GUARD Your Bank’s Vault! A small misstep could result in your funds being “taken” by a rival bank. Bankers are already complaining about the rising cost of liquidity. The competition between banks for funds has becomes a common occurrence. However, this „erce rivalry, which has been ongoing for the past decade, has now taken a more aggressive turn, involving the monetary authority of Bank Indonesia and the Ministry of Finance. If this competition for funds is not controlled, it may lead to the onset of crowding out.

Bank Indonesia’s products, such as Retail Bank Indonesia Securities and Government Securities, have become key competitors to banks. In fact, banks are now competing aggressively for third-party funds. The situation has become even more pressured since late last year, when major „nancial institutions like the Social Security Management Agency and the Hajj Financial Management Agency began pressuring banks to raise their interest rates.

Is this the beginning of crowding out, or is it simply a result of the banking sector’s inherent sensitivity due to the shallow level of „nancial deepening, which makes it more vulnerable to market ¦uctuations? The shallowness of the „nancial sector causes the banking industry to be highly sensitive to economic disruptions. Interest rates tend to rise suddenly, akin to a runny nose when someone has the ¦u, rising quickly, but di§cult to lower.

Crowding out, as a growing concern, is an economic phenomenon where increased government spending or public investment leads to a reduction in private investment. This happens when the government borrows money to „nance its expenditures, increasing demand for funds in the „nancial markets. As a result, interest rates can rise, making borrowing more expensive for the private sector, thereby reducing the willingness and ability of companies to invest.

In Indonesia, crowding out can occur for several reasons. First, there is the increase in government debt. The government has been ramping up its borrowing to „nance infrastructure projects and social programs, which reduces the availability of funds for the private sector. In fact, Finance Minister Sri Mulyani Indrawati seems to be opting for the “easy way out.” To manage the government’s growing debt, especially the loans taken by the Jokowi-Sri Mulyani administration that are now due, she has turned to a debt switch strate®y. This involves exchanging maturing debt for new bonds, a shortcut that is being employed not only with Bank Indonesia but also with other investors.

Second, monetary policy plays a role. The high interest rates set by Bank Indonesia to control in¦ation and stabilize the exchange rate can make borrowing more expensive for the private sector.

Lastly, the competition for liquidity has intensi„ed. Products from the banking sector, such as deposits and loans, are now competing with Government Securities and Retail Bank Indonesia Securities, which can lead to crowding out.

If this situation continues, as it appears likely to do, investors may choose to buy Government Securities or Retail Bank Indonesia Securities because of their attractive returns. This reduces the funds available for private sector investments. Therefore, the competition for liquidity between banking products and Government Securities or Retail Bank Indonesia Securities can indeed lead to crowding out. When funds ¦ow into these securities, fewer funds are left for private sector loans, thereby hindering private investment and economic growth.

At the same time, the upcoming maturity of Retail Rupiah Securities suggests that Bank Indonesia may issue new securities to absorb the maturing ones. This will continue to drive the competition for funds in the market, making liquidity more expensive.

We ought to know the early signs of crowding out. Ultimately, the early signs of crowding out are already visible, and this will have signi„cant implications for investment, rising credit costs, and economic growth targets. The growth target for the economy may remain an elusive goal. Additionally, economic instability and ine§ciencies in resource allocation are likely to follow. A bloated and expensive bureaucracy will further hinder the smooth functioning of the economy.

Banks, too, must be vigilant in managing their loan portfolios to avoid defaults. Credit risk is increasing, and banks must also maintain liquidity to avoid losing funds to rival banks. Despite Bank Indonesia announcing the lowest in¦ation rate in history, Retail Rupiah Securities remain high, and the rupiah continues to struggle.

In this environment, banks must remain alert to avoid being swept up in the looming tsunami of crowding out. Money is becoming increasingly scarce and costly.

Bank Indonesia’s products, such as Retail Bank Indonesia Securities and Government Securities, have become key competitors to banks. In fact, banks are now competing aggressively for third-party funds. The situation has become even more pressured since late last year, when major „nancial institutions like the Social Security Management Agency and the Hajj Financial Management Agency began pressuring banks to raise their interest rates.

Is this the beginning of crowding out, or is it simply a result of the banking sector’s inherent sensitivity due to the shallow level of „nancial deepening, which makes it more vulnerable to market ¦uctuations? The shallowness of the „nancial sector causes the banking industry to be highly sensitive to economic disruptions. Interest rates tend to rise suddenly, akin to a runny nose when someone has the ¦u, rising quickly, but di§cult to lower.