Speaker 1: Welcome to Cope Time, a podcast series on Markets and
Speaker 1: Economies from D BS Group Research. I'm Tambe, chief economist.
Speaker 1: Welcoming you to our 97th episode. Today's episode is not
Speaker 1: your typical coby time on March 15th. I was in
Speaker 1: Jakarta where I sat down with former Finance Minister of
Speaker 1: Indonesia Kati Basri at the D BS Indonesia Asian Insights
Speaker 1: Forum 2023. What is about to follow is a recording
Speaker 1: of our conversation
Speaker 1: in it first. Mr Basri provides a brief presentation about
Speaker 1: the outlook for Indonesia in the context of global macroeconomic developments.
Speaker 1: He explains the Indonesian economy's middle path which is neither
Speaker 1: high nor low single digit growth. And he does that
Speaker 1: by taking into account resilient domestic demand and still positive
Speaker 1: commodity sectors exports outlook.
Speaker 1: Consequently, when there are global headwinds, Indonesia tends to outperform
Speaker 1: due to its low beta nature. The flip side is
Speaker 1: during a global upswing, Indonesia tends to underperform
Speaker 1: on climate change and green financing. Mr Basri underscores the
Speaker 1: daunting challenges ahead along with the massive domestic external, as
Speaker 1: well as private public multilateral financing mix needed, removing fossil
Speaker 1: fuel subsidy is key despite the obviously uh political impediments
Speaker 1: in place. He then expands on the possible opportunities for
Speaker 1: regional trade and manufacturing in the context of China us
Speaker 1: tension
Speaker 1: ASEAN has got to be united in setting rules for
Speaker 1: trade and commerce. While dealing with this dynamic. According to
Speaker 1: Mr Basri,
Speaker 1: We then have a very nice back and forth uh
Speaker 1: on the investment environment need for a balance between industrial
Speaker 1: policy and private sector incentives. The importance of the services sector,
Speaker 1: e-commerce techno nationalism. 2024 elections and the economic impact of
Speaker 1: camp and finance strength of Indonesia's financial system in light
Speaker 1: of global market sell off and the role of regulatory
Speaker 1: policy to deal with that. Well, here you go with
Speaker 1: the conversation.
Speaker 1: Good afternoon, everybody. Uh lots to talk about. But first,
Speaker 1: Pabu three will spend about 10 minutes talking about the
Speaker 1: ASEAN outlook. And from that, we will take cues on
Speaker 1: some of the current issues that are near and dear
Speaker 1: to our hearts. Please sending, keep sending your questions. I
Speaker 1: have a lot of questions for him too. But first,
Speaker 1: let's hear from him about 10 minutes on the ASEAN outlook.
Speaker 1: Pabu three.
Speaker 2: Thank you very much. Uh timer a very good afternoon
Speaker 2: to all of you. It is a great pleasure to
Speaker 2: be here. I won't use my Power Point presentation because
Speaker 2: when I saw already give all the numbers then perhaps
Speaker 2: let me try to speak in the human language in
Speaker 2: the next 10 minutes. Uh
Speaker 2: I'll give a sort of like a background about the
Speaker 2: ASEAN economic situation in general. But uh I'll be focusing
Speaker 2: on Indonesia after that. Yeah. So let me start by
Speaker 2: putting Indonesian's position when I saw the result of this
Speaker 2: survey was very interesting. I believe that more than 70%
Speaker 2: of people are optimistic.
Speaker 2: So if you ask me, how do I describe Indonesia?
Speaker 2: Let me
Speaker 2: uh share my view. I called Indonesia is a disappointing country.
Speaker 2: It disappoint the optimists
Speaker 2: Who expect that Indonesia will grow by 10% economic growth
Speaker 2: but will also disappoint the pessimists who keep talking that
Speaker 2: this country will collapse every day.
Speaker 2: So the reality is
Speaker 2: we are not doing
Speaker 2: uh you know,
Speaker 2: Extremely well in the sense that the economy grew by 9-10%
Speaker 2: or double-digit growth like some East Asian countries in Asia.
Speaker 2: I will explain to you later on the reasons behind it.
Speaker 2: But
Speaker 2: despite the global situation, Indonesia will do relatively well. Yeah.
Speaker 2: So that is why I call this disappointing country, disappoint
Speaker 2: optimist and also disappoint the pessimists. Now, let, let me
Speaker 2: explain to you about our position in ASEAN.
Speaker 2: If you look at the experience for many ASEAN countries
Speaker 2: compared to
Speaker 2: uh the other part of the world. Uh If you
Speaker 2: look at the
Speaker 2: projection of the global growth for 2023 timer, uh IMF
Speaker 2: projected that the global growth will be around 2.9% whereas
Speaker 2: the advanced economy may grow around maybe 1.3 So the
Speaker 2: source of growth may come from the emerging developing countries
Speaker 2: and ASEAN countries
Speaker 2: Will continue to grow by more than 4%.
Speaker 2: Yeah, it is quite strong. And if you look at Indonesia,
Speaker 2: the projection made by the IMF Indonesia will grow around 4.8%.
Speaker 2: Much better than many countries in the region.
Speaker 2: Yeah. And if you ask me, why is that? I
Speaker 2: said that for two reasons. The first one is good
Speaker 2: policy response as explained by the second one. Good luck.
Speaker 2: Why is that?
Speaker 2: Because the share of Indonesian export to GDP is only 25%.
Speaker 2: So when there is a negative global spill over
Speaker 2: And hit many ASEAN countries, I can imagine timer that
Speaker 2: Singapore because the share export to GDP is about 180%.
Speaker 2: Singapore will be hit severely compared to Indonesia.
Speaker 2: In our case, the export to GDP is only 25%.
