On April 13th, our Leadership Speaker Series featured a presentation and open Q&A session with M. Chatib Basri, Indonesia Minister of Finance 2013-2014 and Donald Wihardja, Partner at ACV, along with participation from Roderick Purwana, Managing Partner of SMDV, and ACV Partners Pandu Sjahrir, Michael Soerijadji, and Adrian Li.
This session focused on the latest insights and expectations on the economic impact of COVID-19, particularly in the banking and multi-finance sector in Indonesia.
Here are our key takeaways:
We have seen the number of COVID-19 cases escalate rapidly in Indonesia. Indonesia has ~4.5K total cases, with 48% of cases concentrated in DKI Jakarta, as of April 13th. The Centre of Mathematical Modelling of Infectious Disease predicts that there are 70K undetected cases on March 24th. On March 20th, Oxford Clinical Research Unit forecasts that Indonesia may reach 71K cases by end of April. According to Badan Intelijen Negara, Indonesia will reach its peak of COVID-19 cases on May 2020.
The Indonesian government has implemented changes to mitigate COVID-19, however, these initiatives will likely have a severe impact on businesses. The rapid increase in cases has resulted in several changes such as travel restrictions, extreme social distancing, rapid testing, and postponement of credit repayment; and these changes have in tern led to severe outcomes for business. Retail sales have already decreased significantly, and will continue to decrease, potentially by as much as 30-60% in 2020 from the previous year. Lebaran, which typically results in an increase in monthly revenue for many businesses by 1.5-2.0x, will likely not provide any significant increase to baseline monthly revenue. Due to this fall in consumer demand and revenue, we will likely witness further layoffs for staff, as companies fail to cover their expenses. On the banking side, financial institutions are estimated a 30-50% decrease in lending collection.
Despite the challenges, some sectors are experiencing growth, due to COVID-19. Although we have seen reductions in top-line for sectors such as travel, ride- sharing, and retail F&B, there are some sectors that have grown because of COVID- 19. Given businesses and schools have been forced to work and study from home, EduTech platforms have increased their revenue by ~70%. Video-streaming and gaming have also increased their engagement by ~60%, as a result of people staying at home and maintaining social distance. Medicine and food delivery have also experienced rapid growth, increasing by roughly 60%.
Many tech enabled companies have helped other businesses maintain “business as usual”. eCommerce platforms and marketplaces have allowed SMEs to continue to have a market and audience to sell to, facilitated by eLogistics and digital payment platform that reduce the need to leave home to purchase goods, or pay with cash. By the end of 2019, eLogistics were facilitating ~5M in parcel deliveries a day. In 2019, eMoney transactions reached US$10.4B, and in February 2020 alone, eMoney transaction were already at US$2.2B. FinTech lenders also help support businesses, by providing lending capital for financial support. As of February 2020, FinTech lenders had US$1B in loans outstanding. Despite providing the right kind of support for the current times, these tech companies are not yet profitable, and therefore would significantly benefit from continued government support.
From a FinTech perspective, the impact of COVID-19 varies depending on sector. On the lending side, OJK has anticipated that non-performing loans (NPL) will increase to 17% for banks. Banks have already experienced a 30-50% reduction in lending collections, however due to the current market conditions, more SMEs and consumers will likely require new or extended credit lines and capital bridging to improve their working capital position. Institutional and P2P lenders will be able to provide this form of finance, however they are encouraged to take caution and monitor their NPLs and loan collections. The payments segment of FinTech has so far seen a significant increase in activity due to the growth in eCommerce transactions, and this will likely further facilitate education and future adoption of eWallet payments. Payments for bills via online platforms have also increased by ~30%, as individuals can no longer use offline payment agents and mitras to pay facilitate bill payments. On the investing facet of FinTech, we estimate significant growth, due to new users looking for new avenues for financial returns, leveraging on market volatility. For insurance, this timing provides a good opportunity to sell health insurance, and bundle other insurance, whilst staying wary of the risks.
