Financial system stability (FSS) in Indonesia was maintained throughout 2024 despite increasing global uncertainty. Global economic growth in 2024 is projected to be in moderation, accompanied by increasing growth divergence among economies. Economic growth in the US is expected to remain solid, with restrained recoveries anticipated in China and Europe and sound economic performance in emerging markets and developing economies (EMDEs). Global financial market uncertainty began to rise again towards the end of 2024 given concerns over the impact of US policy on the global economic and financial outlook moving forward. A prolonged global disinflation process has influenced the direction of monetary policy in advanced economies, particularly the US. This is in turn triggering expectations of more limited reductions to the Federal Funds Rate (FFR) and a potentially larger US fiscal deficit, which raised US Treasury yields and spurred a rebalancing among global investors, with portfolio allocations returning to the US. Such conditions prompted higher risk premiums on government bonds and currency pressures in EMDEs.
Despite the challenge of global uncertainty, economic performance in Indonesia remained solid, supported by resilient FSS. The national economic recovery is intact, with Gross Domestic Product (GDP) growth in 2024 recorded at 5.03%, accompanied by low inflation. External resilience bolstered rupiah exchange rate stability. Meanwhile, global uncertainty caused the rupiah to lose 4.34% (ptp) in value compared with conditions in 2023, despite outperforming several other regional currencies. Robust national economic performance was supported by maintained financial system stability, with the Financial System Stability Index (FSSI) remaining in the Normal zone. Maintained corporate repayment capacity and a resilient banking industry contributed to FSS resilience. Solid banking industry resilience was reflected in high intermediation growth, improving credit quality and ample capital. Strong intermediation growth supported adequate financing for the economy. Notwithstanding, the bank intermediation function in 2024 faced challenges such as limited TPF growth and the sluggish recovery of micro, small and medium enterprises (MSMEs), leading to mixed or divergent performance among banks. Despite a backdrop of potential vulnerabilities and spillovers that could impact financial system stability in Indonesia, public confidence in future FSS resilience remained high.
Banking intermediation was maintained in 2024, supported by supply-side factors in the form of bank appetite to lend and adequate financing capacity. Growth of loans disbursed by the banking industry was recorded high at 10.39%, underpinned by corporate loans in the form of investment credit as well as household or individual loans in the form of housing loans (KPR) despite moderating growth of MSME loans. Bank appetite to lend was maintained, with a loose Lending Requirement Index (LRI) for most economic sectors. Restrained TPF growth, recorded at 4.48% in 2024, indicated no adverse impact on bank financing capacity, supported by the asset reallocation strategy pursued by the banking industry and the Macroprudential Liquidity Incentive Policy (KLM) instituted by Bank Indonesia. In terms of the non-bank financial industry (NBFI), economic intermediation was supported by positive growths recorded at finance companies, pawnbrokers, FinTech lending and micro-finance institutions.
Strong intermediation performance was also supported by the favourable impact of healthy competition in terms of credit pricing for the corporate and household sectors. Greater competition in the funding market edged up TPF rates throughout 2024. Similarly, competition in the credit market suppressed lending rates, which was also supported by the banking strategy to hold lending rates at competitive levels. This intended to maintain competitiveness and market share in the credit market, particularly among KBMI 4 banks. Despite facing pressure on interest rate margins, bank appetite to lend remained high due to attractive lending rates. The banking industry successfully mitigated the impact of narrower interest rate margins on profitability by optimising yields on liquid assets, diversifying non-interest income, utilising derivatives and improving operational efficiency.