Speaker 2: We are less integrated to the global economy. If you
Speaker 2: ask me whether this is something by design, my answer
Speaker 2: is no, we would like to be as competitive as
Speaker 2: Singapore because there are many mistakes that we made. We
Speaker 2: are not as competitive as Singapore but blessing a discuss
Speaker 2: because we are less integrated than the impact of the
Speaker 2: negative global spill over will be relatively limited for us.
Speaker 2: So I can imagine a country like Singapore. Now
Speaker 2: You may grow around zero point something to 1% for 2023,
Speaker 2: Indonesia will grow much higher than that.
Speaker 2: Thailand will be affected. Vietnam will be affected by this
Speaker 2: tightening monetary policy. The decline of the volume of trade,
Speaker 2: et cetera, the impact to Indonesia will be relatively less
Speaker 2: compared to many countries in ASEAN. For that reason, from
Speaker 2: the investor perspective, I would call Indonesia is one of
Speaker 2: the least unattractive countries in the world,
Speaker 2: not because we are doing great but because the other
Speaker 2: part of the world are in trouble.
Speaker 2: So if you are an investor, you are talking about
Speaker 2: relative from the relative perspective, you will continue to invest
Speaker 2: Indonesia because we have growth, we have economic growth. Palu
Speaker 2: mentioned about this huge potential related to the rising middle class.
Speaker 2: We have the market size, we have the resources. So
Speaker 2: from that perspective, I won't be surprised that if the
Speaker 2: economy
Speaker 2: for 2023 for this year, Indonesia will perform better than
Speaker 2: much country in ASEAN. Yeah. And then,
Speaker 2: but the other side of the coin, when the global
Speaker 2: economy starts to recover, then
Speaker 2: Singapore will probably will recover faster than us because they
Speaker 2: are more integrated compared to Indonesian economy. Now many people
Speaker 2: started to worry about the SI PB the Silicon Valley
Speaker 2: uh Bank.
Speaker 2: The question is whether there will be a sort of
Speaker 2: a systemic global risk. Again when I look at the data,
Speaker 2: the exposure to the Indonesian economy in terms of this
Speaker 2: banking is also relatively less. So that is why if
Speaker 2: you look at on the financial sector until today. The
Speaker 2: impact is relatively limited compared to many countries like in Europe.
Speaker 2: So talking from this,
Speaker 2: you know, comparison of Indonesia to many ASEAN countries, I
Speaker 2: would say that Indonesia will perform better than many ASEAN countries.
Speaker 2: If you're talking about the 2023
Speaker 2: The only thing that we need to worry about, we
Speaker 2: can have a discussion about a timer. The last time
Speaker 2: I was in Davos at the World Economic Forum. Larry
Speaker 2: Summers mentioned about the possibility of the Fed Fund rate
Speaker 2: may go to 6% if the us economy remains strong.
Speaker 2: So the implication is I do believe that the central bank,
Speaker 2: the bank Indonesia need to maintain the parity with the fed.
Speaker 2: Yeah, if that's the case, then the implication, we will
Speaker 2: see that there will be a sort of like a
Speaker 2: tightening cycle also in Indonesia. But because the share of
Speaker 2: investment to GDP is relatively small compared to the consumption,
Speaker 2: because our share consumption to GDP is about 55%,,
Speaker 2: Then the economy will remain to grow by about 4.8%.
Speaker 2: For that reason,
Speaker 2: The share export to GDP is on 25%.
Speaker 2: A couple of things that we need to anticipate is
Speaker 2: the declining in energy commodity prices. This definitely will hit
Speaker 2: the Indonesian export. And if you look at the data
Speaker 2: on the fourth quarter, we have seen the export is
Speaker 2: slowing down.
Speaker 2: And if you look at the import, the reasons why
Speaker 2: we are running a current account surplus because the import
Speaker 2: dropped more significantly than our export.
Speaker 2: Yeah, 90% of our import is made up of capital
Speaker 2: goods and raw materials.
Speaker 2: So if the imports start to slow down,
Speaker 2: then we will see six months from now, the investment
Speaker 2: will also slow down.
Speaker 2: Yeah, under this kind of situation, it is inevitable, the
Speaker 2: economy will slow down. But I do believe that the
Speaker 2: impact will be relatively limited again because that's, you know,
Speaker 2: the huge percentage of the consumption. Now let me talk
Speaker 2: to the other issue that mentioned about the climate and
Speaker 2: mostly you know, the the the climate change
Speaker 2: issue related to the ASEAN countries. I think the biggest
Speaker 2: challenge for a country like Indonesia and many countries in
Speaker 2: ASEAN as well is about climate finance.
Speaker 2: Yeah, it's about climate finance
Speaker 2: mentioned about jet P $20 billion money available.
Speaker 2: I'm sure that
Speaker 2: any ASEAN countries will commit to achieve this net zero emissions.
Speaker 2: In our case, we already sort of like put our
Speaker 2: target more ambitious than before. I was involved in the
Speaker 2: independent level expert group for the COP 27. But one
Speaker 2: thing that I have to say that climate financing for
Speaker 2: the energy transition, this is not an easy thing
Speaker 2: because we need to mobilize fund probably about
Speaker 2: two or 3% of the global GDP. We are talking
Speaker 2: about $100 billion. The question is how do ASEAN countries
Speaker 2: including Indonesia,
Speaker 2: you know, can mobilize fund related to this? My response,
Speaker 2: my answers to it is there will be a combination
Speaker 2: between domestic resource management,
Speaker 2: external and the fiscal framework to attract the philanthropy and
Speaker 2: the private sector because there is no way that this
Speaker 2: financing for climate could be entirely financed simply by the
Speaker 2: government spending. So like in the case of Indonesia, if
Speaker 2: you look at the composition, Indonesia probably need about $28
Speaker 2: billion
Speaker 2: for the issue of the climate finance. If you look
Speaker 2: at the allocation of budget
Speaker 2: In our total government budget, in terms of this climate
Speaker 2: is still relatively limited, it's only about 1%. Yeah, so
Speaker 2: it's still relatively limited. But there are a couple of
Speaker 2: things that the government can do. The first one is
Speaker 2: the budget allocation.
