Kopi Time E097 - Chatib Basri on Indonesia

in it first. Mr Basri provides a brief presentation about the outlook for Indonesia in the context of global macroeconomic developments. He explains the Indonesian economy's middle path which is neither high nor low single digit growth. And he does that by taking into account resilient domestic demand and still positive commodity sectors exports outlook. Consequently, when there are global headwinds, Indonesia tends to outperform

due to its low beta nature. The flip side is during a global upswing, Indonesia tends to underperform on climate change and green financing. Mr Basri underscores the daunting challenges ahead along with the massive domestic external, as well as private public multilateral financing mix needed, removing fossil fuel subsidy is key despite the obviously uh political impediments

in place. He then expands on the possible opportunities for regional trade and manufacturing in the context of China us tension ASEAN has got to be united in setting rules for trade and commerce. While dealing with this dynamic. According to Mr Basri, We then have a very nice back and forth uh on the investment environment need for a balance between industrial policy and private sector incentives. The importance of the services sector,

e-commerce techno nationalism. 2024 elections and the economic impact of camp and finance strength of Indonesia's financial system in light of global market sell off and the role of regulatory policy to deal with that. Well, here you go with the conversation. Good afternoon, everybody. Uh lots to talk about. But first, Pabu three will spend about 10 minutes talking about the ASEAN outlook. And from that, we will take cues on some of the current issues that are near and dear

to our hearts. Please sending, keep sending your questions. I have a lot of questions for him too. But first, let's hear from him about 10 minutes on the ASEAN outlook. Pabu three.

survey was very interesting. I believe that more than 70% of people are optimistic. So if you ask me, how do I describe Indonesia? Let me uh share my view. I called Indonesia is a disappointing country. It disappoint the optimists Who expect that Indonesia will grow by 10% economic growth but will also disappoint the pessimists who keep talking that this country will collapse every day.

So the reality is we are not doing uh you know, Extremely well in the sense that the economy grew by 9-10% or double-digit growth like some East Asian countries in Asia. I will explain to you later on the reasons behind it. But despite the global situation, Indonesia will do relatively well. Yeah. So that is why I call this disappointing country, disappoint optimist and also disappoint the pessimists. Now, let, let me explain to you about our position in ASEAN.

If you look at the experience for many ASEAN countries compared to uh the other part of the world. Uh If you look at the projection of the global growth for 2023 timer, uh IMF projected that the global growth will be around 2.9% whereas the advanced economy may grow around maybe 1.3 So the source of growth may come from the emerging developing countries and ASEAN countries Will continue to grow by more than 4%.

Yeah, it is quite strong. And if you look at Indonesia, the projection made by the IMF Indonesia will grow around 4.8%. Much better than many countries in the region. Yeah. And if you ask me, why is that? I said that for two reasons. The first one is good policy response as explained by the second one. Good luck. Why is that? Because the share of Indonesian export to GDP is only 25%.

So when there is a negative global spill over And hit many ASEAN countries, I can imagine timer that Singapore because the share export to GDP is about 180%. Singapore will be hit severely compared to Indonesia. In our case, the export to GDP is only 25%. We are less integrated to the global economy. If you ask me whether this is something by design, my answer is no, we would like to be as competitive as

Singapore because there are many mistakes that we made. We are not as competitive as Singapore but blessing a discuss because we are less integrated than the impact of the negative global spill over will be relatively limited for us. So I can imagine a country like Singapore. Now You may grow around zero point something to 1% for 2023, Indonesia will grow much higher than that. Thailand will be affected. Vietnam will be affected by this

tightening monetary policy. The decline of the volume of trade, et cetera, the impact to Indonesia will be relatively less compared to many countries in ASEAN. For that reason, from the investor perspective, I would call Indonesia is one of the least unattractive countries in the world, not because we are doing great but because the other part of the world are in trouble. So if you are an investor, you are talking about relative from the relative perspective, you will continue to invest

Indonesia because we have growth, we have economic growth. Palu mentioned about this huge potential related to the rising middle class. We have the market size, we have the resources. So from that perspective, I won't be surprised that if the economy for 2023 for this year, Indonesia will perform better than much country in ASEAN. Yeah. And then, but the other side of the coin, when the global economy starts to recover, then Singapore will probably will recover faster than us because they

are more integrated compared to Indonesian economy. Now many people started to worry about the SI PB the Silicon Valley uh Bank. The question is whether there will be a sort of a systemic global risk. Again when I look at the data, the exposure to the Indonesian economy in terms of this banking is also relatively less. So that is why if you look at on the financial sector until today. The impact is relatively limited compared to many countries like in Europe.

