Global Risks

KOMPAS/HERU SRI KUMORO

A. Prasetyantoko

The failure of financial institutions and financial asset bubbles are two problems that could have enormous implications globally. These concerns are highlighted in the Global Risks Report 2018 published by the World Economic Forum. In addition to the economy, global risks are also triggered by political and environmental problems, which are likely to occur and the scale of their impact will even be greater.

Overall, although the future will be more prosperous and sophisticated, the world will be increasingly at risk. This is a situation the next generation will face.

Even though there are signs of improvement, the economic growth of the United States is not real because it is supported by incorrect policies. At least, these are the conclusions of economists, including Ben Bernanke, the former chairman of US Federal Reserve (the Fed). President Donald Trump has signed a US$1.5 trillion corporate tax reduction and corporate tax policy and added $300 billion in federal spending. As a result, the 2018 fiscal deficit will be more than $800 billion.

Bernanke cynically likened Trump’s policy to a Looney Tunes cartoon episode in which antagonist Wile E. Coyote falls off a cliff. According to Bernanke, by 2020, the US economy will start experiencing problems. Will the US economy be on the brink of a cliff in 2020? No one knows for sure. Clearly, in the short term, the Fed\'s benchmark interest rate is expected to rise further as inflation increases by about 2 percent due to the aggressive fiscal stimulus.

As a result of the monetary tightening policy, our economy has been affected. The rupiah weakened sharply, passing Rp 14,000 per US dollar, and the Jakarta Composite Index (JCI) fell below 6,000. The newly appointed Bank Indonesia (BI) governor, Perry Warjiyo, acted quickly by raising the benchmark interest rate for a second time in two weeks to 4.75 percent. The rupiah strengthened and the JCI rose. If the Fed further raises its benchmark rate during Idul Fitri later this week, the rate hike will have the potential to cause turmoil. In anticipation, BI is ready to raise its benchmark interest rate again.

Why are we so vulnerable? Of course, it is nothing new. We identified the vulnerability of our economy a long time ago. The World Bank’s Indonesian Economic Quarterly review of June 2018 highlights the fundamental issues of our economy. The revision of the government’s growth target from 5.4 percent to 5.2 percent in 2018 indicates the condition of its fundamentals. Our economy lacks the nutrition to grow.

In the first quarter of 2018, economic growth of 5.1 percent was mainly supported by rising commodity prices in global markets. Investment grew 7.9 percent, the highest over the last five years, driven by increased purchases of machinery and vehicles due to rising commodity prices. As a consequence, imports soared and the trade deficit became a problem. Our dependence on imported raw materials is still relatively high so that an increase in investment, in line with economic growth, will weigh on the trade balance.

Another problem is our dependence on foreign capital. About 40 percent of government bondholders are foreign investors, meaning that the Fed rate hike triggers foreign capital outflows , resulting in a deficit in the balance of payments. In the first quarter of 2018, the deficit reached 1.5 percent of gross domestic product (GDP), the first deficit in two years.

The long-term problems of relying on imported raw materials and foreign capital are worth noting. To overcome the dependence on raw materials, the government should promote an intermediate industry. After the infrastructure development program has been realized, it will be time to develop a good industrial (manufacturing) base. Economic competitiveness and industrialization are the pillars of programs that have begun to be carried out in a systematic way.

Financial inclusion

How to solve the second problem, namely dependence on foreign capital? Dependence on foreign capital must be addressed by encouraging the expansion of the financial sector through financial inclusion. If expansion of the financial sector remains limited to the diversification of financial products, it will not change the economic landscape. Conversely, financial inclusion is the structural answer. Unfortunately, there is a lack of attention to the program, making progress slow.

In 2011, only 20 percent of the population had access to the financial sector. It rose to 36 percent in 2014. In 2019, it is targeted that 75 percent of the population will have access to financing from formal institutions. How to achieve the target?

The Financial Services Authority (OJK) has introduced  a branchless bank program to encourage access to financing in remote areas. However, its progress is relatively slow and the impact has been insignificant. While BI, which focus on the payment system, does not touch the layer of   people who have difficulty accessing financial services.

The implementation of financial inclusion on a larger scale appears very sectoral, especially after the OJK was established and took over some of BI\'s duties. For the time being, access to financial services through telecommunication technology has not been well developed. Financial inclusion programs still rely on banking roles. On the other hand, financial technology (fintech) startups  are very involved in providing financial services.  This has the potential to increase financial inclusion.

One example that is considered successful in utilizing technology in expanding access to finance is M-Pesa in Kenya. Within two years, the private company managed to serve 8.5 million people or 20 percent of the total population of Kenya and 40 percent of the adult population.

M-Pesa is a mobile-based money transfer system established in 2007 by Vodafone, a private telecommunications company based in France, and local partners of Safaricom.

There are several things that can be learned in this. First, the initiative was that of the private sector, which can take advantage of the opportunity to ensure sustainability. However, certainly, the role of the government is also important, both in providing a regulation that facilitates some unclosed schemes of pure business approaches. Second, businesses based on telecommunications, not on banks, look more promising. Today, M-Pesa is challenged by the emergence of many fintech startups.

Given this experience, it seems the government needs to fix things quickly and find an unusual approach to resolving the extraordinary issue of financial inclusion. BI, the OJK, and  the Communication and Information Ministry need to sit together to formulate a policy framework involving private actors, especially if we want to encourage telecommunication companies to play a bigger role than banks.

One of the best ways to tame global turmoil is to make our financial sector more integrated. To achieve this requires great policy and hard work, in addition to discipline and consistency.

A. Prasetyantoko, Economist at Atma Jaya Catholic University