Speaker 2: I think the government
Speaker 2: Did a good job last September when they adjusted the
Speaker 2: fuel price by about 30% at that time. Because without
Speaker 2: adjusting the fuel price, then the relative price between fossil
Speaker 2: fuel and renewable energy will not attract the investment into
Speaker 2: renewable energy. So the first things that the government needs
Speaker 2: to do is to adjust the fuel price, reduce the
Speaker 2: fossil fuel subsidy.
Speaker 2: But the thing is it's easier to be said than
Speaker 2: done because
Speaker 2: nine months from now, it's election, 12 months from now
Speaker 2: it is an election. So we probably have to wait. Yeah,
Speaker 2: the other possibility is to mobilize one through the
Speaker 2: carbon tax, the pean tax,
Speaker 2: this is from the domestic resources. The second one is
Speaker 2: probably this has been discussed in the in the World
Speaker 2: Bank and IMF as well about how to expand the
Speaker 2: concessional loan. Yeah,
Speaker 2: the S D R from the IMF has been sort
Speaker 2: of like, you know, extended to the Regional Development Bank
Speaker 2: to support the climate finance and this all this money
Speaker 2: can be used to the risking to invite the philanthropy
Speaker 2: and private sector to you know, to support the climate
Speaker 2: finance for the energy transition.
Speaker 2: Before I conclude timer, then we can have a discussion
Speaker 2: about it.
Speaker 2: The other important thing that I would like to touch
Speaker 2: related to the Indonesia and ASEAN issues is about
Speaker 2: us, China tension and R ce P
Speaker 2: I think this is my personal opinion, of course,
Speaker 2: since I'm no longer in the government, I can talk
Speaker 2: based on my own opinion.
Speaker 2: Seems to me that ASEAN countries, we don't have the
Speaker 2: luxury to choose between us and China,
Speaker 2: it is very difficult. But I can see in the
Speaker 2: case of the tension between us and China, this is
Speaker 2: the only issue that both Republican and Democrats are bipartisan.
Speaker 2: So looking at this, maybe this tension will continue for
Speaker 2: quite some time.
Speaker 2: Yeah, we have to stay this, this issue will stay
Speaker 2: with us.
Speaker 2: So the question is what can we do what the
Speaker 2: Indonesian and Asean countries can respond to it. Here is the,
Speaker 2: the idea of the R CE P is very important.
Speaker 2: I recall back in 2011, when Indonesia was the chair
Speaker 2: of the ASEAN. At the time,
Speaker 2: we realize that it's not possible for any individual ASEAN
Speaker 2: countries to deal bilaterally with China.
Speaker 2: It is very difficult. So one way to do it
Speaker 2: is we have to take ASEAN as a single entity.
Speaker 2: So ASEAN plus China ASEAN plus Japan, ASEAN plus Korea,
Speaker 2: et cetera. So that is why this R C become
Speaker 2: very important, not only from the economic perspective, but also
Speaker 2: from the geopolitical perspective. And somehow this will reflect the
Speaker 2: ASEAN position related to the US China tension. The good
Speaker 2: news is with the US China tension.
Speaker 2: We will see some reallocation from China into some Southeast
Speaker 2: Asian economy to enter the market, the US market,
Speaker 2: you know, from the back door. And I think countries
Speaker 2: like Vietnam already take the advantage. And if the government
Speaker 2: could pass the bill, the emergency state law regarding the
Speaker 2: omnibus law, then we do hope that the investment will
Speaker 2: also come to Indonesia. So I leave it up here,
Speaker 2: timer and certainly be happy for the conversation. Thank you
Speaker 2: very much.
Speaker 1: Thank you very much. Past three, I want to stay,
Speaker 1: I want to stay with ASAP. And you pointed out
Speaker 1: a very important issue that is close to our heart DB,
Speaker 1: sitting in Singapore with operations in China. And ASEAN is
Speaker 1: trying to understand that under R E P. And the
Speaker 1: context of the China U conflict would ASEAN economies be
Speaker 1: able to attract Chinese capital
Speaker 1: because under RCEP, you can have 40% value added in
Speaker 1: your home country and then produce the rest in a
Speaker 1: partner RCEP country and export it under that country's manufacturer name.
Speaker 1: So a Chinese company can come to Indonesia with 40%
Speaker 1: value added
Speaker 1: build here, assemble complete here and export.
Speaker 1: You were there during the G-20. Is your sense that
Speaker 1: Chinese capital will play a large role in Indonesia's development
Speaker 1: going forward?
Speaker 2: Um This is a very good question.
Speaker 2: Uh We will see some of it but not as
Speaker 2: much as to Vietnam because the the country that the
Speaker 2: one who really take the benefit of it. I think
Speaker 2: so far is Vietnam. Yeah
Speaker 2: and the other country that also take the benefit it
Speaker 2: is outside the ASEAN is Bangladesh because if you look
Speaker 2: at the R M G, the ready made garment, most
Speaker 2: of the companies in China actually move it to Bangladesh.
Speaker 2: But I do believe one of the reasons behind it
Speaker 2: is because the investors are waiting for the omnibus allow
Speaker 2: and hopefully you know this
Speaker 2: emergency state law about this, this p about this omnibus
Speaker 2: will be approved by the parliament soon. And after that,
Speaker 2: we will see that more capital come into Indonesia,
Speaker 1: you saw in Park Luo's presentation, the dynamics around the
Speaker 1: E V and the battery ecosystem. And again, just going
Speaker 1: back to China and Chinese investment.
