Bank Indonesia's $33b Quantitative Easing Not Much Use Without Fiscal Policy: Governor

Jakarta. Bank Indonesia, the country's central bank, has pumped close to $25 billion in additional liquidity into the local market since January to prop up the largest economy in Southeast Asia and is preparing to inject $7.6 billion more in the next few months, Bank Indonesia Governor Perry Warjiyo said on Wednesday. 

Yet, the effect of the central bank's efforts would largely depend on how effective the government's fiscal stimulus for healthcare, social safety net and small and medium businesses increases much-needed demand in the economy.   

"What will be the result of the Rp 503.8 trillion [$32.8 billion] quantitative easing?" Perry said, referring to Bank Indonesia's bond-buying program and its loosening of monetary and macroprudential policies. 

"Fiscal policy is so important because the central bank's monetary policy can't reach the real sector directly,” Perry said. 

"The fiscal stimulus is supposed to help the real sector. It should ensure banking liquidity, as a result of our easing, will flow through to the real sector," he said.

From January to April, Bank Indonesia has injected Rp 386 trillion to the economy, Perry said.

The central bank managed to do it through Rp 166 trillion worth of bond-buying in the secondary market and through repurchase agreement (repo) deals with local banks. 

The repos allowed the lenders to get a total of Rp 137 trillion in additional cash by trading their bond holdings to the central bank, with a promise to buy them back in the next one, three, six or 12 months.

Bank Indonesia also lowered its minimum statutory reserve (GWM) requirement to free up Rp 53 trillion in the banking system.

Lastly, the central bank offered foreign exchange swap facilities to help local lenders save up to Rp 29.7 trillion from foreign exchange liabilities. 

Perry said Bank Indonesia would lower the GWM requirement again next month and suspend its macroprudential intermediation ratio (RIM) requirement to add Rp 117.8 trillion to the banking system, he said. 

Perry said the government must ensure its pandemic relief programs reach their intended targets so Bank Indonesia's quantitative easing can make an impact.

"The banking system still has enough liquidity. Now we need the quantitive easing to flow to the real sector," Perry said, referring to the part of the economy that consists of transactions in goods and services, as opposed to the monetary sector that deals with the circulation of money and financial assets.

Bank Mandiri's corporate secretary, Rully Setiawan, said the central bank's repo facility was a welcome addition to lenders' strategies to maintain liquidity.

"Since we still have enough liquidity, we've yet to optimize the facility," Rully said. 

Bank Mandiri's government bonds now make up 10 percent of its third-party funds, well above Bank Indonesia's macroprudential liquidity buffer (PLM) requirement of 6 percent.

The government's pandemic stimulus includes a social safety net program, incentives for industries, subsidized bank loans (KUR), pre-employment card, the Social Affairs Ministry's conditional cash transfer and non-cash aid.

In the short term, the extra liquidity from the quantitative easing should be used in credit restructuring for customers economically impacted by the pandemic and who might not be able to pay their debts, Perry said.

The government is working closely with the Financial Services Authority (OJK) to ensure banks and financial companies comply with the regulation.

"Credit restructuring is necessary. We have a regulation backing it and the OJK will monitor the process. That way, the extra funds in banks from the quantitative easing can reach the real sector,” Perry said.

He said the government, Bank Indonesia and the OJK are in close coordination to ensure the effectiveness of the government's monetary policies.