Economy and Business

Economic Risks of Coronavirus

The government believes the spreading coronavirus in China will add to downside risks and uncertainties in the domestic economy as Indonesia’s largest trading partner braces for a blow to its economic growth. The Chinese New Year, which took place in January, should have given momentum to China’s economy, Sri Mulyani has told lawmakers. “The outbreak has resulted in the country failing to realize its economic potential.” Each percentage-point decline in China’s growth rate results in a 0.3 percent drop in Indonesia’s, the World Bank has said. “For now, the biggest battle is to keep investors’ trust in the country’s economy amid uncertainties and lower confidence,” Sri Mulyani said. “We must first prepare policy instruments to mitigate the risks and maintain economic stability.” Apart from the coronavirus, global manufacturing disruption and geopolitical tensions have also become sources of global economic uncertainty, said Coordinating Economic Minister Airlangga Hartarto. “The challenges to the global situation will continue in 2020 despite easing trade tensions,” Airlangga added. (Jakarta Post)

Chinese Digital Payment Companies Enter Indonesian Market

Bank Indonesia, the country’s central bank, has told Chinese digital wallet company Alipay to rework their application for operating a payment service in Indonesia in collaboration with state-controlled lenders Bank Mandiri and Bank Rakyat Indonesia. Alipay and rival WeChat Pay have made public their plans to operate in Indonesia last year. Today, only the latter has managed to make the incursion into the key market, which is expected to make up a lion’s share of Southeast Asia’s $1 trillion digital payment market in the next five years according to a joint study from Google, Temasek and Bain & Company. BI Governor Perry Warjiyo said foreign digital wallet companies wanting to roll out operations in Indonesia must use the rupiah currency and the QR Indonesia Standard (QRIS), the local standard quick response code used in digital transactions. The code often appears as a small square filled with randomly-placed black and white rectangles. “Fintech companies must use QRIS. If you don’t use QRIS, we will ban and shut down your system,” Perry said. “We want the fintech and banking systems to be connected. We encourage an open banking and fintech infrastructure so we can connect all payment transactions. It’s easy to do that now with the Open Application Programming Interface [API],” he said. So far, WeChat Pay is the only foreign digital wallet service that has been able to obtain permission from BI to operate in Indonesia through a partnership with Bank CIMB Niaga. (Jakarta Globe)

Insurance Ownership Rules Changed

Indonesia now allows foreign investors to own more than 80 percent of shares in locally-listed insurance companies, loosening a rule that has for a long time stopped foreign insurance companies from expanding their business in Indonesia. Under previous regulations, the government capped foreign ownership at 80 percent, undermining the insurers’ ability to expand. Foreign investors have long lobbied the government to change the rule, arguing they had not been able to inject new capital when the time came for expansion. Their local partners, more often than not, did not have enough money to keep their ownership from being diluted.

The rule also drops the requirement for a local partner, which, according to the old rule, had to be a locally-based entity wholly controlled by Indonesian citizens. Dody Dalimunthe, the executive director of the Indonesian General Insurance Association (AAUI), welcomed the new rule, saying foreign investors’ local partners are often individuals with either shallow pockets or little expertise to commit more capital in the insurance industry. (Editor’s Note: Indonesia has been rocked by the insolvency of state-owned insurance company, Jawisraya, which may have contributed to the change.)

Indonesia Poised To Enter Golden Age: HSBC Report

Despite the forecast of slow global economic growth in 2020, Southeast Asia, including Indonesia, is expected to enter an economic golden age that will take the region well on the path to become the world’s fourth-largest economic bloc in the next decade. HSBC Private Banking’s chief market strategist for Southeast Asia, James Cheo, said he is convinced the region could ride out the current global slowdown and soon catch up with the world’s economic powerhouses. “The most exciting story, if we look at the next decade, is Southeast Asia. The next ten years could very well be the region’s golden age because if it continues to grow, say, at its current pace, it can become the fourth largest economic bloc, behind the US, Europe and China,” Cheo said to the Jakarta Globe. Cheo pointed out there are at least three supporting factors behind Southeast Asia’s economic rise.

  • First is the demographic bonus that many countries in the region are already enjoying. “Sixty percent of Southeast Asians are under the age of 35. In the next ten years, they will come of age: they’ll start working and get their first paycheck. They will increase their purchases. They’ll buy cars. They’ll get married and buy a house. They’ll have kids and spend more money on education, and of course, they’ll travel to see the world,” Cheo said.
  • Second, urbanization is getting more widespread in Southeast Asia, not only in big metropolitans but also in second-tier cities.
  • The third is the fact that Southeast Asia is “more digital” than the rest of the world.

According to Chao there are several investment sectors with bright potentials in Indonesia this year. The first is consumption – the backbone of global economic growth. The next one is infrastructure, currently one of the Indonesian government’s priority sectors. Cheo noted the increase in infrastructural spending is not only happening in Indonesia but also in other Southeast Asian countries, including Malaysia and Thailand. Sweeping regulatory reforms – especially in taxation and labor laws – promised by the Indonesian government, Cheo said now is the right time to push through significant changes. However, he warned foreign investors not to expect a complete overhaul of local bureaucracy, though they should still see the government’s insistence on reform as a sign of good things to come.

World Bank Predicts 5.1% GDP Growth

Indonesia’s economy is expected to perform slightly better in 2020 on the back of improved commodity prices and easing external pressures, economists have said. In its latest Global Economic Prospect report, the World Bank forecast Indonesia would book 5.1 percent gross domestic product (GDP) growth in 2020 and 5.2 percent in 2021. The figures were 0.2 percent lower compared with its June 2019 projection. “Growth in Indonesia, which depends less on export growth than other regional economies, is projected to tick up to 5.1% [in 2020] reflecting continued support from private consumption, a pickup in investment, growth of the working-age population and improving labor markets,” the Washington-based development bank wrote in a statement. Global growth, meanwhile, was set to pick up by 2.5 percent this year, higher than the 2.4 percent projected for 2019, driven by higher growth in emerging markets and developing economies, amid a recovery in global trade and investment. (Editor’s Note: Indonesia’s former Minister of Trade. Mari Pangestu, has been appointed the World Bank’s Managing Director for Development Policy and Partnerships)