Speaker 1: The Chinese are very keen on finding areas where they
Speaker 1: can get the backward linkage. Um And you may have
Speaker 1: even noticed in the pas presentation, the two companies he
Speaker 1: had one was a Korean company, one was a Chinese company.
Speaker 1: So on this area around backward linkage of metals mining
Speaker 1: E V. What's your sense of both M N C
Speaker 1: Western M N C as well as Chinese investment. Uh
Speaker 2: time I was
Speaker 2: I was at MFI was the one who
Speaker 2: implement the idea about this
Speaker 2: Uh this incentivized for the export at that time was
Speaker 2: back 2014. So we introduced a policy that we uh
Speaker 2: if companies export the raw materials, they need to pay
Speaker 2: a prohibitive tax. So that's the the the the uh
Speaker 2: the the the first move. So with this kind of
Speaker 2: policy would call it it downs streaming policy. You will
Speaker 2: see the impact
Speaker 2: on the you know the increase the value of export,
Speaker 2: et cetera. The investment coming in Indonesia, even the Economist magazine,
Speaker 2: praise us related to that.
Speaker 2: But
Speaker 2: I think we need also to be very careful as
Speaker 2: an economist if the relative price
Speaker 2: very high
Speaker 2: because this export ban, then the implication is there will
Speaker 2: be an innovation in another country to come up with
Speaker 2: a new product. So we can learn the experience from
Speaker 2: the rubber,
Speaker 2: Indonesia produced rubber and rubber price was very high. And
Speaker 2: as a result there was a synthetic rubber at the time.
Speaker 2: If you recall, when the Middle East began to embargo
Speaker 2: oil back in the seventies, then shale gas started to
Speaker 2: kick in,
Speaker 2: you know, renewable energies start to kick in. So my
Speaker 2: response to it, this is really the opportunity for us
Speaker 2: but needs to be combined with the competitive policy as well.
Speaker 2: Indonesia should be part of this global supply chain. So
Speaker 2: I don't know, I'm not, I'm not an expert about battery,
Speaker 2: but I won't be surprised if in the future,
Speaker 2: you know, one of the elements of battery is no
Speaker 2: longer only about lithium, but something else because once the
Speaker 2: relative price is too high, then there will be an
Speaker 2: incentive to do an innovation. That's basically how the market works.
Speaker 2: So for Indonesia, while people are still preparing for the
Speaker 2: new innovation, we need to do something to improve the
Speaker 2: quality and also the competitiveness.
Speaker 1: It's very fashionable these days for governments to talk about
Speaker 1: manufacturing and jobs around manufacturing. You see in the US
Speaker 1: the build back better bill, even the Inflation Reduction Act
Speaker 1: has a lot of buy American component. The idea is
Speaker 1: to bring jobs back to America. You see in India,
Speaker 1: the whole making India initiative that has been pursued over
Speaker 1: the last half a decade. It's again about manufacturing. And
Speaker 1: as we have heard from Palau and we have heard
Speaker 1: from others in the government of Indonesia, there is a
Speaker 1: desire to do that
Speaker 1: But what about the service sector? This country is increasingly
Speaker 1: service friendly. We see tremendous uh penetration of social media
Speaker 1: and outsourcing capabilities. So why are we always fixated on
Speaker 1: manufacturing jobs and not services
Speaker 2: jobs?
Speaker 2: This is a very good question. Let me respond to
Speaker 2: the manufacturing first as well. Yeah, I think
Speaker 2: we are talking about the returning of the industrial policy now. Yeah,
Speaker 2: somehow this is good, but we need to be very
Speaker 2: careful on this as well because in Indonesia, let me
Speaker 2: be frank and honest with you, we had an experience
Speaker 2: in the past that government is very bad in picking
Speaker 2: winner but losers are very good in picking government. So
Speaker 2: you start with the industrial policy,
Speaker 2: there will be an implication that probably some companies that
Speaker 2: politically very well connected with the government will take the
Speaker 2: advantage of it.
Speaker 2: Yeah, so this industrial policy can be justified as long
Speaker 2: as you ensure about the transparency about the governance, you know,
Speaker 2: et cetera. Now talking about the surfaces sector. One thing
Speaker 2: that perhaps if you're talking about surfaces basically in Indonesia,
Speaker 2: in terms of the surfaces we really lack behind because
Speaker 2: the limited quality of the human capital, I just came
Speaker 2: back from India last week for the G-20.
Speaker 2: And I can see
Speaker 2: like if you're talking about bangalore. Yeah, I would imagine
Speaker 2: correct me if I'm wrong, I'm not an expert about India,
Speaker 2: but Bangalore will not exist without Silicon Valley because so
Speaker 2: many Indus uh Indian diaspora in in Silicon Valley, they
Speaker 2: have the network, et cetera, Indonesia, we still not on
Speaker 2: that stage. So that is why in terms of this,
Speaker 2: you know, services sector, etcetera, I think
Speaker 2: the sort of like to be part of this the
Speaker 2: global supply chain of production network is rather different. Yeah,
Speaker 2: so this will take some time. But one thing that
Speaker 2: is also important but I know this is very, very
Speaker 2: sensitive and controversial is about e-commerce. This is something that
Speaker 2: we probably have to look at in the future. Because
Speaker 2: if every country,
Speaker 2: yeah in the world try to sort of like do
Speaker 2: restrict the data flows, et cetera, then maybe the growth
Speaker 2: on the digital technology will be relatively limited. This is
Speaker 2: not unique to Indonesia or other or other countries doing
Speaker 2: the same thing as well. So there are a couple
Speaker 2: of issues that we have to look at it. Yeah,
Speaker 2: especially on the before I forgot on the digital technology.