On the demand side, intermediation sustainability was supported by improving corporate performance, maintained household consumption and convenient access to NBFI financing. Improving corporate sales and investment supported the demand for credit. Furthermore, the corporate sector was more inclined to borrow from the banking industry as an external source of funds, while the use of internal funds moderated. Nevertheless, the impact of global uncertainty on corporate performance demands vigilance due to a potential decrease in the demand for financing moving forward. On the other hand, maintained household purchasing power and consumption in 2024 helped boost household credit growth, primarily underpinned by housing loans. Despite competitive lending rates, housing loans in 2024 experienced moderation. Notwithstanding, policy synergy between the Government and Bank Indonesia successfully offset deeper housing loan moderation. Amid caution and prudence in the banking industry, NBFI financing through fintech lending increased the access to finance for households, including low-income households, supported by the adoption of digitalisation that significantly increased the speed of services and delivery channels.
Corporate sector resilience was maintained in line with increasing repayment capacity. Corporate repayment capacity increased on the back of positive profitability growth and adequate liquidity. Wider profit margins contributed to higher profitability, particularly among exporters as commodity prices continued to recover. Corporate liquidity also remained adequate given the positive impact of higher sales on corporate liquidity ratios. Such conditions assisted to control the debt-at-risk (DaR) ratio despite the exchange rate depreciation observed in 2024. Corporate resilience was also reflected in a low probability of default (PD). Corporations are expected to remain resilient moving forward and absorb the impact of inward -looking US trade policy through the trade channel and commodity prices. Moving forward, the upward DaR will continue to demand attention along with the impact of moderating energy and food production on corporate resilience.
Household resilience was also maintained as a corollary of higher incomes despite divergent recoveries across different income levels. Household repayment capacity was maintained as household incomes improved. Despite maintained repayment capacity, household credit risk increased, particularly among the middle- and lower-income brackets. Such dynamics prompted a multispeed recovery according to income. Consequently, credit risk among upper income households decreased, contrasting higher credit risk for middle- and lower-income households. In addition, this was also influenced by the high share of informal workers in the structure of the labour market in Indonesia, characterised by lower wages and more limited potential for wage hikes. Moving forward, potentially weaker purchasing power among low-income households must be monitored along with the knock-on effect on MSME and corporate performance and resilience.
Banking industry resilience was maintained, supported by low credit risk, market risk and liquidity risk, coupled with solid bank capital. Low credit risk in the banking industry was maintained, with non-performing loans (NPL) and loans-at-risk (LaR) tracking downward mitigated, supported by smaller holdings of government securities (SBN), a smaller share of fixed-income securities, and a limited net open position (NOP) in the banking industry. Adequate liquidity was also preserved, both short-term and long-term, with a high ratio of liquid assets to TPF recorded at 25.59%. Bank profitability was also sustained with the support of efforts to diversify income, improving credit quality that triggered a correction in loan loss allowances, as well as improving operational efficiency. Solid bank capital also strengthened banking industry resilience. The results of stress tests indicated that capital conditions remained solid and bank liquidity adequate to absorb potential losses under various macroeconomic shock scenarios. NBFI resilience was also maintained on the back of solid capital, while finance companies and fintech lending maintained the quality of disbursed financing, despite increasing slightly. Potential spillovers from NBFI default were also contained, as reflected by the limited exposure to interconnectedness between NBFI and the banking industry in terms of assets and liabilities.
Corporate and banking resilience were maintained against the risk of default on external debt. Corporate external debt as of November 2024 experienced a contraction, accompanied by low growth of external debt in the banking industry. Interest rate and exchange rate developments throughout 2024 impacted external debt dynamics in the reporting period. Corporations tended to reduce their reliance on external debt as a source of financing when interest rates were high and exchange rates weak. Corporate external debt risk was relatively well contained, supported by the characteristics of the instruments, maturities and types of interest. On the other hand, positive external debt growth in the banking industry was used for liquidity management and credit financing in a foreign currency. Nevertheless, the resilience of external debt in the banking industry was maintained given the relatively small share of external debt to bank assets, the dominance of long-term tenors, fixed interest rates and ample liquidity.