So talking from this, you know, comparison of Indonesia to many ASEAN countries, I would say that Indonesia will perform better than many ASEAN countries. If you're talking about the 2023 The only thing that we need to worry about, we can have a discussion about a timer. The last time I was in Davos at the World Economic Forum. Larry Summers mentioned about the possibility of the Fed Fund rate may go to 6% if the us economy remains strong.

So the implication is I do believe that the central bank, the bank Indonesia need to maintain the parity with the fed. Yeah, if that's the case, then the implication, we will see that there will be a sort of like a tightening cycle also in Indonesia. But because the share of investment to GDP is relatively small compared to the consumption, because our share consumption to GDP is about 55%,, Then the economy will remain to grow by about 4.8%. For that reason, The share export to GDP is on 25%.

A couple of things that we need to anticipate is the declining in energy commodity prices. This definitely will hit the Indonesian export. And if you look at the data on the fourth quarter, we have seen the export is slowing down. And if you look at the import, the reasons why we are running a current account surplus because the import dropped more significantly than our export. Yeah, 90% of our import is made up of capital goods and raw materials.

So if the imports start to slow down, then we will see six months from now, the investment will also slow down. Yeah, under this kind of situation, it is inevitable, the economy will slow down. But I do believe that the impact will be relatively limited again because that's, you know, the huge percentage of the consumption. Now let me talk to the other issue that mentioned about the climate and mostly you know, the the the climate change

issue related to the ASEAN countries. I think the biggest challenge for a country like Indonesia and many countries in ASEAN as well is about climate finance. Yeah, it's about climate finance mentioned about jet P $20 billion money available. I'm sure that any ASEAN countries will commit to achieve this net zero emissions. In our case, we already sort of like put our target more ambitious than before. I was involved in the

independent level expert group for the COP 27. But one thing that I have to say that climate financing for the energy transition, this is not an easy thing because we need to mobilize fund probably about two or 3% of the global GDP. We are talking about $100 billion. The question is how do ASEAN countries including Indonesia,

you know, can mobilize fund related to this? My response, my answers to it is there will be a combination between domestic resource management, external and the fiscal framework to attract the philanthropy and the private sector because there is no way that this financing for climate could be entirely financed simply by the government spending. So like in the case of Indonesia, if you look at the composition, Indonesia probably need about $28 billion

for the issue of the climate finance. If you look at the allocation of budget In our total government budget, in terms of this climate is still relatively limited, it's only about 1%. Yeah, so it's still relatively limited. But there are a couple of things that the government can do. The first one is the budget allocation. I think the government Did a good job last September when they adjusted the

fuel price by about 30% at that time. Because without adjusting the fuel price, then the relative price between fossil fuel and renewable energy will not attract the investment into renewable energy. So the first things that the government needs to do is to adjust the fuel price, reduce the fossil fuel subsidy. But the thing is it's easier to be said than done because nine months from now, it's election, 12 months from now

it is an election. So we probably have to wait. Yeah, the other possibility is to mobilize one through the carbon tax, the pean tax, this is from the domestic resources. The second one is probably this has been discussed in the in the World Bank and IMF as well about how to expand the

concessional loan. Yeah, the S D R from the IMF has been sort of like, you know, extended to the Regional Development Bank to support the climate finance and this all this money can be used to the risking to invite the philanthropy and private sector to you know, to support the climate finance for the energy transition. Before I conclude timer, then we can have a discussion about it.

The other important thing that I would like to touch related to the Indonesia and ASEAN issues is about us, China tension and R ce P I think this is my personal opinion, of course, since I'm no longer in the government, I can talk based on my own opinion. Seems to me that ASEAN countries, we don't have the luxury to choose between us and China,

it is very difficult. But I can see in the case of the tension between us and China, this is the only issue that both Republican and Democrats are bipartisan. So looking at this, maybe this tension will continue for quite some time. Yeah, we have to stay this, this issue will stay with us. So the question is what can we do what the Indonesian and Asean countries can respond to it. Here is the, the idea of the R CE P is very important. I recall back in 2011, when Indonesia was the chair

of the ASEAN. At the time, we realize that it's not possible for any individual ASEAN countries to deal bilaterally with China. It is very difficult. So one way to do it is we have to take ASEAN as a single entity. So ASEAN plus China ASEAN plus Japan, ASEAN plus Korea, et cetera. So that is why this R C become very important, not only from the economic perspective, but also from the geopolitical perspective. And somehow this will reflect the

ASEAN position related to the US China tension. The good news is with the US China tension. We will see some reallocation from China into some Southeast Asian economy to enter the market, the US market, you know, from the back door. And I think countries like Vietnam already take the advantage. And if the government could pass the bill, the emergency state law regarding the omnibus law, then we do hope that the investment will also come to Indonesia. So I leave it up here,

timer and certainly be happy for the conversation. Thank you very much.

sitting in Singapore with operations in China. And ASEAN is trying to understand that under R E P. And the context of the China U conflict would ASEAN economies be able to attract Chinese capital because under RCEP, you can have 40% value added in your home country and then produce the rest in a partner RCEP country and export it under that country's manufacturer name. So a Chinese company can come to Indonesia with 40% value added build here, assemble complete here and export.