Speaker 2: One thing that I'm concerned time are related to the
Speaker 2: recent development
Speaker 2: is also the possibility of the two internet of things
Speaker 2: probably in the future, there will be a China system
Speaker 2: and the US system. So we are entering the era
Speaker 2: of what I call the Pano nationalism.
Speaker 2: And this one is perhaps more difficult than the trade
Speaker 2: war because it is justified by the economic security. Let
Speaker 2: me give an example about supply chain in terms of
Speaker 2: this infantry method. We understand about what we call just
Speaker 2: in time. I won't be surprised that a couple of
Speaker 2: years from now, most of the country will no longer
Speaker 2: adopt the just in time, but just in case
Speaker 2: because they need to anticipate if there is a disruption,
Speaker 2: global change, disruption, geopolitical tension, et cetera, this will make
Speaker 2: the cost production costs much more expensive than what we
Speaker 2: had before.
Speaker 1: I want to stay with the digital economy for a
Speaker 1: little longer. And although the questions that I'm getting are
Speaker 1: all about S V B and interest rates. So wait,
Speaker 1: we we'll come to that. Um But on, on the
Speaker 1: digital economy side, the
Speaker 1: entrepreneurs in Indonesia increasingly also want to join the global
Speaker 1: zeitgeist in producing apps for Indonesian consumers. They want to
Speaker 1: create payments distribution solutions that may look like a payment
Speaker 1: distribution solution in China or somewhere but with an Indonesian flavor.
Speaker 1: Um So what's your assessment of Indonesia's digital journey if
Speaker 1: you will both at the private sector level, as well
Speaker 1: as the public sector level, I would
Speaker 2: say
Speaker 2: if you know, is very proud about Indonesia.
Speaker 2: So am I yeah, especially
Speaker 2: related to if you're talking about digital technology. If you
Speaker 2: mention about how many unicorns or even the cons that
Speaker 2: we have here in Asia, in terms of this technology capability,
Speaker 2: we are doing very well. Yeah, and this is related
Speaker 2: to the issue of the e-commerce, et cetera, a lot
Speaker 2: of ideas.
Speaker 2: So in terms of this capability, the market size, the potential,
Speaker 2: I would say that Indonesia is perhaps one of the
Speaker 2: most potential countries in in ASEAN.
Speaker 2: I understand country like Singapore,
Speaker 2: they cannot afford not to have Indonesia as the market, right?
Speaker 2: So if you look at if you're talking about many
Speaker 2: peer to peer lending, fintech company, if you're talking about right? Healing,
Speaker 2: if you're talking about e commerce like it or not,
Speaker 2: you have to look at the market for Indonesia. The
Speaker 2: potential is there
Speaker 2: my concern now and this is related to the issue
Speaker 2: that I uh response before I I I I I
Speaker 2: raised before
Speaker 2: 2012 or 20. Yeah, 2008-2022,
Speaker 2: we were living in the fast normal world
Speaker 2: when the interest rate was very low.
Speaker 2: I'm not sure timer that from 2022 onwards,
Speaker 2: The Fed Fund rate will return back to 0.25. So
Speaker 2: perhaps the normal rate will be around, I don't know, 3, 3.5%.
Speaker 2: Under this kind of situation, the cost of fund will
Speaker 2: become much more expensive than before. So the PC, they
Speaker 2: cannot afford to continue with their strategy only focusing on
Speaker 2: growth like GM fee, GT, fee loan to disbursement, et cetera.
Speaker 2: Unless the startup companies including in Indonesia,
Speaker 2: you know, change their business model into path to profitability.
Speaker 2: Otherwise they will be in a difficult situation. And this
Speaker 2: is not unique for Indonesia
Speaker 2: Also for other digital company. That's the first one, the
Speaker 2: second one about the digital issue. I'm not too worried
Speaker 2: so much about the so called the industrial 4.0. I
Speaker 2: am concerned about government 4.0.
Speaker 2: The reason behind it is the product cycle because the
Speaker 2: disruption is getting shorter and shorter. If you are, if
Speaker 2: you were in the position of the policy makers, can
Speaker 2: you imagine you make a regulation will only last for
Speaker 2: six months and after that, there will be a new
Speaker 2: disruption
Speaker 2: will be very difficult for the government anywhere in the world.
Speaker 2: So under this kind of situation, the ideally what we
Speaker 2: need is an agile bureaucracy, but agile bureaucracy is an oxymoron,
Speaker 2: there is no way bureaucracy can be agile
Speaker 2: under this kind of situation. What we need is to
Speaker 2: change the mindset, especially from the regulator perspective, from agree
Speaker 2: on rules to agree on principle. Without that some innovations
Speaker 2: in many countries including Indonesia, you know, will be difficult
Speaker 2: to develop.
Speaker 1: These are exceptionally astute insights. I hope we're absorbing it
Speaker 1: and we should consider ourselves lucky that uh Park Bater
Speaker 1: is weighing in.
Speaker 1: I'm going to postpone the interest rate discussion for another
Speaker 1: couple of minutes. I want to talk about election for
Speaker 1: a second. Uh You have watched over two decades of
Speaker 1: presidential election in Indonesia,
Speaker 1: give us a sense of the political business cycle. Does
Speaker 1: the economy's direction change regardless of the outcome of the election?
Speaker 2: Very good question. Let me talk about the, the downside
Speaker 2: and the upside race. The first one is, let me
Speaker 2: talk with the positive, the uh the, the, the, the
Speaker 2: downside race. The first one is,
Speaker 2: I think the political party in Indonesia political parties in
Speaker 2: Indonesia will,
Speaker 2: you know, nominate their candidates in September.
