TEMPO.CO, Jakarta - The chairman of the Financial Services Authority (OJK), Muliaman Hadad, 56, is optimistic about the coming year. He believes Indonesia will greet the coming year with growth exceeding the 5.2 percent target set by the government. "We can do it if we harness domestic potential optimally and continue with our reforms and transformation programs to enable investment," said Muliaman.
His views do not reflect those of global economic leaders who met at the annual conference of the World Bank and International Monetary Fund (IMF) in Washington, DC recently, at which Muliaman himself attended. Participants at the meeting proclaimed that the world economy was growing exceedingly slow, taking far too long to recover and benefitted only a handful of people. They concluded that the weakening of the global economy which began in 2014, had yet to recover in the coming year.
But Indonesia, according to Muliaman, has a special weapon to fight the downward trend: its domestic economy. He believes that the steps taken by the government of President Joko Widodo in slashing onerous regional regulations and licenses has spurred domestic growth. As a consequence, Indonesia stands in a much better position among other emerging markets, including Brazil, Argentina and Turkey. "But this needs to be maintained throughout 2017," exhorted Muliaman.
Tempo reporter Reza Maulana spoke to the OJK chairman last week when the two shared a ride to an event in South Jakarta. This interview was merged with a separate discussion between Muliaman and Tempo reporters Agus Supriyanto and Faiz Nashrillah, two weeks ago. Excerpts:
How do you see Indonesia's economic performance next year?
The year 2017 will remain a difficult period, because there are still no significant signs that the global economy is on the mend. Our challenge next year will be to continue optimizing the domestic economic potential. What is essentially needed, particularly by the financial industry, is to empower financial institutions in Indonesia, such as banks, financial companies or other such entities, to really optimize and support the effort to increase domestic economic activities.
A number of facilities, initiatives and simplifications have been carried out and we will keep on doing it. Banks, for example, must be more innovative in seeking sources of funding and in designing financial products in line with people's needs. That goes for the stock market, especially those dealing in investments, because although the global economy has not improved as we had hoped, our own economy has performed quite well, compared to other emerging markets.
Which countries do you compare us with?
Compared to Brazil, Turkey, Argentina and others, we are in a much better position, making us still an investment destination country among the emerging markets. That's why we can hope that our economic growth in 2017 will be higher than in 2016. The government has predicted next year's growth to be 5.2 percent, but I say it will be higher than that.
It's difficult to put in figures, but it can be higher than 5.2 percent. But this depends on whether we can optimize and harness the domestic potential, and continue with the various reforms and transformation we have been carrying out to facilitate investment.
Is that where the government is heading?
We have taken the right steps. When Pak Jokowi began his administration, the economy was going downwards. We faced a slowdown in demand and in exports. So, right from the start, the President and Vice-President tried to figure out ways to raise the domestic economic potential, like cutting back the number of regional regulations which have been of little use, and instead, facilitated the process for issuing licenses. This needs to be continued through 2017, given that global economy has yet to recover significantly. China still has problems and the same goes for Japan and Europe. This is why our plan to empower the domestic economy must be prioritized.
So, we're relying on the domestic sector?
It will be our strength. Hence the 13 packages (economic policies) which have been issued. Their (essential) substance is how to improve the investment climate. I see the tax amnesty not as an isolated (program) but part of the government's response to the weak global economic growth. So, we're on the right track.
Together with Finance Minister Sri Mulyani and Bank Indonesia Governor Agus Martowardojo, I have just returned from the annual meeting of the World Bank and the IMF in Washington, DC. What caught the world leaders' attention is the exceedingly low global economic growth which has been going on for too long and which only seems to benefit a handful of people, and the gap is widening. So financial inclusion is one answer. It's one attempt to resolve the disparity, to provide better access to financial services, so people can take part in the economy. The government is promoting financial inclusiveness as an important part of the agenda. In other words, the government is stressing on the right issues.
Has the impact of the economic packages been felt yet?
Yes, in phases. It might be felt more in the regions. Infrastructure projects in the regions are really moving the economy there. Their capacities may be limited, but they can improve when export-import gets going.
How do you plan to push that financial inclusiveness?
The problem so far has been the difficult access to financing, especially by the small and micro businesses. If access is made easier, that will help in empowering the domestic economy. There are more than 50 million micro, small and medium enterprises (SMEs) in Indonesia, operated by about 90 percent of our domestic economic players. So, if we're able to resolve this problem, they can re-energize the economy.
Is that what the OJK is doing through its Laku Pandai program?
In Indonesia, there are 104,000 Laku Pandai (an acronym for virtual or officeless financial services) agencies or entities. They work alongside 18 banks, banks in general or the Buku 3 (banks with capitalization of Rp5-30 trillion) and Buku 4 (banks with capitalization over Rp40 trillion) banks. Even banks with lower capitalization can work together with fintech companies. We want as many agents as possible working on it, to make it more effective. I am pushing for Laku Pandai and agents of digital financial services to be harmonized in one technology system. I don't want to have agents having two computers.
What would be an effective way to manage funds from the tax amnesty program?
One important phase of the continuing tax amnesty program is to monitor incoming funds, in particular repatriated funds. According to the law, those funds must remain in Indonesia for at least three years. Aside from the monitoring aspect, the challenge will be to allocate them in productive projects. We will plan them for this year and the next, especially to ensure that funds coming in through banks will be monitored. Because the fund owners don't want to invest their money only in bonds but also in the real sector. The OJK will find out more about simpler and effective mechanisms, to motivate bigger repatriation of funds. According to the latest figures, repatriated funds total Rp163 trillion.
What happens if all that money just stays in the country?
If the money stays in the country for at least three years, that's good for the economy. We hope it can be longer. If the money goes into the real sector, it will continue to circulate. If it goes into the capital market, there wouldn't be any problem either, because in the financial market there are many investment choices with attractive returns. So, hopefully, the funds will remain longer, not just parking it temporarily, but to find something attractive to invest it in.
Will the amount of the repatriated funds affect interest rates?
Very much so. At least, liquidity will be helped and when that happens, we can control interest rates better.
So, interest rate projections for next year can be as low as Bank Indonesia's 7-day Repo Rate, which today stands at the 5 percent level?
We always want lower interest rates. The single digit interest rate has been met. This means a positive environment, especially since inflation has been kept low. Overall, liquidity is good, so with such a situation, we hope interest rates next year can be lower. (*)
Read the full interview in this week's edition of Tempo English Magazine