Tech companies are doing their part in supporting Indonesia during this challenging time. From helping distribute essential items to consumers, to delivering test kids, to providing lending capital to SMEs and consumers, we are proud to see Indonesia’s ecosystem of tech-enabled platforms playing an active role in mitigating the health, social and economic impact of COVID-19.
Although the government is playing a proactive role in containing the pandemic, Indonesia is not fully ready. Like many other countries, Indonesia ‘s infrastructure is under-developed if to fight a pandemic of this significance. Java has the highest number of hospitals and doctors, nonetheless, Java only has 1 hospital and 1 doctor per 1,000 individuals. This is why the government has to invest heavily to fund COVID-19 mitigation, which will go towards hospital and medical resources.
Unlike the global financial crisis, the impact of this Black Swan event has hit both demand and supply side. On the demand side, we’ve seen declines in travel, exports, retail sales, and overall purchasing power. However, we also experience a negative impact on the supply side, through local production cutbacks (as social distancing leads to factory closures) and disruptions in global supply chains (as China played a significant role in global production). During the 2008 crisis, Indonesia still maintained ~4.6% economic growth, as local production helped fuel production and consumption. The impact of both facets of the spectrum is what makes this crisis to unique, and far more challenging.
The likely impact on banking and market risk is that there is a high risk of default. The risk of default is high, as many companies will be unable to pay their debts due to worsening market conditions. As a result of this, NPLs will increase, which could then lead to banks and multifinance institutions putting a temporary halt on providing lending capital. If they instead choose not to maintain credit lines, businesses in Indonesia will collapse, leading to lay-offs and bankruptcy. The solution to this is that the banking sector should continue to take risks and provide credit lines, with the support of the government. Today, the banking sector is still healthy and liquid. The bigger issue at hand at the moment is the likelihood of a credit crunch. To facilitate this, Indonesia has launched an Emergency State Law (PERPPU), with articles on ideas of how they can support businesses.
There is no doubt that COVID-19 is responsible for this economic crisis, which is why mitigating COVID-19 should be the top priority. COVID-19 was the culprit of the global recession. A recent example is that the uncertainty resulted in foreigners selling Indonesian bonds and stocks, which lead to the depreciation of the Rupiah. MoF predicts a -0.4% – 0.25% GDP growth in Indonesia for 2020. Until the pandemic gets contained, the economic and financial sector will continue to be under pressure. Monetary and fiscal policies will help provide a foundation for the economy, but the pandemic must get contained first.
The government should focus its agenda towards containing the virus, as well as providing social protection. Notwithstanding that a vaccine needs to be made readily available in order to put COVID-19 behind us, for the time-being, the government should focus on flattening the curve of new COVID-19 cases in Indonesia. In order to do this successfully, social distancing is required, to keep people at home and stop the virus from spreading. In Indonesia, if people are to put work on hold and close their businesses, they need to be provided with a form of social protection. Whilst Indonesia’s social protection program is designed to protect the lowest income groups, it is not yet designed for low to middle income groups (e.g. UMKM, GoJek drivers, minimum wage workers).
The next focus area should be towards supporting local businesses. Today, companies are under financial pressure due to the decrease in consumer demand and supply chain disruptions. The government should work closely with financial institutions to facilitate the provision of lending capital and credit lines to businesses that are at risk of default. Another opportunity that arises in the light of COVID-19, is the potential for Indonesia to become a larger participant of global production. Focus for global production and import will likely shift towards Southeast Asia, as an alternative to importing from China.
Indonesia should stay open to receiving international support. Currently, the cap on budget deficit is set at 3%, with discussions of now increasing that figure to 5%, as of March 23. This would be ideal, as Indonesia will need resources from abroad to support COVID-19 mitigation plans. The goal should be to work with other countries to initiate support and to further facilitate foreign direct investment into Indonesia.
Here are some questions from our audience to our speakers and Q&A participants:
1. This crisis is not just a financial crisis like the global financial crisis in 2008. All the policies to boost liquidity by major central banks around the world is merely a relief effort to support the social safety net. What is the best way to re-start the economy with confidence, balancing between health vs economic vs the risk of a second COVID-19 attack?