Speaker 2: Yeah. So you can imagine from September until February 2024
Speaker 2: because the election will be held on 14 February during
Speaker 2: the Valentines Day.
Speaker 2: Um Then you would expect that everyone will focus on
Speaker 2: the election
Speaker 2: after that.
Speaker 2: Then people will wait. I don't know whether it is
Speaker 2: only one round or two rounds after that. People have
Speaker 2: to wait who will be ministers on the cabinet. So
Speaker 2: I don't think there will be a major decision will
Speaker 2: be made
Speaker 2: After that, the Echelon one on its line ministries will
Speaker 2: wait after their minister is being appointed, whether they will
Speaker 2: stay in their position or not.
Speaker 2: So the downside is the major decision perhaps from September
Speaker 2: 2024 until December, sorry, the September 2023 until December 2024. Probably,
Speaker 2: you know, we won't see the major or significant reform.
Speaker 2: Yeah, and that's not only unique for this year. Also
Speaker 2: happened back in 2014. Similar things also happened in 2000 2004.
Speaker 2: So for the investors,
Speaker 2: you know, probably they have to wait. So that is
Speaker 2: why many investors take the position of wait and see
Speaker 2: because this kind of situation. But let me talk now
Speaker 2: about the upside.
Speaker 2: If you look at the data six months before the
Speaker 2: election consumption in Indonesia jumped significantly. Why is that? Because
Speaker 2: all the politicians spend money for election?
Speaker 2: Yeah, let me give an example. This is just some illustration.
Speaker 2: I don't know whether this figure is still valid or not.
Speaker 2: Back on 2014, there were about 750,000 ballots for each
Speaker 2: political party. They need to nominate someone as a witness,
Speaker 2: you know, to stay in the ballot from the morning
Speaker 2: until evening, right? So they got
Speaker 2: of of course you need to fit them with meal.
Speaker 2: So let's start with the Nasi Padang 30,000 yeah per meal.
Speaker 2: So three times you are talking about 200,000 multiply by
Speaker 2: 750,000 ballots. You are talking about 75 billion rupiah money
Speaker 2: per day per one witness.
Speaker 2: At least political party should come with the three people.
Speaker 2: If you multiply by 10 people, you are talking about
Speaker 2: two point something trillion already. So as a lot of
Speaker 2: money will be spent on t shirt on banner traveling.
Speaker 2: One thing that I cannot answer is where does the
Speaker 2: money come from?
Speaker 2: Yeah,
Speaker 2: it will be very sensitive to her response to that question.
Speaker 2: The other thing is so that is why if you
Speaker 2: look at the data consumption boom. So six months from now,
Speaker 2: you will see there's a lot of demand, strong demand
Speaker 2: come from the you know the society. So that is
Speaker 2: why I'm not too worried so much about the economic
Speaker 2: growth for this year. The other thing is
Speaker 2: let me put this way,
Speaker 2: usually two years after the election, every president will become
Speaker 2: a normal president.
Speaker 2: What I mean by normal presidents is during campaign, you
Speaker 2: can promise everything but once you are in power, then
Speaker 2: you will see your budget is limited. Your tax ratio
Speaker 2: is limited, then you become realistic. Most of the presidential
Speaker 2: candidates before they become a president, they criticize the decision
Speaker 2: to adjust the fuel price. But all of them once
Speaker 2: they are in power, the first policy that they did
Speaker 2: adjust to the fuel price.
Speaker 2: So my point is whoever becomes a president by 2024,
Speaker 2: they will be very realistic
Speaker 2: Because the fiscal space is limited, the budget is limited.
Speaker 2: 2nd point because there are many,
Speaker 2: you know, the the uh uh customers of the D
Speaker 2: Bs and D BS Bank is, is a foreign banks.
Speaker 2: Let me talk with the number. Bear with me a
Speaker 2: little bit
Speaker 2: A timer. The Indonesian incremental capital output ratio is about
Speaker 2: 6.5 now. So 1% economic growth will require investment over
Speaker 2: GDP 6.5. So if Indonesia like said, want to achieve
Speaker 2: the income per capita about 10,000 by 2030, we need
Speaker 2: to grow by 6% per annum.
Speaker 2: So if you want to grow by 6%. It means
Speaker 2: that you need investment over GDP six multiply by 6.5.
Speaker 2: You are talking about 39% investment over GDP.
Speaker 2: Our domestic savings now is 35%. So there is a
Speaker 2: saving investment gap which is reflected in the current-account deficit.
Speaker 2: About four
Speaker 2: market will not accept this unless you finance this current
Speaker 2: account deficit by the F D I or you mobilize
Speaker 2: saving by boosting economic growth or you do economic deregulation
Speaker 2: to lower
Speaker 2: The incremental capital output ratio. So my point is whoever
Speaker 2: becomes a president by 2024, he or she needs to
Speaker 2: provide the job needs to provide jobs, then he or
Speaker 2: she will be open to the foreign investor will be
Speaker 2: open to the streamlining regulation, economic deregulation, etc
Speaker 2: to improve productivity and need to boost economic growth. So
Speaker 2: I'm not too worried so much about, you know, the
Speaker 2: result of the election. The difference is me but the
Speaker 2: leadership style and gimmick because if you're talking about I
Speaker 2: megawati administration by S B Y administration, by Jokowi administration,
Speaker 2: if you're talking about, you know, the big idea, more
Speaker 2: or less the same talking about job creation, poverty, infrastructure.
Speaker 2: The difference is about the leadership and deliverable but but
Speaker 2: I don't think there will be a radical change in
Speaker 2: terms of this economic policy,
Speaker 1: Right? No, no secret sauce improve productivity, become more business friendly. Absolute. OK.
