JAKARTA (REUTERS) - 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 South-east Asia's largest economy cheered.
But as 2017 begins, lending rates remain double-digit, well above his 9 per cent target, even though the central bank cut its benchmark interest rate six times last year.
The situation threatens to undermine Mr Widodo's efforts to reinvigorate stalled economic growth. Getting more investment is critical to raising annual growth to 7 per cent from 5 per cent - another ambitious Widodo target - at a time revenue shortfalls mean the government cannot jack up spending.
The marginal decline in loan rates frustrates regulators. "We called banks and asked why their interest rates are still high," Mr 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 rates.
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 per cent this year, well above 2016's level of about 7 to 9 per cent. But among the factors clouding the outlook are anticipated hikes in US interest rates, which could pull more money out of emerging nations, and uncertainty about world trade with Mr Donald Trump as US president.
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 US dollar from about 2,000, inflation once topped 80 per cent and scores of Indonesian banks collapsed.
Recently, the rupiah has been stable: It appreciated 2.6 per cent in 2016, and inflation has been under 4 per cent.
In October, Indonesia's average loan rate on working capital loans was 11.60 per cent, more than double the central bank's benchmark rate then of 4.75 per cent.
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. Some Indonesian banks enjoy a return on equity of more than 20 per cent and the industry's average net interest margin was 5.65 per cent.
Mr Juda Agung, BI's executive director of economic and monetary policy, told a recent forum that the slow pace at which central 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 do not 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.
Mr Hanafi, owner of property development company in Pekanbaru on Sumatra island, said paying 14 per cent annual interest for a US$226,000 (S$327,000) loan stymies business, adding that he would "build more houses if capital was cheaper".