Indonesia’s Economic Outlook Amid US Interest Rate Shifts Posted on 14 August 202327 October 2023 by Indah Ramadhanti As Indonesia stands at the crossroads of economic dynamism and global financial interplay, the imminent shifts in US interest rates cast a substantial shadow of anticipation. The intricate interplay between Indonesia’s economic landscape and the fluctuations in US interest rates has become a topic of keen interest and intense scrutiny. This article will delve into Indonesia’s economic outlook within the context of these impending US interest rate changes. By exploring the potential ramifications, challenges, and opportunities that lie ahead, we aim to shed light on the path that Indonesia’s economy may traverse in the wake of these significant global financial shifts. US interest rates hiked the highest in 22 years In July 2023, the US Federal Reserve (The Fed) implemented another increment of 25 basis points, elevating its benchmark interest rates to a range spanning from 5.25% to 5.55%. According to Forbes’s report, this move by the Fed brings the interest rates to their highest since February 2001, marking the highest level in the last 22 years. The decision to implement this policy is driven by the ongoing need for the US to combat inflation. However, in June, annual US inflation increased at its slowest pace in over two years, accompanied by diminishing underlying price pressures. This trend could bring the Federal Reserve closer to concluding its most rapid interest rate hiking cycle since the 1980s. How do the US interest rates impact the global economy? The US wields significant influence over global financial markets. The Fed’s decision to change interest rates could have economic consequences beyond its borders. According to the World Bank, the rapid implementation of tighter monetary policy in the US will have a pronounced effect on emerging markets and developing economies, commonly referred to as EMDEs. The concern over EMDEs EMDEs with financial vulnerabilities and macroeconomic imbalances may be particularly exposed to the economic and financial challenges of US interest rate hikes. Moreover, following a series of bank failures this spring, turbulence in the US financial system could also threaten EMDEs. The strain on the US banking sector, which has led to a slower-than-expected path of interest rate adjustments, could result in reduced exports and disruptions in financial markets, impacting their growth prospects. Since late 2021, many EMDEs have experienced difficulties accessing the market and face an increased risk of default. With the potential economic risk, the question remains on how the hike of US interest rate can affect Indonesia. US interest rates’ effect on Indonesia The Fed’s increase in the US interest rate could influence Indonesia’s central bank (Bank Indonesia) to raise its benchmark interest rate. However, if the rupiah remains stable, Bank Indonesia will likely maintain its current interest rate. Furthermore, the Fed’s interest rate increase can impact investments in Indonesia, as reflected in the value of the Indonesian rupiah. Foreign investors will hold US dollars as their main currency, leading to an appreciation of the dollar and a decline in the rupiah’s value. Yet, the impact of the US interest rate hike on the Indonesian bond and stock markets is relatively insignificant for the time being. This anticipation stems from the fact that the Indonesian market has already factored in two rate hikes by the Federal Reserve in the second half of 2023. The subsequent increment, predicted for September, is projected to be a 25 basis points elevation. This aligns with Bank Indonesia’s prediction of a US interest rate hike in September. This prediction finds support in the most recent United States Gross Domestic Product (GDP) data, revealing a growth of 2.4% in the second quarter of 2023. This figure surpasses the previous quarter’s 2% and the anticipated 1.8%. While the US interest rate can affect Indonesia’s macro economy, businesses should also examine how the interest rate increase affects business operations. Read more: Can Indonesia Overcome Stagnant Foreign Direct Investment? Business risks from interest rates hike The increase in interest rate can present businesses with advantages and disadvantages, as described below comparison: Disadvantages for business The rise in interest rates can bring about a range of drawbacks for businesses, including: 1. Difficulty in servicing debt When interest rates rise, a company may experience a reduced capacity to service its debt, as it incurs higher costs without a corresponding revenue increase to balance them. 2. Stagnant growth When interest rates increase, businesses frequently experience slower growth rates due to challenges in accessing loans and the elevated costs associated with borrowing. Read more: Addressing Business Challenges in the Indonesian Market Advantages for business While the hike of interest rate, in general, can affect the overall cost of doing business, some types of business may reap advantages instead, with the following circumstances: 1. Business-owning floats As interest rates rise, banks and institutions also witness a rise in interest income. Consequently, having a giant float can result in higher returns when interest rates increase. 