Speaker 1: So we have less than 10 minutes left. And given
Speaker 1: what has happened in the world over the last one week,
Speaker 1: I think we need to go a little deeper on
Speaker 1: the issue of bank stress in the us and its
Speaker 1: implication for finance and by extension, regional economic outlook.
Speaker 1: So as you pointed out, you don't think inflation or
Speaker 1: interest rates are going to be as low in the
Speaker 1: coming decade than it has been in the past decade,
Speaker 1: which also means that investors will be more discriminatory. Borrowers
Speaker 1: will have a little harder time
Speaker 1: in the very near term. Do you think the actions
Speaker 1: taken by the FED and the FDIC are sufficient to
Speaker 1: stop a systemic risk from spreading worldwide?
Speaker 2: This is a very tough question because
Speaker 2: we don't really know the real situation. Yeah, about
Speaker 2: the complexity and also the size. But I think
Speaker 2: the action that
Speaker 2: you know, took by the FDIC and also the FED
Speaker 2: at least by guaranteeing that the depositors will get the
Speaker 2: money back somehow will calm the market.
Speaker 2: Yeah, so I think, but, but but the issue is
Speaker 2: we probably need to look at about the possibility of
Speaker 2: the
Speaker 2: risk of some other banks as well. There is um
Speaker 2: if I'm not mistaken, there is uh research done by
Speaker 2: JP Morgan if I'm not mistaken. Yeah, it shows about
Speaker 2: the loan to deposit ratio and the characteristic the diversification.
Speaker 2: So we probably need to look at, you know, some
Speaker 2: of other banks as well about the quality. But so
Speaker 2: far timer, I would say that
Speaker 2: I think the fed and also the FDIC I read
Speaker 2: Secretary Yellen's statement in financial Times a couple of days
Speaker 2: ago that she would not guarantee, put the blanket guarantee,
Speaker 2: at least at this moment can help to sort of
Speaker 2: like to calm the market. Of course, there will be
Speaker 2: a sort of like a turbulence but hopefully not. But again,
Speaker 2: I have to say that it's too early to judge
Speaker 2: at this moment
Speaker 1: beyond banks. What about the risk on the balance sheet
Speaker 1: of non-bank finance companies, corporations and countries
Speaker 2: you're talking about in, in Southeast Asian countries? Yeah,
Speaker 2: I think the exposure for
Speaker 2: ASEAN countries, especially South East Asia related to the,
Speaker 2: you know, to the US is relatively small. I don't
Speaker 2: know about Singapore because because Singapore is quite advance but
Speaker 2: looking about what happened a couple of years ago, unless
Speaker 2: the supply market gets, the impact was also relatively less
Speaker 2: uh the impact to the most
Speaker 2: uh Southeast Asian economies came into three channel rather than
Speaker 2: financial channel. Yeah. So looking at this, of course, the
Speaker 2: risk is there. But I would say that let me
Speaker 2: talk about because my knowledge is mostly Indonesia. I think
Speaker 2: the exposure of the Indonesian banks or the insurance, the
Speaker 2: non bank financial institution
Speaker 2: related to what happened in the US is relatively small.
Speaker 2: So I'm not too worried so much about it, but
Speaker 1: At the sovereign level, if rates were to remain high
Speaker 1: and the dollar liquidity were to tighten. Would the government
Speaker 1: of Indonesia be able to fund itself the external part
Speaker 1: at sub 6% or would we be prepared to pay
Speaker 1: much higher than that to the government of Indonesia debt?
Speaker 1: Would it stay at sub 6% the next issuance or
Speaker 1: would it be much higher than 6%?
Speaker 2: This is a very good question because the way I
Speaker 2: look at this situation, timer, the first one is
Speaker 2: I won't be surprised if the fed fund rate may
Speaker 2: go to
Speaker 2: 5.75 or even 6%. So under this kind of situation,
Speaker 2: if you look at the
Speaker 2: Uh 10 years standards of the government bond,
Speaker 2: It probably may go to run between 7.5-8% the implication.
Speaker 2: So it is very important for the government to do
Speaker 2: a sort of like a front loading before this happened. Otherwise,
Speaker 2: the cost of fund will become very expensive. And from
Speaker 2: the Bang Indonesia side,
Speaker 2: the inflation in Indonesia after September
Speaker 2: may come down to less than 4% because the base
Speaker 2: effect of the last year fuel price high,
Speaker 2: but maybe bank Indonesia don't have doesn't have much room
Speaker 2: to lower the interest rate now.
Speaker 2: Yeah. So under this kind of situation, the cost of
Speaker 2: fund will be relatively high and this may have an implication.
Speaker 2: I think the big banks, big banks in Indonesia are
Speaker 2: relatively ok. I'm not too worried so much. My concern
Speaker 2: is related to the small banks because there will be
Speaker 2: a flight to quality. Then this will trigger a sort
Speaker 2: of like a price war from the small banks which
Speaker 2: is raising the interest rate. But back to your question again,
Speaker 2: I think related to that,
Speaker 2: The, the, the, the government, it's better to do a
Speaker 2: sort of like a front loading. The good news is
Speaker 2: the fiscal deficit for 2023 is projected maximum 2.8%. So
Speaker 2: the need for the sort of like a financing perhaps
Speaker 2: will be relatively limited
Speaker 1: if f funds go to five and 75%. Where does
Speaker 1: the Rupiah go?
Speaker 2: Very good question.
Speaker 2: Um
Speaker 2: I don't think anyone can make a, you know, prediction about, about,
Speaker 2: about Ruia. If I knew the answer, I was sitting
Speaker 2: in the dealing room to, you know, rather than talking
Speaker 2: to all of you. But let me, let me put
Speaker 2: this way,
Speaker 2: there are a couple of reasons that
Speaker 2: I don't see the Rupiah will overshoot.