You were there during the G-20. Is your sense that Chinese capital will play a large role in Indonesia's development going forward?

But I do believe one of the reasons behind it is because the investors are waiting for the omnibus allow and hopefully you know this emergency state law about this, this p about this omnibus will be approved by the parliament soon. And after that, we will see that more capital come into Indonesia,

Western M N C as well as Chinese investment. Uh

et cetera. The investment coming in Indonesia, even the Economist magazine, praise us related to that. But I think we need also to be very careful as an economist if the relative price very high because this export ban, then the implication is there will be an innovation in another country to come up with a new product. So we can learn the experience from the rubber, Indonesia produced rubber and rubber price was very high. And as a result there was a synthetic rubber at the time.

If you recall, when the Middle East began to embargo oil back in the seventies, then shale gas started to kick in, you know, renewable energies start to kick in. So my response to it, this is really the opportunity for us but needs to be combined with the competitive policy as well.

Indonesia should be part of this global supply chain. So I don't know, I'm not, I'm not an expert about battery, but I won't be surprised if in the future, you know, one of the elements of battery is no longer only about lithium, but something else because once the relative price is too high, then there will be an incentive to do an innovation. That's basically how the market works.

So for Indonesia, while people are still preparing for the new innovation, we need to do something to improve the quality and also the competitiveness.

the last half a decade. It's again about manufacturing. And as we have heard from Palau and we have heard from others in the government of Indonesia, there is a desire to do that But what about the service sector? This country is increasingly service friendly. We see tremendous uh penetration of social media and outsourcing capabilities. So why are we always fixated on manufacturing jobs and not services

winner but losers are very good in picking government. So you start with the industrial policy, there will be an implication that probably some companies that politically very well connected with the government will take the advantage of it. Yeah, so this industrial policy can be justified as long as you ensure about the transparency about the governance, you know,

et cetera. Now talking about the surfaces sector. One thing that perhaps if you're talking about surfaces basically in Indonesia, in terms of the surfaces we really lack behind because the limited quality of the human capital, I just came back from India last week for the G-20. And I can see

like if you're talking about bangalore. Yeah, I would imagine correct me if I'm wrong, I'm not an expert about India, but Bangalore will not exist without Silicon Valley because so many Indus uh Indian diaspora in in Silicon Valley, they have the network, et cetera, Indonesia, we still not on that stage. So that is why in terms of this, you know, services sector, etcetera, I think the sort of like to be part of this the global supply chain of production network is rather different. Yeah,

so this will take some time. But one thing that is also important but I know this is very, very sensitive and controversial is about e-commerce. This is something that we probably have to look at in the future. Because if every country, yeah in the world try to sort of like do restrict the data flows, et cetera, then maybe the growth on the digital technology will be relatively limited. This is not unique to Indonesia or other or other countries doing

the same thing as well. So there are a couple of issues that we have to look at it. Yeah, especially on the before I forgot on the digital technology. One thing that I'm concerned time are related to the recent development is also the possibility of the two internet of things probably in the future, there will be a China system and the US system. So we are entering the era of what I call the Pano nationalism. And this one is perhaps more difficult than the trade

war because it is justified by the economic security. Let me give an example about supply chain in terms of this infantry method. We understand about what we call just

in time. I won't be surprised that a couple of years from now, most of the country will no longer adopt the just in time, but just in case because they need to anticipate if there is a disruption, global change, disruption, geopolitical tension, et cetera, this will make the cost production costs much more expensive than what we had before.