2. Those with negative working capital Businesses with negative working capital usually gain from rising interest rates because the excess cash on their balance sheet starts earning a return. This gives these businesses more resources for internal investments and other operational goals. 3. Company with good cash flow Companies experiencing positive cash flow have the potential to gain from increasing interest rates as they can use their surplus funds to invest in higher-yielding securities. Effective business strategy during rising interest rate [elementor-template id=”229205″] Amid the increasing trend of interest rates, companies should consider the right strategy to ensure business stability and stay ahead of the curve. 1. Evaluate current loan rates Variable-rate loans can quickly adjust in response to market rate increases, posing a risk to the available cash flow. It is prudent to take action to avoid potential costs that could impact a company’s financial stability. 2. Refinancing debt To enhance the business’s financial standing, consider refinancing or consolidating high-interest debts, including loans expected to face rate hikes. 3. Finance before a higher rate increase If your business aims to find new financing, it might be best to act promptly before the rates continue to rise. 4. Reduce expenses To mitigate the financial impact of the rate hike on your business, contemplate implementing cost-cutting measures. Explore opportunities to reduce expenses related to supplies and production, thus maintaining a better financial balance. Conclusion To conclude, the ripple effects of the US interest rate hike extend across the global economy, impacting nations like Indonesia. Within this complex scenario, businesses face a dual prospect of challenges and opportunities. Amidst the backdrop of economic unpredictability, prioritizing the stability of your business takes center stage. InCorp Indonesia emerges as a valuable ally, offering a reliable resource to turn to by providing an extensive range of financial & operational resilience services alongside specialized accounting solutions. By engaging with InCorp Indonesia’s expertise, you can fortify your business in advance against the unpredictable tides of the economy, safeguarding its operational continuity and financial prosperity. Don’t hesitate to contact our consultants by filling out the form below.
Can Indonesia Overcome Stagnant Foreign Direct Investment? Posted on 1 August 202322 August 2023 by Indah Ramadhanti Foreign Direct Investment (FDI) has long been a crucial driver of economic growth and development in Indonesia. However, in recent times, the nation has faced the challenge of stagnant FDI levels, prompting concerns among policymakers and economic analysts alike. This article discusses factors contributing to the fluctuation of FDI growth and how FDI can affect Indonesia’s development. By analyzing the factors contributing to the stagnation and examining potential solutions, we aim to shed light on the importance of revitalizing FDI for Indonesia’s sustainable economic prosperity. The current FDI situation in Indonesia The World Bank predicts a slowdown in Indonesia’s economy in 2023, partly due to a decrease in foreign direct investment. It shows a stagnant contribution to the country’s gross domestic product (GDP) compared to pre-pandemic levels. According to the recent Indonesia Economic Prospects (IEP) report by the World Bank, net FDI is projected to rise to 1.3% GDP in 2023, an increase from 1.1% in the previous year. However, this figure remains below the 1.8% GDP recorded in 2019. This disparity raises pertinent questions about the underlying factors affecting FDI inflows and their impact on Indonesia’s economic trajectory. Read more: 8 Potential Cities for Foreign Direct Investment in Indonesia The factors contributing to the stagnation of FDI Several factors contribute to the stagnation of FDI, and isolating individual elements is challenging due to numerous variables. Those factors are highlighted below points: 1. High wage rates The higher the wage rates in a particular country, the smaller likelihood for investors to inject their funds into outsourcing labor-intensive production and vice versa. 2. Lack of skilled labor While a country might offer low to medium wage rates, the lack of skilled labor may make investors reluctant to start their business in a particular country. 3. High tax rates Countries with high tax rates tend to be less favorable for investors because they can reduce business profitability and returns on investment. 4. Inadequate transport and infrastructure Investors prefer countries with advanced transportation and infrastructure to ensure a smooth shipping process within the country. 5. Poor economic outlook Countries with pessimistic economic outlooks are less desirable for investors to start their businesses. On the contrary, a positive economic outlook can attract investment by instilling confidence in investors about the potential for growth and profitability. 