Jakarta – The Financial Services Authority (OJK) has assessed the Middle East conflict as having an “insignificant impact” on the capital and liquidity of Indonesian banks. This conclusion is based on the limited exposure of Indonesian financial institutions to non-resident parties in the region.
Dian Ediana Rae, chief executive of banking supervision at the OJK, stated on Monday that while direct consequences remain contained, Indonesia’s open economy necessitates close monitoring of global developments. He highlighted the geopolitical and geoeconomic ramifications of ongoing international conflicts as key areas of vigilance.
Rae cautioned that a prolonged escalation could introduce vulnerabilities to the Indonesian economy via trade and financial channels. Potential disruptions to global energy distribution, such as the closure of the Strait of Hormuz, might drive up energy commodity prices.
Such price increases would elevate fuel costs and distribution expenses for goods, including raw materials and food, thereby intensifying both global and domestic inflationary pressures. Should tighter monetary policy be implemented in response, economic growth could be impacted by reduced public consumption and production.
Furthermore, rising living costs amidst slowing demand could pressure corporate margins and increase overall business risk. Heightened global uncertainty might also trigger a risk-off sentiment among investors, potentially increasing Indonesia’s risk premium, leading to capital outflows, and depreciating the rupiah, which could pose financial risks to banks.
In terms of credit, elevated energy prices and inflation could raise production costs, diminishing corporate profitability and weakening debtors’ repayment capacity and public purchasing power. This scenario could increase non-performing loans (NPLs) and the need for impairment loss provisions. Sectors sensitive to energy prices, such as transportation and manufacturing, along with MSME and consumption segments, are particularly susceptible.
Despite these potential risks, Rae affirmed the robust resilience of Indonesian banking, citing financial standards that surpass international best practices. As of February, banking capital remained strong, with a Capital Adequacy Ratio (CAR) of 25.83 percent. Credit risk was manageable, reflected in a gross NPL ratio of 2.17 percent and a stable trend in provisions for impairment losses.
Liquidity metrics also remained adequate. The liquid assets to third-party funds ratio (LA/TPF) and liquid assets to non-core deposits ratio (AL/NCD) both exceeded thresholds. The loan-to-deposit ratio (LDR) was 84.72 percent, within a healthy range, and the liquidity coverage ratio (LCR) stood at 195.64 percent, significantly above regulatory requirements.
The OJK continues to urge banks to implement prudential principles in lending and comprehensive risk management. Banks are advised to conduct routine stress tests to measure their resilience to macroeconomic shocks, with existing results indicating adequate capital to face significant changes. The OJK also coordinates with relevant institutions, including the Financial System Stability Committee (KSSK), to ensure financial system stability and support national economic growth.
Source: Original
