Indonesia’s central bank governor, Perry Warjiyo, predicts a bright future for the country on the back of solid monetary policies. He talks to Kimberley Long about plans to build on this with digitised payments and further infrastructure expenditure. 

Perry Warjiyo

Perry Warjiyo

Indonesia is enjoying a period of economic stability. In April 2019, president Joko Widodo was re-elected for a second term on a polling day that saw the ballots open to 192 million eligible voters. The win, with about 55% of the votes, has granted the government another five years to enact an economic policy to grow Indonesia’s gross domestic product (GDP). 

The government has also laid the groundwork for Indonesia to expand its export economy, overseeing significant investment in infrastructure with the construction of airports, seaports and toll roads. One notable project has been the opening of the Jakarta Mass Rapid Transit in March 2019 – a significant step for a city that suffers notorious traffic problems. 

Indonesia’s GDP growth has remained a stable 5% over the past five years and, while this is a respectable rate of growth within Asia, the government has ambitions to increase this during Mr Widodo’s second term. 

Supportive policies 

The goal is to trigger economic growth using a number of policies to boost lending. In July 2019, the central bank cut its benchmark interest rate for the first time in two years, reducing the seven-day reverse repo rate to 5.75%, a 25 basis points (bps) reduction from the previous 6% rate. 

“The central bank’s target is for 3.5% inflation this year,” says Mr Warjiyo. “The latest forecast is lower than that level, offering us some room for a more accommodative monetary policy.” The central bank aims to increase bank lending by between 10% and 12% in the coming year to boost the economy, and is open to freeing up more liquidity to ensure ample financing is available. 

“There is strong support for economic growth, and there is an expected 5% to 5.4% GDP growth [in 2019],” says Mr Warjiyo. “Last year saw the start of our supportive economic growth policy, which saw an injection of liquidity into banking to boost lending. The central bank has adopted a more accommodative monetary policy, with a further injection of liquidity from lowering reserve requirements by 50bps. The move will inject an additional Rp25,000bn [$1.75bn] in liquidity.” 

Better rating 

So far these reforms have paid off. Rating agency Standard and Poor’s (S&P) has upgraded the country to BBB, in an encouraging move for potential investors; the rating is in line with those of Fitch and Moody’s. In its assessment, S&P noted Indonesia’s relatively low levels of debt and strong economic growth compared with its peers in the same income bracket. 

“We are very happy to have the upgrading. It is a testament to what we have been doing, and a vote of confidence in Indonesia,” says Mr Warjiyo. “It will help to continue the economic [prosperity] of Indonesia, and demonstrates the maintained stability and sound policy response from the central bank, and the fiscal reform from the government.” 

S&P also notes the continuation of these trends with the re-election of Mr Widodo, and estimates the fiscal deficit will continue at about 2%, and net general government debt will remain below 30% of GDP. The current account deficit is forecast to decline in an improved trade climate. 

This is good news for a country looking to draw in foreign investment. At present, Indonesia is ranked 73rd globally for ease of doing business by the World Bank. It plans to climb up the rankings by introducing changes such as tax holidays across 18 industries, ultimately attracting the foreign finance necessary to complete an ambitious $400bn infrastructure programme announced at the beginning of 2019. 

S&P has, however, highlighted possible headwinds. For example the government’s debt is prone to foreign exchange risk, with about 40% of its total debt denominated in foreign currencies. A shift in the composition of governmental borrowing may help reduce this in the coming years. 

Mobile payments  

Indonesia’s next step is to modernise its payments system to bring it in line with its Asian neighbours, by employing the same kinds of mobile and digital solutions as found elsewhere on the continent. These aims are outlined by the launch of Indonesia’s Payment System 2025 (IPS 2025) Visions, which consist of five initiatives.

Mr Warjiyo says: “In May 2019 we saw the launch of IPS 2025. The central bank’s ultimate objective is to support the fast-growing digital finance sector in Indonesia. It will also help to support greater levels of financial inclusion.” 

Indonesia’s population size, and a geography that includes 17,000 islands, makes traditional banking both incredibly difficult and often prohibitively expensive for many of its rural inhabitants. One solution has been the rise of mobile payments, and following the regional trend towards mobile payments via QR codes, Indonesia initiated its QR Indonesia Standard (QRIS). Through the QRIS, users from one payment platform will be able to transfer funds to a secondary payment platform.

By adopting the standard, Indonesia hopes to help more of its 65 million small and medium-sized enterprises (SMEs) adopt cashless transactions – SMEs have lagged in their uptake of cards for payments as card readers are costly. The central bank has forecast that the adoption of the new payments system will help to push GDP growth above the 5% seen in recent years. 

“QRIS has been developed in line with the global EMV [Europay, Mastercard, Visa] standard, and can differentiate between a domestic and cross-border transaction,” says Mr Warjiyo. “Retail payments will also be boosted as clearing systems are moving to 24/7 payments. In due course we will also look to wholesale payments as part of the real-time gross settlement system.” 

Digital economy 

Indonesia’s digital economy could make the country one of Asia’s growth stories in the next few years. A report from McKinsey estimates its total online commerce market will be worth up to $65bn by 2022, and the industry will support up to 26 million full-time jobs, representing 20% of Indonesia’s total workforce. 

Mr Warjiyo says IPS 2025 will create a new ecosystem with greater integration between the e-commerce, fintech and bank end-to-end systems. The emergence of open application programming interface (API) technology has been embraced as part of this overhaul by the central bank, to facilitate greater connectivity between the country’s banks.

“The central bank is talking to 50 large banks about adopting open APIs,” says Mr Warjiyo. “A greater use of open banking and fintech will be a good step. It will help to avoid the risk of shadow banking, support the digital economy and strengthen the link between banking and fintechs.” 

Taking a forward-thinking stance on the development of the digital economy does not mean the market will be without scrutiny; as with its financial controls, Indonesia will keep a tight rein on the emerging companies. “We want to take the development approach and not the regulatory approach to change,” says Mr Warjiyo. “There needs to be a balance between fast-growing innovation and the need for greater customer protection. Cybersecurity is taken very seriously.” 

The government has shown it is serious: as of August 2019, Indonesia had closed down 826 illegal fintech start-ups. The Financial Services Authority has taken a dim view of fintechs operating without a licence, and has enlisted the police to track down illicit businesses. Such unregulated start-ups often provide loans with high interest rates to consumers in the country. 

As Indonesia seeks to encourage consumer confidence in mobile technology to boost the broader economy, the creation of a safe environment – especially for those entering the formal financial sector for the first time – will be high on the agenda. 


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