Um So what's your assessment of Indonesia's digital journey if you will both at the private sector level, as well as the public sector level, I would

So in terms of this capability, the market size, the potential, I would say that Indonesia is perhaps one of the most potential countries in in ASEAN. I understand country like Singapore, they cannot afford not to have Indonesia as the market, right? So if you look at if you're talking about many peer to peer lending, fintech company, if you're talking about right? Healing, if you're talking about e commerce like it or not,

you have to look at the market for Indonesia. The potential is there my concern now and this is related to the issue that I uh response before I I I I I raised before 2012 or 20. Yeah, 2008-2022, we were living in the fast normal world when the interest rate was very low. I'm not sure timer that from 2022 onwards, The Fed Fund rate will return back to 0.25. So perhaps the normal rate will be around, I don't know, 3, 3.5%. Under this kind of situation, the cost of fund will

become much more expensive than before. So the PC, they cannot afford to continue with their strategy only focusing on growth like GM fee, GT, fee loan to disbursement, et cetera. Unless the startup companies including in Indonesia, you know, change their business model into path to profitability. Otherwise they will be in a difficult situation. And this is not unique for Indonesia Also for other digital company. That's the first one, the

second one about the digital issue. I'm not too worried so much about the so called the industrial 4.0. I am concerned about government 4.0. The reason behind it is the product cycle because the disruption is getting shorter and shorter. If you are, if you were in the position of the policy makers, can you imagine you make a regulation will only last for six months and after that, there will be a new disruption will be very difficult for the government anywhere in the world.

So under this kind of situation, the ideally what we need is an agile bureaucracy, but agile bureaucracy is an oxymoron, there is no way bureaucracy can be agile under this kind of situation. What we need is to change the mindset, especially from the regulator perspective, from agree on rules to agree on principle. Without that some innovations in many countries including Indonesia, you know, will be difficult to develop.

Um Then you would expect that everyone will focus on the election after that. Then people will wait. I don't know whether it is only one round or two rounds after that. People have to wait who will be ministers on the cabinet. So I don't think there will be a major decision will be made After that, the Echelon one on its line ministries will wait after their minister is being appointed, whether they will stay in their position or not. So the downside is the major decision perhaps from September

2024 until December, sorry, the September 2023 until December 2024. Probably, you know, we won't see the major or significant reform. Yeah, and that's not only unique for this year. Also happened back in 2014. Similar things also happened in 2000 2004. So for the investors, you know, probably they have to wait. So that is why many investors take the position of wait and see because this kind of situation. But let me talk now about the upside. If you look at the data six months before the

election consumption in Indonesia jumped significantly. Why is that? Because all the politicians spend money for election? Yeah, let me give an example. This is just some illustration. I don't know whether this figure is still valid or not. Back on 2014, there were about 750,000 ballots for each political party. They need to nominate someone as a witness, you know, to stay in the ballot from the morning until evening, right? So they got of of course you need to fit them with meal.

So let's start with the Nasi Padang 30,000 yeah per meal. So three times you are talking about 200,000 multiply by 750,000 ballots. You are talking about 75 billion rupiah money per day per one witness. At least political party should come with the three people. If you multiply by 10 people, you are talking about two point something trillion already. So as a lot of money will be spent on t shirt on banner traveling. One thing that I cannot answer is where does the money come from?

Yeah, it will be very sensitive to her response to that question. The other thing is so that is why if you look at the data consumption boom. So six months from now, you will see there's a lot of demand, strong demand come from the you know the society. So that is why I'm not too worried so much about the economic growth for this year. The other thing is let me put this way, usually two years after the election, every president will become a normal president.

What I mean by normal presidents is during campaign, you can promise everything but once you are in power, then you will see your budget is limited. Your tax ratio is limited, then you become realistic. Most of the presidential candidates before they become a president, they criticize the decision to adjust the fuel price. But all of them once they are in power, the first policy that they did adjust to the fuel price.

So my point is whoever becomes a president by 2024, they will be very realistic Because the fiscal space is limited, the budget is limited. 2nd point because there are many, you know, the the uh uh customers of the D Bs and D BS Bank is, is a foreign banks. Let me talk with the number. Bear with me a little bit A timer. The Indonesian incremental capital output ratio is about 6.5 now. So 1% economic growth will require investment over

GDP 6.5. So if Indonesia like said, want to achieve the income per capita about 10,000 by 2030, we need to grow by 6% per annum. So if you want to grow by 6%. It means that you need investment over GDP six multiply by 6.5. You are talking about 39% investment over GDP. Our domestic savings now is 35%. So there is a saving investment gap which is reflected in the current-account deficit.

About four market will not accept this unless you finance this current account deficit by the F D I or you mobilize saving by boosting economic growth or you do economic deregulation to lower The incremental capital output ratio. So my point is whoever becomes a president by 2024, he or she needs to provide the job needs to provide jobs, then he or she will be open to the foreign investor will be open to the streamlining regulation, economic deregulation, etc

to improve productivity and need to boost economic growth. So I'm not too worried so much about, you know, the result of the election. The difference is me but the leadership style and gimmick because if you're talking about I megawati administration by S B Y administration, by Jokowi administration, if you're talking about, you know, the big idea, more or less the same talking about job creation, poverty, infrastructure.

