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Indonesia: Future FinTech giant?

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In the fate of the Citarum River, one might almost be tempted to spot an analogy for the strange predicament Indonesia finds itself in when it comes to economic and technological development.

On one hand, the 170 mile long river – a vital resource for some 25 million people – represents vast and immense potential. Like the Yellow River in ancient Chinese thought, it is a cradle of Indonesian civilisation, a gift from the gods to drive nourishment and prosperity.

Yet this potential has been, at best, unfulfilled and, at worst, terribly mismanaged. The poor handling of resources and poor planning has made the Citarum the most polluted river in the world, rendering it an ugly symbol of waste and poverty. The Citarum, rather than a source of sustenance and affluence, has become a threat to farmers and the agricultural industry; the military has been called in a salvage operation.

And herein lies the reality of modern Indonesia. Already the world’s fourth largest country by population, the world’s sixteenth largest economy, and a member of the G20, it is a vast nation of immense economic potential. Indonesia has already embraced new, innovative technologies related to FinTech and digital assets and is spearheading the digitalisation push in South-East Asia. Its young population is driving massive demand for e-commerce and financial technology, making it one of the largest markets in the world for these products and services. Yet, at the same time, millions of adults in the country are not formally banked and have little access to lending. In many ways, it is a highly advanced economy that nonetheless has many of the characteristics of a third-world country.

Serious economic frailties remain, which are stunting Indonesian growth. Reported problems include slower economic growth compared to Asian rivals, large pressures on the state budget, and a widening deficit. Contrary to the rest of the world, finance minister Sri Mulyani Indramati has indicated that too little inflation could be a cause for concern. The Indonesian Rupiah remains vulnerable on foreign exchange markets, and has plunged as much as 15% in short periods of time. The country, which depends on foreign tourism to a significant extent, has been badly affected by the Covid-19 pandemic. Indeed, the World Bank argues that it went from upper-middle income status to lower-middle as a result of Covid restrictions. A record-low poverty rate of 9.2% in September 2019 could not be sustained; the rate had increased to 10.4% by March 2021. Government bonds offer the highest real yield in Asian emerging markets – currently at about 3.5% when adjusted for 2022-predicted inflation – which might seem attractive, but also could reflect the greater degree of risk that investors are taking on.

Yet it would be a mistake to characterise Indonesia as nothing more than a backward, impoverished country. Even by emerging market standards the situation is hardly disastrous; after all, in 2021, the MSCI Indonesia Index grew by 2.63% same time at the same time as the EM Index posted a loss of -2.22%. While conditions do remain bleak for some, the economy is also highly advanced in many cases. One area in which this is true is crypto. Despite the National Ulema Council branding crypto haram, owing to the elements of uncertainty and wagering that surround crypto trading, the Indonesian government has been generally supportive of digital assets. Indeed, while they are banned from being used as currencies, they are traded alongside commodity futures. The result is that 7.4 million Indonesians had invested in crypto by July 2021, a number that has doubled since 2020. Crypto transactions have surged to $33 billion and Bank Indonesia is looking at developing a CBDC. The authorities are aiming to set up a crypto-focused domestic exchange by the end of 2022. The world’s largest cryptoexchange, Binance, is currently working with PT Bank Central Asia and PT Telekom Indonesia to establish an exchange in the country. The United Arab Emirates and Bahrain have demonstrated that crypto innovation can be encouraged in Islamic countries, so might the world’s largest Muslim country follow? It could even be the case that Indonesia’s sizeable unbanked population jump straight to digital forms of finance, skipping over the kind of financial structures which we have used in the West.

It is certainly the case that we are seeing an increasing sophistication in Indonesian tech companies. A prime example of this is the IPO of Jakarta-based tech firm GoTo. This company is a merger of the country’s two most valuable startups, and is currently being advised by Goldman Sachs and Citigroup as it prepares to list on the Indonesia Stock Exchange. In a recent fundraising round the company raised $1.3 billion, with investors including the Abu Dhabi Investment Authority, Temasek, Tencent and Google. We are seeing some of the world’s largest private and public wealth funds flood into the Indonesian market as they seek to take advantage of the country’s rapidly expanding digital economy. August 2021 saw the first unicorn – PT Bukalapak – list on the Indonesian stock market. Again, the question must be asked: could Indonesia, fuelled by the increasing amounts of international capital pouring into its high-quality tech giants, be suddenly propelled to a state of Seoul-like tech sophistication? VC firm Singapore Golden Gate Ventures seems to think so: they are pouring $120 million into Indonesian fintechs and tech startups, and has previously backed (now proven) companies like Klinik Pintar. Partly because of such investment activity, the digital economy is set to double to $146 billion in 2025. Another Indonesia fintech giant has expected annual revenues of $619 million and is considering a SPAC merger in the US:

Of course, much work will still be needed to ensure Indonesia fulfils this potential. Developments this month – with the government banning shipments of coal in a bid to secure supply for domestic power production – are a reminder of economic vulnerabilities. But what cannot be questioned is that the ambition is there. Indeed, one reason for the export ban on coal is that the Indonesian government is seeking to take on China in the electric vehicles industry. China gets 84% of its ferronickel, a key material for making EV batteries, from Indonesia. In restricting China’s access to this material, Indonesia is pushing up prices for a competitor and is trying to prove it is more than a raw materials supplier. Through protectionism, the government is trying to encourage manufacturing to stay in the country and to position Indonesia as a hub for EVs, and the technology of the future. Indeed, back in September the government announced that an electric vehicles battery factory, jointly owned by Korean giants Hyundai and LG Energy, would begin operations in May 2022. Could we see Indonesia emerge as a rival to economic powerhouses like China in building the tech hubs of the future?

Despite the hurdles that remain in the path of Indonesian development, it is clear that there are reasons to get excited about the country’s future. It is very possible that Indonesia’s innovative fintechs and tech firms – benefiting from increasingly large amounts of international cash – will provide many of the solutions required to alleviate conditions in the Asian state. In turn, this could propel Indonesia to a state of advancement and sophistication, in Jakarta and across the country, that currently seems distant.

Author: Harry Clynch

#Indonesia #Asia #FinTech #DigitalAssets #Digitilisation #Ecommerce #IndonesianRupiah #GovernmentBonds #Inflation #EmergingMarkets #Crypto #CommodityFutures #BankIndonesia #CBDCs #Jakarta #GoTo #GoldmanSachs #Citigroup #IndonesiaStockExchange #IPOs #VentureCapital #StartUps #SPACs

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