Bad property loans feared to cause crisis

JAKARTA (JP): Property analyst Panangian Simanungkalit warned yesterday that Indonesia could tumble into financial crisis unless the government took measures to curb lending growth in property sector.

Panangian, managing director of property consultancy firm PT Panangian Simanungkalit & Associates, said although the central bank, Bank Indonesia, had called on banks to funnel credit into the property sector carefully because of its huge bad loans, credit to the sector kept rising.

What made matters worse was the credit was mostly channeled to middle-upper class housing projects despite the fact that bad loans mostly occurred in the sector, he said.

"I am afraid we shall tumble into a financial crisis if the government does not quickly solve the problem," Panangian said at the launching of a book on the performance of property business last year and its prospects for this year. The book was published by Pusat Studi Properti Indonesia.

Credit to the property sector rose to Rp 16 trillion (US$6.7 billion) last year from Rp 9.6 in 1995. Until last year total bank credit in the sector was Rp 58 trillion.

He also said credit to the property sector grew more quickly than total credit growth over the past three years.

Credit to the property sector grew 52.9 percent in 1994, 29.1 percent in 1995 and 37.4 percent in 1996, while total bank credit increased 25.7 percent in 1994, 24.2 percent in 1995 and 23.7 percent in 1996.

"In the past three years alone, the property subsector obtained total credit of Rp 37 trillion, Rp 11.5 trillion in 1994, Rp 9.6 trillion in 1995 and Rp 16 trillion in 1996," he said.

Panangian said the real estate and construction sectors, which had a weakening market, had received more bank credit last year (Rp 6.9 trillion and Rp 6.2 trillion respectively), than cheap housing projects, whose buyers were growing (Rp 2.89 trillion).

He said the rise in credit to the construction and real estate sectors was not because developers built more properties but because they borrowed in order to pay back their loans.

Banks were aware of growing bad loans in the sectors but had no choice but to give more credit because they fear they will not regain their money.

"Banks are in dilemma. If they don't continue supporting the projects, they fear that developers will not be able to pay their loan. Thus, they continue providing developers with credit in the hope for property boom in the future," Panangian said.

He predicted bad loans in property sector would increase to Rp 5.6 trillion this year from Rp 5.25 billion last year.

Panangian warned that Indonesia might tumble into a financial crisis like Thailand has experienced over the past two years.

Until 1996, total credit to Thailand's property sector amounted to the equivalent of Rp 75.3 trillion or 12.96 of the total bank credit, about Rp 7.6 of which were bad loans. About 350 property firms in the country had went bankrupt in the first half of last year.

The financial failure in the property sector caused the widening of the country's current account deficit and the decline in the economic growth rate.

"The same thing is going on here. Indonesia's economic growth has kept falling, from 8.2 percent in 1995 to 7.8 percent last year," he said.

To prevent the crisis the central bank should not only persuade banks to limit credit to the property sector but enforce a credit limit as countries like Malaysia had done. (jsk)