6. Political instability An unstable political climate introduces uncertainties for businesses and investors, causing them to adopt a cautious “wait and see” approach in their investment decisions. This approach can result in slow progress in implementing investment plans. 7. Lack of key commodities Essential commodities such as nickel, palm oil, or bauxite are critical in attracting FDI. The absence of high-demand commodities makes a country less visible to investors. 8. Fluctuated exchange rate The volatility of exchange rates has the potential to deter investment. On the other hand, a depreciated exchange rate in the host country can incentivize more significant FDI as it lowers the cost for multinational corporations to acquire assets. 9. Limited track record in a specific sector Foreign companies are frequently drawn to invest in sectors that have already attracted FDI. Conversely, countries with limited experience or a proven track record in specific investment areas may need help attracting new investment. 10. Minimum access to the free trade area Limited access to non-free-tariffs barriers might be a consideration for businesses to hold their investment decisions in a particular country. Read more: Indonesia Embraces US Investment Opportunities Strategies for overcoming the FDI stagnation [elementor-template id=”229205″] An Organization for Economic Co-operation and Development (OECD) report in 2010 stated that FDI in Indonesia has played a significant role in raising employment and productivity and generating exports. Other than economic impacts, FDI has the potential to contribute to social and environmental objectives, which might include the following: 1. Enhancing domestic productivity Foreign companies bring added value and job opportunities, directly contributing to domestic productivity. They can also positively impact productivity by transferring knowledge and expertise to local companies. 2. Promoting local labor The arrival of foreign investments or foreign investors’ acquisition of domestic companies can lead to changes in local labor demand, affecting employment levels, wages, and the composition of the workforce, such as gender balance and skill requirements. 3. Financing renewable infrastructure With favorable market conditions, FDI can finance renewable infrastructure and contribute to reducing emissions. Foreign companies also play a significant role in disseminating renewable energy technologies across borders. Conclusion With the potential to extend far beyond the economic sphere, Foreign Direct Investment (FDI) presents enticing business prospects for actively contributing to Indonesia’s development goals. Businesses emerge as crucial allies in the government’s pursuit of growth and progress. Nonetheless, a cautious Indonesia FDI outlook, influencing the nation’s economic slowdown, may also impact the business landscape. Skillfully navigating these economic uncertainties can help businesses stay ahead of the curve, overcoming challenges. InCorp Indonesia stands ready to provide financial and operational resilience, offering accounting services to ensure sustainable business growth despite domestic economic obstacles. Fill out the form to contact our consultants for expert guidance in navigating your business through economic uncertainty.
The Role of Digital Transformation in ASEAN’s Economy Posted on 3 April 20234 April 2023 by Indah Ramadhanti Digital transformation has become a hot topic in recent years, particularly in the business world, and the ASEAN economic landscape is no exception. It raises a question, how digital transformation in Asean looks like now? The COVID-19 pandemic has compelled numerous industries to adopt digital initiatives to stay afloat. Moreover, it has accelerated the shift towards digitalization, highlighting digital transformation’s crucial role in enabling businesses to grow and remain sustainable. In this article, we will delve into the state of digital transformation in the ASEAN economic landscape, examining the obstacles businesses encounter and the opportunities that await them. ASEAN Economic Landscape and Digital Transformation On numerous occasions, Indonesia has expressed intentions of strengthening its digital economy through collaborations with foreign companies. The focus was on leveraging technology to increase productivity, create jobs and enhance trade relations between countries. Indonesia’s upcoming ASEAN 2023 chairmanship is also integral to supporting the goal of digital transformation. The desired deliverables of this chairmanship are sustainability, digitalization, facilitation of e-commerce, and strengthening the roles of small and medium-sized enterprises in ASEAN. The COVID-19 pandemic has pushed the ASEAN region closer to achieving its development objectives and spurring the adoption of digital initiatives. As a result, the region has integrated the Fourth Industrial Revolution into its recovery strategy. The strategy comes as the Consolidated Strategy of the Fourth Industrial Revolution for ASEAN to help build a digital community across the three pillars and maximize the benefits of this