The difference is about the leadership and deliverable but but I don't think there will be a radical change in terms of this economic policy,

which also means that investors will be more discriminatory. Borrowers will have a little harder time in the very near term. Do you think the actions taken by the FED and the FDIC are sufficient to stop a systemic risk from spreading worldwide?

JP Morgan if I'm not mistaken. Yeah, it shows about the loan to deposit ratio and the characteristic the diversification. So we probably need to look at, you know, some of other banks as well about the quality. But so far timer, I would say that I think the fed and also the FDIC I read Secretary Yellen's statement in financial Times a couple of days ago that she would not guarantee, put the blanket guarantee, at least at this moment can help to sort of

like to calm the market. Of course, there will be a sort of like a turbulence but hopefully not. But again, I have to say that it's too early to judge at this moment

financial channel. Yeah. So looking at this, of course, the risk is there. But I would say that let me talk about because my knowledge is mostly Indonesia. I think the exposure of the Indonesian banks or the insurance, the non bank financial institution related to what happened in the US is relatively small. So I'm not too worried so much about it, but

the cost of fund will become very expensive. And from the Bang Indonesia side, the inflation in Indonesia after September may come down to less than 4% because the base effect of the last year fuel price high, but maybe bank Indonesia don't have doesn't have much room to lower the interest rate now. Yeah. So under this kind of situation, the cost of fund will be relatively high and this may have an implication. I think the big banks, big banks in Indonesia are

relatively ok. I'm not too worried so much. My concern is related to the small banks because there will be a flight to quality. Then this will trigger a sort of like a price war from the small banks which is raising the interest rate. But back to your question again, I think related to that, The, the, the, the government, it's better to do a sort of like a front loading. The good news is

the fiscal deficit for 2023 is projected maximum 2.8%. So the need for the sort of like a financing perhaps will be relatively limited

we are running a current-account surplus. The second one is even though the energy and commodity price decline but still remains high compared to 2021. If you're talking to people who are in the coal business, you know, their, their profit increased by quadruple because the price of coal increased four times maybe. So in terms of the terms of the Air Indonesia will be benefited from that. And then the downstream industry like Palo explained in his presentation.

So I won't see, I'm not too worried so much with this current account deficit, especially when the economy will slow down under this kind of situation, the pressure to Ruia will be relatively limited. I cannot make a prediction, but I don't think it will go to around 17,000. I don't think so. Maybe the will be between 5000,

500 to about 6000. If you look at the non delivery forward 12 months from now around this level, you know, maybe the situation will not be as bad as during the taper tantrum when when I was at the M O F at the time.

I don't know because their present has been here for many years, but at the same time, we need us as well. We we definitely need to sort of like to, to uh support from the US to balance the position in Southeast Asia, especially related to the South China Sea. Yeah. So on the geopolitical tension, still a lot of uncertainty. But let me put some, You know, the the bright spot that possible may come.

I recall back on 2012 timer when I was a chairman of the investment board, there was a natural disaster, a flood in Thailand if you recall at that time, and Toyota, their production base in their production base for Southeast Asia at that time was only in Thailand. So I went to Japan to meet the CEO of Toyota. I convince him to invest Indonesia, not because Indonesia is doing great, but you need to diversify your risks. And for that reason, Toyota expand $3.7 billion in Indonesia. Back on 2012.

The similar analogy, I do believe that many investors now they learn from the pandemic, they learn from the geopolitical tension. They need to diversify their source of this supply chain as well. This will push some of the companies to reallocate the investment to many countries in Southeast Asia. And I don't think Vietnam, you know, is big enough to absorb all of them. So some of the investment will go to Malaysia, will go to Singapore to Indonesia. So I would see a

lot of potentials related to that. The second one with the US China geopolitical tension, they need somehow the back door to enter the US market. So I believe that some Asian countries including Indonesia, you know, can be a potential, can be sort of like an opportunity for them, provide that we improve the investment climate. And let me be honest and frank with you.

When I was at the investment board, I told my colleague in the cabinet, one of the reasons of why many Indonesians become religious is because they have to deal with the government. You know, because if you apply something, then you never know whether your permit will be approved by the government. The only thing that you could do is only pray to God, right? So that is why I do really expect by this omnibus law, we can streamline the regulation,

et cetera. Last but not least I know as said, you know, Indonesia is not perfect, so many problems. But as a former chairman of the investment board, let me give a sort of like a disclaimer. Investing in Indonesia is very dangerous because it is addictive.

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