Currency depreciation and higher domestic interest rates are likely to halt the recent improvement in Indonesian banks’ asset quality and put downward pressure on profitability, says Fitch Ratings. However, their margins are likely to remain strong which, together with high core capital ratios, will act as a buffer against the impact of market turbulence.

Banks’ foreign-currency assets and liabilities are generally well-matched, or hedged, which limits risks from currency weakness. Further declines in the rupiah could, however, create debt-servicing pressures for borrowers with substantial foreign-currency debt and weaker hedging practices, posing asset-quality risks to banks.

System-wide foreign-currency lending accounted for around 15% of total loans at end-1H18, which was down from 17% in 2014 and more than 30% in the 1990s, but is still high compared with regional emerging market peers.