digital transformation. ASEAN Secretary-General Dato Lim Jock Hoi emphasized the importance of ASCC’s role in harnessing the opportunities of digital transformation to support regional recovery and improve people’s lives. The ASEAN Comprehensive Recovery Framework (ACRF) and the Ha Noi Declaration on the ASEAN Community’s Post-2025 Vision have recognized that inclusive digital transformation is necessary to create social and economic opportunities for people and reduce social disparity. Therefore, ASEAN must adapt to this new era promptly. Read more: ASEAN’s Plans to Implement an Online Payment Gateway The Digital Transformation in Indonesia’s Economic Development Indonesia, as the only Southeast Asian country in the G20, championed the digital transformation agenda during its G20 presidency in 2022, focusing on digital economy issues and post-pandemic recovery. As Indonesia transitions from the G20 presidency to the ASEAN chairmanship in 2023, it has a unique opportunity to push for international cooperation in digitalization. During its ASEAN chairmanship, Indonesia can push for policy convergence in digital trade, improve digital literacy and skills for vulnerable groups, and reduce unnecessary regulatory burdens in labor mobility to support the region’s dynamic digital economy. Indonesia should lead ASEAN with a bolder digital transformation agenda amidst concerns about the upcoming “tech winter.” “Tech winter” refers to a potential downturn in the technology industry, similar to the dot-com bust in the early 2000s. In addition, there are concerns that the current valuations of tech companies are inflated and unsustainable, leading to a potential market correction. Indonesia’s role in leading a bolder digital transformation agenda in ASEAN becomes even more crucial amidst these concerns. By prioritizing policy convergence in digital trade, improving digital literacy and skills for SMEs and vulnerable groups, and reducing regulatory burdens in labor mobility, Indonesia can help pave the way for a more inclusive, empowering, and sustainable digital economy in the region. Given that the technology sector has played a crucial role in propelling economic growth in Southeast Asia, it is especially significant to acknowledge that the pandemic has hastened the move towards digitalization in various aspects of life. By focusing on these critical policy goals, Indonesia can help ensure that the region’s digital economy is well-positioned to weather potential challenges and continue to drive growth and digital innovation in the future. The Challenges of Digital Transformation in Indonesia Digital transformation initiatives can be complex and challenging, and the benefits of digital transformation may only sometimes be apparent. Implementing technology and digital strategies requires a clear vision and a willingness to embrace change. Organizations may need to adjust their expectations to achieve their desired outcomes. Some of the challenges are: 1. Global Digital Divide Many developing countries need help achieving the same technological development level as more economically developed countries. Despite having a technologically savvy population, Indonesia needs a more substantial ICT infrastructure to catch up with technological advancement. 2. Cybersecurity Threats The widespread adoption of new technologies and increasing reliance on digital technologies raises concerns about privacy, security, and potential misuse or abuse. Indonesian people must improve their personal data protection awareness, as they risk falling victim to cyberattacks and digital crime. 3. IT Talent Shortage The demand for IT professionals is exceeding the available supply worldwide, and IT job functions revolve around ensuring an organization’s technology systems and processes are both practical and efficient. How to Successfully Implement Strategies for Digital Transformation in Indonesia 1. A Comprehensive Digital Transformation Plan The process should encompass an in-depth examination of the organization’s current procedures, pinpointing areas suitable for digitization, and prioritizing endeavors based on their feasibility and impact. 2. Build A Solid Digital Infrastructure It involves investing in robust digital networks and infrastructure to ensure businesses and individuals can access high-speed internet, cloud computing, and other digital technologies. 3. Partnerships and Collaborations Collaboration between the government, private sector, and academia can help accelerate digital transformation by providing access to resources, knowledge, and expertise. Conclusion Organizations can expect to undergo digital transformation in the coming years by adhering to the steps above. However, to achieve this, it is essential for businesses first to identify and overcome any obstacles they may encounter. In some cases, businesses may require assistance, and InCorp Indonesia (formerly Cekindo) provides one-stop business licensing and process outsourcing services to help them do so. In conclusion, considering Indonesia’s chairmanship for ASEAN in 2023, it presents the best opportunity for businesses to embark on digital transformation.