion in December 2009. Despite the global crisis, credits for sectors other than the manufacturing sector increased.

In 10 years after the 1998's monetary crisis, the manufacturing sector has remained in the doldrums with no significant credits extended for the sector.  Data at Bank Indonesia showed that early 2002, credits for the manufacturing sector made up 37.6% of the total bank credits in the country. However, in the following years the ratio continued to scale down to as low as 17.2% by November 2009.

The decline in the performance of the manufacturing industry was also shown by its shrinking contribution to the country's Gross Domestic Product (GDP). In 2004, the manufacturing sector accounted for 28.1% of the country's GDP and in 2009; the ratio shrank to only 26.4%.

A sharper fall was recorded in credits form foreign and joint venture banks. By December 2009 total credits for the manufacturing sector extended by foreign banks reached Rp 59.31 trillion or down 20.3% from a year earlier.

The highest growth of credits for the manufacturing sector was recorded by development banks owned by regional administrations Bank Pembangunan Daerahs (BPDs). In December 2009, credits for the sector from BPDs totaled Rp 1.146 trillion or an increase 40.7% from Rp814 billion a year earlier.

State banks and private banks recorded a 4.4% increase in their credits for the sector. By December, 2009, credits from state banks for the sector totaled Rp 533.9 trillion   and the outstanding credits recorded by private banks reached Rp 92.74 trillion. Credits from People's Credit Bank (BPR) for the sector reached Rp 505 billion or an increase of 18.5% from a year earlier.

Non performing credits in the manufacturing sector high

The portion of bank credits funneled in to the manufacturing sector has continued to shrink since 1998 compared to total bank credits in the country. Banks still hesitate to extent new credits for the manufacturing sector as they see investment in that sector is still too risky. On the other hand industrialists are not encouraged to use bank credits as they see the interest rates are still too high.

The banking sector and the manufacturing sector, therefore, have become less intensive in business cooperation, although both sides need each other. The manufacturing sector is still the largest market for bank credits and on the other hand the manufacturing sector badly needs banking support to revitalize and replace outdated factory machines to remain competitive.
High non performing loans (NPL) are one of the main factors discouraging banks to provide new credits for the manufacturing sector. In the past five years NPL in the manufacturing sector is higher than in other sectors. In 2005 and 2006 NPLs in the manufacturing sector exceeded 10% - 15.6% in 2005 and 10.5% in 2006. In 2009, the NPL ratio already decline to 5%, but remained the highest.

A declining trend has been recorded in the manufacturing sector in the past 5 years when banks began to be more generous in extending credits, notably for the consumer sector, which had been the main driver helping prop up the banking industry and the country's economy in general during the bad period of the devastating global financial crisis in 2008 and 2009. The consumer sector has been the fastest to recover from the impact of the crisis in the country.

Low growth of credits for the manufacturing sector is feared to lead to the failure of the sector to keep pace with the growing consumption in 2010. Improved condition of the country's economy is expected to result in an increase in consumption. If the domestic manufacturing industry remained in the doldrums, and failed to meet the growing demand, the domestic market is feared to sink deeper in the domination of imported products. The situation will more difficult for the domestic industry to recover with the implementation of the free trade with China under the Asean-China Free Trade Agreement (AC-FTA).

The consumer sector, sustained by the manufacturing industry, will be a more effective growth driver for the country's economy. Unfortunately the manufacturing sector has failed to grow to sustain the consumer sector. If the condition is allowed to continue it is feared the consumer sector will lose its strength and the result could be bad for the economy.

Banks, therefore, need to play greater role in revitalizing the manufacturing sector, which once had been the locomotive for the country's economic growth especially in the 1980's - 1990's.

Indeed, the bank factor is not the only one important to revive the manufacturing sector.  A number of other factors  are no less important  such as infrastructure that need to be improved or modernized, high cost economy  and labor issues that need to be  seriously addressed and many other.  Banks, however, could play a more vital role in short term. The business sector has complained about high interest rates put up by Indonesian banks although the rates have been much reduced in the past five years. In the        past two years, the interest rates are around 13%-14% on working capital credits and 12%-13% in investment credits.

In 2009, the interest rate on credits for the manufacturing sector also declined to 11.81% by December from 13.92% in 2008. However, the interest rate was still not competitive compared with the interest rates in other countries such as China and other Asean countries.

The manufacturing sector was also weakened by weak demand for manufactured goods in the world market in 2009 as a result of the global financial crisis that badly hit major markets including the United States, Europe and Japan. In 2010, however, the condition improved and demand begins to rise.

Time to funnel credits to the manufacturing sector

Bank Indonesia has encouraged commercial banks to assumed their intermediary role and funnel more credits to the real sector especially the manufacturing sector. The central bank has steadily cut its benchmark interest rates over the past two years hoping that the commercial banks would follow by slashing their interest rates. So far banks have seen various industries such as textile, electronics and shoe making industries as sunset industries. Banks did not believe the industries could not longer be expected to expand and are no longer credit worthy. Banks are also reluctant to finance   industries they see as foot loose industries that could easily move to other countries where the condition promises greater profitability.

What the bank think as a reality, however, does not really turn out to be a fact. The textile industry, with old machines remains a major export earner for the country.  This shows that not all textile companies have lost their market foothold even in international market.

The government and the central banks have both sought to convince banks that the country's real sector is still potential. The government has even offered subsidized credits for textile makers to restructure their factories buying new machines to replace old and inefficient ones.  The credit scheme, however, did not work well as expected.

A more comprehensive and effective scheme is needed to prop the ailing sector, otherwise the fear of   de-industrialization could come to reality in the not very long time.  Some observers have even said the process of de-industrialization is already taking place over the past several years. Amid tighter competition the government should remove all hurdles hampering the process of recovery of the manufacturing sector.  Access to cheap funds should be opened.

When the market of manufactured goods is recovering  and when the country is  seen as one of the most favorable investment destinations as indicated by the strong inflow of foreign capital , banks should  take advantage  of the condition  by converting the large public funds  in the financial market into direct investment fund to boost the  real sector. Banks will pass up the good momentum if they fail to move fast.


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