Inclusive finance in 2024 experienced moderation as MSMEs continued their financial recovery, coupled with the banking strategy to improve credit quality. Loans disbursed to MSMEs experienced broad-based moderation across all borrower segments, particularly the micro segment, and economic sectors with the largest share of MSME loans. The ongoing post-pandemic financial recovery of the MSME sector undermined repayment capacity and, therefore, subdued MSME demand for credit. On the supply side, the banking strategy to improve credit quality eroded bank appetite to lend to MSMEs. In the NBFI, similar conditions spurred moderation in terms of the financing disbursed by finance companies, coupled with a contraction of financing from FinTech lending. On the other hand, Islamic finance disbursed to MSMEs maintained solid growth, supported by improving financing quality. Sharia bank appetite to finance MSMEs remained strong, particularly for sectors with an existing ecosystem, including the Islamic ecosystem.
Bank Indonesia held an accommodative macroprudential policy stance throughout 2024 to nurture national economic growth (pro-growth), while maintaining financial system stability. Supporting optimal intermediation, Bank Indonesia strengthened its KLM instruments on 1st June 2024 by providing additional liquidity for the banking industry to extend credit to economic sectors that boost growth. Bank Indonesia introduced the Bank Foreign Funding Ratio (RPLN) on 1st August 2024, which provided additional flexibility for banks to manage short-term foreign funding, thus supporting national financing needs, while adhering to prudential principles. Maintaining financial system stability, Bank Indonesia held the Macroprudential Liquidity Buffer (MPLB), including repo flexibility, to maintain liquidity resilience in the banking industry. Bank Indonesia also supported government policy related to inclusive and green finance in pursuit of quality and broad-based national economic growth by optimising the Macroprudential Inclusive Financing Ratio (RPIM), KLM policy for the green and inclusive sectors, as well as the development of green MSMEs by facilitating sustainable business models. Bank Indonesia continued strengthening policy synergy and coordination with the Government, relevant authorities and other strategic partners, including national policy coordination to maintain financial system stability through the Financial System Stability Committee (KSSK) as well as bilateral coordination with members of the KSSK committee.
Bank Indonesia projects stronger banking intermediation growth in 2025, supported by financial system resilience and upbeat national economic growth. The global economic and financial challenges faced in 2024 are expected to continue and increase in 2025, with the national economy nevertheless forecast to maintain solid growth in the 4.7-5.5% range, supported by maintained domestic demand, improving export performance, controlled inflation and rupiah stability. Credit growth is projected to accelerate in the 11-13% range, supported by the promising national economic outlook and rising international commodity prices. On the demand side, corporate demand for credit is expected to increase in line with improving financial performance, moderating growth of internal funding and the ongoing preference for financing from the banking industry. Meanwhile, household demand for consumer loans, particularly from upper-income households, is forecast to remain high, supported by improved repayment capacity. From the supply side perspective, the interest of banking industry to provide loans is estimated to remain high supported by competitive interest rates, ample liquidity due to liquidity incentives, mitigated credit risk and solid capital in the banking industry. Nevertheless, credit growth in 2025 will be overshadowed by weaker purchasing power among middle- and lower-income households as well as MSME performance, thus requiring adequate support for funding growth and bank liquidity, especially for banks that support credit growth.
Moving forward, Bank Indonesia will maintain an accommodative macroprudential policy stance to support sustainable economic growth and maintain the stability of the financial system. Accommodative macroprudential policies will be instituted to support optimal growth by accelerating financing to priority sectors that drive economic growth and create job opportunities, while maintaining prudential principles. The financial cycle in Indonesia is not expected to peak until 2028, thus providing a compelling opportunity to accelerate credit growth further. Bank Indonesia will continue the macroprudential policy mix through various policy instruments based on optimal credit targets, financial system resilience as well as inclusive and green finance. Furthermore, Bank Indonesia will continue optimising national policy mix synergy to maintain stability in pursuit of sustainable economic growth, while supporting the Government's Asta Cita program.
