The Financial Services Authority (OJK) assesses that the risks faced by the national banking industry due to the recent strengthening of the United States dollar can still be mitigated well.
Based on the results of the stress test conducted by the OJK, the current weakening of the rupiah exchange rate has a relatively insignificant direct effect on bank capital.
“This is considering that the net foreign exchange (PDN) position of Indonesian banks is still far below the threshold and in general it is in a “long” PDN position (foreign currency assets are greater than foreign currency liabilities),” said Chief Executive of OJK Banking Supervision Dian Ediana Rae, Friday (19 /4).
Banking capital cushions which are quite large (high Capital Adequacy Ratio/CAR) are believed to be able to absorb fluctuations in the rupiah exchange rate and interest rates which are still relatively high.
The portion of Third Party Funds (DPK) in the form of foreign currency is currently around 15 percent of total Banking DPK. Until the end of March 2024, foreign exchange deposits were still growing quite well on an annual basis (yoy) and compared to the beginning of 2024 (ytd).
The current weakening of the rupiah exchange rate can also have a positive effect on exports of commodities and their derivatives, which is expected to offset the withdrawal of non-resident funds and encourage domestic industry to increase the use of domestic components in their production processes.
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OJK carries out routine stress tests on banks using several macroeconomic scenario variables and considering the main risk factors, namely credit risk and market risk.
OJK always carries out optimal supervision to ensure that various risks resulting from weakening exchange rates and relatively high interest rates for each bank are properly mitigated.
OJK also asked banks to always monitor the potential impact of transmission from global and domestic economic developments on bank conditions and take necessary mitigation steps.
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Coordination with KSSK members also continues to be carried out accompanied by a commitment to continue to issue the necessary policies in an effective and timely manner.
OJK urges the public to remain calm in facing the impact of the global geopolitical shock that is currently occurring.
“The calm and rationality of society, as well as coordination between relevant authorities, are key factors in facing the current global economic dynamics,” said Dian.
Also read: OJK: Financial Services Sector Ready to Mitigate the Impact of Conflict in the Middle East
According to him, so far, the strengthening of the US dollar has occurred once morest all currencies globally, as reflected in the Dollar Index which has recorded an upward trend since the end of March 2024.
Several factors that influence the strengthening of the US dollar include the high for longer interest rate policy which continues amidst the strength of the US economy but at the same time as the US inflation rate which is still quite far from the target of 2 percent.
This was reinforced by the Fed’s statement which stated that it would not rush to reduce interest rates and would continue to monitor developments in future economic data.
Meanwhile, increasing geopolitical tensions in the Middle East following Iran’s direct conflict with Israel have led to fears of an increasingly widespread war and might burden the world economy, especially from increases in prices of key energy and mineral commodities, as well as increases in logistics costs as major trade routes are disrupted due to conflicts in the Middle East and Russia-Ukraine.
This increase in geopolitical tension and global uncertainty has caused the US dollar, which is one of the safe haven assets, to continue to be sought following by market players and has encouraged its further strengthening.
On the other hand, the domestic economy is also affected by the external geopolitical situation. This can be seen from Indonesia’s inflation data for March 2024 which was recorded at 0.52 percent (mtm) or 3.05 percent (yoy), an increase compared to 2.75 percent (yoy) in February 2024, although it still remains within the set target range. (Try/Z–7)
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