(Bloomberg) -- Indonesia’s local currency loan growth is facing a potential slowdown amid dwindling domestic bank liquidity and growing expectations that the Federal Reserve’s rate cuts will lure borrowers back into the dollar market.
The nation’s outstanding rupiah-denominated corporate loans grew 15.7% year-on-year in August, according to data released by the central bank this week. That puts the growth rate at a continuous streak of over 15% since March, a pace that was last seen in November 2022.
The deal rush continued earlier this month with borrowers such as PT Petrosea signing trillions in rupiah-denominated facilities. But that’s set to change, analysts say.
“The rapid corporate loan growth that we’ve seen this year might slow down toward the end of 2024 and into 2025 as it will exhaust the liquidity in the banking sector,” according to Jeffrosenberg Chenlim, head of research at PT Maybank Sekuritas Indonesia. “The loan-to-deposit ratio of the banking sector would rise and that will limit banks’ ability to extend credit.”
Overall lending growth in Southeast Asia’s biggest economy has consistently outpaced the rise in bank deposits this year in nominal terms. That has pushed the loan-to-deposit ratio to close to 90% last month, the highest since at least 2021, according to this week’s central bank data.
Indonesian firms’ rush to raise local currency loans this year is part of a broader trend in Asia, as borrowers turn to the domestic markets for cheaper funding amid elevated dollar benchmark rates. That has resulted in shrinking loan volumes of the greenback in the region. Dollar loans raised by Indonesian borrowers plunged to a 17-year low of $6 billion year-to-date, according to Bloomberg-compiled data.
While issuers have chosen to tap local currency markets in recent years due to comparatively higher cost of funding in the international markets, this is now shifting, said Edward Tsui, head of debt capital markets and syndicate, Asia Pacific at Deutsche Bank.
A slew of issuers have already hired banks or kicked off bond deals denominated in the greenback this week following the Federal Reserve’s half-a-percentage-point rate cut. Expectations of further cuts will likely lure more borrowers in the region back into the dollar financing market.
“New issue activity in international markets has already picked up in 2024 and we expect activity levels to accelerate in 2025,” said Tsui.
--With assistance from Grace Sihombing.
©2024 Bloomberg L.P.