* Interest rates of loans stay above president's 9 pct
* Lower lending rates seen as critical for stronger growth
* Central bank cut its policy rate six times in 2016
By Gayatri Suroyo and Cindy Silviana
JAKARTA, Jan 4 When Indonesian President Joko
Widodo 11 months ago called for the interest rates that
borrowers pay banks to "fall, fall, fall" and become single
digit, businesses in Southeast Asia's largest economy cheered.
But as 2017 begins, lending rates remain double-digit, well
above his 9 percent target, even though the central bank cut its
benchmark interest rate six times last year.
The situation threatens to undermine Widodo's efforts to
reinvigorate stalled economic growth. Getting more investment is
critical to raising annual growth to 7 percent from 5 percent -
another ambitious Widodo target - at a time revenue shortfalls
mean the government can't jack up spending.
The marginal decline in loan rates frustrates regulators.
"We called banks and asked why their interest rates are
still high," Nelson Tampubolon, chief banking supervisor at the
Financial Services Authority (OJK), told Reuters.
Banks, which have trimmed credit expansion as the economy
has slowed, say liquidity conditions make it hard to cut lending
Officials hope 2017 will be better. Lending picked up in
November, helped by higher commodity prices. And funds returning
home under a tax amnesty will bolster deposits, which some
banks say are insufficient to support new lending.
OJK targets lending to rise 13.5 percent this year, well
above 2016's level of about 7-9 percent. But among the factors
clouding the outlook are anticipated hikes in U.S. interest
rates, which could pull more money out of emerging nations, and
uncertainty about world trade with Donald Trump as U.S.
BIG PAST DEVALUATIONS
Traditionally, interest rates on rupiah loans have been
high, partly because of the Indonesian currency's history, which
includes whopping devaluations. During the 1997-98 Asian
financial crisis, the rupiah plummeted to as low as 17,000 to
the dollar from about 2,000, inflation once topped 80 percent
and scores of Indonesian banks collapsed.
Recently, the rupiah has been stable: it appreciated
2.6 percent in 2016, and inflation has been under 4 percent.
In October, Indonesia's average loan rate on working capital
loans was 11.60 percent, more than double the central bank's
benchmark rate then of 4.75 percent.
According to the World Bank, in 2015 Indonesia's lending
rates were higher than those of Vietnam and even Papua New
Guinea, one of the poorest Asian nations. (bit.ly/2hM314G)
Some Indonesian banks enjoy a return on equity of more than
20 percent and the industry's average net interest margin was
Juda Agung, BI's executive director of economic and monetary
policy, told a recent forum that the slow pace at which cental
bank rate cuts were transmitted "shows banks are trying to widen
their margin" and that they "are not competitive."
Banks say they need to protect net interest margins, worry
about potential bad debts and don't have enough new deposits.
BI data showed that Indonesia's base money, or cash in
circulation, contracted as of November from end-2015.
"What can we do when we don't have the money?" asked
Sunarso, Bank Rakyat Indonesia's vice president
director, who said higher government spending was needed to push
up the economic growth rate.
Money has also been pulled out of bank deposits after a
regulation ordering pension funds to hold more bonds and some
funds were withdrawn to pay penalties under the tax amnesty.
Some lenders are lifting deposit rates to attract customers,
with Bank Central Asia raising them by 1 percentage
point in December.
Some borrowers say that if loan rates were lower, they could
get make bigger investments.
Hanafi, the owner of property development company in
Pekanbaru on Sumatra island, said paying 14 percent annual
interest for a $226,000 loan stymies business, adding that he
would "build more houses if capital was cheaper".
(Additional reporting by Hidayat Setiaji; Editing by Ed Davies
and Richard Borsuk)