Speaker 2: The first one is
Speaker 2: because the pandemic
Speaker 2: Private saving increase. So that's explain why the current account
Speaker 2: we are running a current-account surplus. The second one is
Speaker 2: even though the energy and commodity price decline but still
Speaker 2: remains high compared to 2021. If you're talking to people
Speaker 2: who are in the coal business,
Speaker 2: you know, their, their profit increased by quadruple because the
Speaker 2: price of coal increased four times maybe. So in terms
Speaker 2: of the terms of the Air Indonesia will be benefited
Speaker 2: from that. And then the downstream industry like Palo explained
Speaker 2: in his presentation.
Speaker 2: So I won't see, I'm not too worried so much
Speaker 2: with this current account deficit, especially when the economy will
Speaker 2: slow down under this kind of situation, the pressure to
Speaker 2: Ruia will be relatively limited. I cannot make a prediction,
Speaker 2: but I don't think it will go to around 17,000.
Speaker 2: I don't think so. Maybe the will be between 5000,
Speaker 2: 500 to about 6000. If you look at the non
Speaker 2: delivery forward 12 months from now
Speaker 2: around this level, you know, maybe the situation will not
Speaker 2: be as bad as during the taper tantrum when when
Speaker 2: I was at the M O F at the time.
Speaker 1: OK, final question. I want to bring it back to geopolitics.
Speaker 1: How will Indonesia strategize around this China us conflict?
Speaker 2: This is a very tough question. I don't think any
Speaker 2: ASEAN countries can you know, can respond to this question.
Speaker 2: But my response to it is there is no single
Speaker 2: ASEAN countries
Speaker 2: have the luxury to choose between us. And China. Definitely
Speaker 2: I was mentioning about the two internet of things. If
Speaker 2: this happen ASEAN countries will be very pragmatic because most
Speaker 2: of the products that are being here may be Huawei.
Speaker 2: I don't know because their present has been here for
Speaker 2: many years, but at the same time, we need us
Speaker 2: as well.
Speaker 2: We we definitely need to sort of like to, to
Speaker 2: uh support from the US to balance the position in
Speaker 2: Southeast Asia, especially related to the South China Sea. Yeah.
Speaker 2: So on the geopolitical tension, still a lot of uncertainty.
Speaker 2: But let me put some,
Speaker 2: You know, the the bright spot that possible may come.
Speaker 2: I recall back on 2012 timer when I was a
Speaker 2: chairman of the investment board, there was a natural disaster,
Speaker 2: a flood in Thailand if you recall at that time,
Speaker 2: and Toyota, their production base in their production base for
Speaker 2: Southeast Asia at that time was only in Thailand.
Speaker 2: So I went to Japan to meet the CEO of Toyota.
Speaker 2: I convince him to invest Indonesia, not because Indonesia is
Speaker 2: doing great, but you need to diversify your risks. And
Speaker 2: for that reason, Toyota expand $3.7 billion in Indonesia. Back
Speaker 2: on 2012.
Speaker 2: The similar analogy, I do believe that many investors now
Speaker 2: they learn from the pandemic, they learn from the geopolitical tension.
Speaker 2: They need to diversify their source of this supply chain
Speaker 2: as well. This will push some of the companies to
Speaker 2: reallocate the investment to many countries in Southeast Asia. And
Speaker 2: I don't think Vietnam, you know, is big enough to
Speaker 2: absorb all of them.
Speaker 2: So some of the investment will go to Malaysia, will
Speaker 2: go to Singapore to Indonesia. So I would see a
Speaker 2: lot of potentials related to that. The second one with
Speaker 2: the US China geopolitical tension, they need somehow the back
Speaker 2: door to enter the US market. So I believe that
Speaker 2: some Asian countries including Indonesia, you know, can be a potential,
Speaker 2: can be
Speaker 2: sort of like an opportunity for them, provide that we
Speaker 2: improve the investment climate. And let me be honest and
Speaker 2: frank with you.
Speaker 2: When I was at the investment board, I told my
Speaker 2: colleague in the cabinet, one of the reasons of why
Speaker 2: many Indonesians become religious is because they have to deal
Speaker 2: with the government.
Speaker 2: You know, because if you apply something, then you never
Speaker 2: know whether your permit will be approved by the government.
Speaker 2: The only thing that you could do is only pray
Speaker 2: to God, right? So that is why I do really
Speaker 2: expect by this omnibus law, we can streamline the regulation,
Speaker 2: et cetera. Last but not least I know as said,
Speaker 2: you know,
Speaker 2: Indonesia is not perfect,
Speaker 2: so many problems. But as a former chairman of the
Speaker 2: investment board, let me give a sort of like a disclaimer.
Speaker 2: Investing in Indonesia is very dangerous because it is addictive.
Speaker 1: Ok.
Speaker 1: On that optimistic and spiritual note, Bari, thank you very
Speaker 1: much for your insights. Thank you. So, investing in Indonesia
Speaker 1: is very dangerous because it is very addictive. How great
Speaker 1: was that?
Speaker 1: Thanks to Kati Basri for his time and insights and
Speaker 1: thank you dear listeners, Coy time was produced by Ken
Speaker 1: Delbridge from spy studios, Viet Le and Daisy Sherman provided
Speaker 1: additional assistance. It is for information only and does not
Speaker 1: constitute any investment advice.
Speaker 1: 97 episodes of Coy time are available on youtube and
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Speaker 1: As for our research publications and webinars, you can find
Speaker 1: them all by Googling D BS Research Library. Have a
Speaker 1: great day.