As of now, that would depend on when the vaccine is made available in Indonesia, as this would be the final solution to the pandemic. While we wait for that, the government needs to focus on flattening the curve and getting the outbreak under control, which requires facilitation of social distancing. This will have a wide economic impact on people that rely on work and business to support their everyday lives, hence, the government should put in place strong social protection policies to facilitate social distancing, allowing people to stay at home. The order of focus should be: containing the virus and protecting health through social distancing, then providing social protection to facilitate it, and then continuing to support businesses going forward.
2. What is your view towards Indonesian stimulus package with regards to COVID-19? Is 2.5% of nation’s GDP sufficient? For instance, countries like Singapore and Australia have set aside 10% and 11% of GDP respectively for fiscal stimulus.
Yes – our stimulus package appears to be low in comparison to other markets such as Singapore and Australia. However, the issue is not about the magnitude or figure, but more around how we choose to allocate that funding amount. Once again, the government’s focus should be towards health, social protection, and supporting businesses at risk. Once these issues are covered, stimulus package funding can subsequently be increased to 5%, potentially 6%, depending on what the government can afford after considering inflation and other factors.
3. In your opinion, which country has mitigated the health and economic impact of COVID-19 successfully so far? What can we learn from them?
China and South Korea has managed to flatten the curve and reduce the number of new COVID-19 cases successfully. In terms of economic impact, most countries are still faced with economic challenges and are still in the process of implementing solutions.
4. Do you have any idea of what action OJK is taking to save the banking system?
At this stage, the banking sector appears to be liquid; perhaps small banks and lending institutions will struggle more. Indonesia’s emergency state law (PERPPU) has an article that mentions potentially supporting banks through consolidation.
Nonetheless, the most significant impact is on the non-financial sector, as they will struggle the most due to working capital challenges from demand and supply shocks. If banks become risk adverse due to volatility of market conditions and stop providing lending capital to businesses, then the economy will experience a credit crunch that will affect the non-financial sector the most.
5. Do you think that the tax relaxation can be provided to all or most industries? The latest regulation only covers certain sectors. Do these industries have to pay tax for last year’s profit, even though these industries currently have working capital challenges?
At this moment, it is still unclear, however we could expect tax relaxation extending to more sectors, and this will most likely still be for last year’s profit.
6. We know that government has issued the first batch of pandemic bonds and successfully raised an amount of funding. What’s your view on this as in whether a) the country is at liquidity risk, or b) this bond is issued as a liquidity reserve to stimulate national economy? What will be the impact to investors?
At the moment, there is a risk premium. Going forward, the risk premium will only be higher, especially in the next couple of months. Thus, issuing bonds at this point in time is an optimal solution. At the moment, our debt to GDP ratio is low, which means that the government is not at high risk or highly levered (even with a deficit of 5%). As long as growth is higher than our interest rates, then the debt to GDP will stay low.
7. For the non-financial sector, especially for SMEs (UMKM) that are receiving their loans from P2P fintech companies as opposed to conventional banks, what kind of regulation do you think the government should impose to continue lending activities? As many companies have started to experiences decreases in revenue and are now engaging in layoffs and shutdowns, what can the government do to ensure that they survive and pay back their loans?
The current expectation is that the bigger banks will not have a liquidity issue, but the smaller lenders such as multifinance and P2P lenders could experience liquidity challenges. As borrowers might not be able to pay their instalments, the government’s role should be to further support lenders, by working with lenders to help provide guarantees for their NPLs through subsidies that will enable risk- sharing. Ideally, the Central Bank could help support smaller financial institutions to help lower the cost of capital, in order to facilitate the provision of credit lines. As the lending capital is still provided by the P2P FinTech (or their lenders), the risk of moral hazard should be limited.
Here are some additional questions from our audience that we unfortunately didn’t have time to respond to during the session however we’d like to share our responses with you now:
1. Currently, the President has declared “Corona is Bencana Nasional”. If this means Force Majeur, we can expect to see impact to all industries in Indonesia. With the latest Government Bond, do you think that our government could overcome this pandemic?
Financially, we are in a good position to overcome this. Nonetheless, the priority falls on containing the virus first, before any fiscal/monetary policy can be effective.