Transcript
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Speaker: Hello and welcome to Under the Banyan Tree, where we put Asian markets in economics and context.
Speaker: My name is Fred Newman, Chief Asia Economist at HSBC.
Speaker: And my co-host Harold van der Linde is still on the road, but that doesn't stop us from covering ASEAN markets in depth.
Speaker: In fact, today on the show, we'll talk about Indonesia, one of the largest economies in Asia.
Speaker: We'll be talking elections, policy, natural resources, all of that with our Chief Economist for Indonesia, Pranjul Bhandari.
Speaker: So without further ado, let's get the conversation started right here under the Banyan tree.
Speaker: So a few key facts on Indonesia, just to set the context.
Speaker: A very populous country, over 270 million Indonesians spread over 17,000 islands across five time zones.
Speaker: The economy is the 16th largest in the world, growing robustly, fueled by natural resources, EV battery investment and much, much more.
Speaker: Now we're here to discuss all of this with Pranjal Bhandari.
Speaker: So Pranjal, welcome back.
Speaker: I gather you're actually traveling at the moment.
Speaker: You're in a hotel room in Mumbai.
Speaker: Yes, I am.
Speaker: And I'm very excited to join this podcast.
Speaker: Well, it was wonderful to have you.
Speaker: And of course, you've done outstanding analysis on the Indonesian economy, one of the two major economies that you cover here in Asia.
Speaker: And I wanted to ask you to begin really with the presidential election that's coming up.
Speaker: This feels almost the end of an era because, of course, Indonesia had actually a president for the last 10 years who was very popular and
Speaker: Jokowi Dodo or known as Jokowi and now he can't run for another term so we have an open election.
Speaker: Can you give us a sort of sense of the field at the moment going into the elections?
Speaker: Yes indeed so the national elections will be held on the 14th of February.
Speaker: Right now there are three candidates who are running for the presidential post.
Speaker: There's Probovo, there is Ganjar and there is Anis.
Speaker: Interestingly, Probovo's running mate is President Jacobi's son, Gibran.
Speaker: And at this point, the pair, Probovo and Gibran, are actually leading the polls.
Speaker: The problem is that the winning candidate must have at least 50% of the votes.
Speaker: And at this point, Probovo has about 48% of votes.
Speaker: He's come a long way.
Speaker: He was 38% of votes a couple of months ago.
Speaker: So he's come a long way, but still shy of the 50% number.
Speaker: But if you take away the undecided votes, then he's about 51.
Speaker: So it's a touch and go.
Speaker: If we get a president who gets 50% this year, all is good.
Speaker: If not, then there'll be a rerun of elections in June.
Speaker: So it could actually be then a lengthy campaign season.
Speaker: If we do get the rerun, then I guess campaigning continues.
Speaker: But you mentioned something interesting, and that is that the leading candidate Prabowo's vice presidential candidate is actually the president's son, that is Jokowi's son.
Speaker: Does that imply then continuity of policy if he were elected?
Speaker: And
Speaker: And what are some of the big achievements of the Jokowi era that you under those circumstances would expect to continue?
Speaker: Yeah, so, you know, we've had these presidential debates going on for the last couple of months.
Speaker: And I think a couple of things have come out in terms of what ProBogo is batting for.
Speaker: There could be a few changes, for instance, in tax policy.
Speaker: He wants a new tax office reporting directly to him.
Speaker: He wants to modernize defense so we could see slightly higher fiscal expenditure.
Speaker: He also wants to give more subsidies, food, fertilizer, fuel, as well as more social welfare spending.
Speaker: So I think all of this means that
Speaker: The fiscal deficit could be a little higher.
Speaker: It also means that perhaps current account deficit and inflation could be a little higher than target.
Speaker: But my sense is it's not anything that would derail the economy.
Speaker: There's much more exports of processed metals.
Speaker: So I think the trade deficit will remain under control.
Speaker: And then the expenditure and the fiscal deficit has been quite low for the last couple of years.
Speaker: So even if it increases a little bit, it's increasing from a low base.
Speaker: So overall, I think Indonesia continues to remain a good story.
Speaker: Now, you mentioned some of the transformation of Indonesia in the last few years, and that is the processing of natural resources.
Speaker: Can you expand a little bit on this?
Speaker: I think the big story is really nickel and the nickel processing, for example, where exports have shot up and really made...
Speaker: Indonesia almost the powerhouse of global nickel, if you will.
Speaker: What have they done to achieve that status?
Speaker: And why is that so important nowadays?
Speaker: And what does it mean for the economy?
Speaker: So Indonesia has the world's largest nickel reserves.
Speaker: For the longest time, they were just exporting the raw mineral.
Speaker: But now the raw mineral exports have been banned and they have to process nickel in order to export and sell it abroad.
Speaker: And what they've done is really ramped up on things like stainless steel and exporting a lot more processed metals.
Speaker: But it's not just that.
Speaker: They're also trying to make a big foray into the EV ecosystem.
Speaker: Nickel is an important ingredient of EV batteries.
Speaker: So they're trying to get into EV batteries.
Speaker: And eventually, they're also hoping to make the full EV car and export them.
Speaker: So really going up the value chain in manufacturing.
Speaker: Interestingly, we've already seen about $30 billion of FDI come into the process metal space.
Speaker: And our sense is there's $30 billion more waiting on the sidelines.
Speaker: When we look at the EV space, we find about $45 billion of FDIs waiting on the sidelines.
Speaker: And my sense is a lot of that will start coming in after the elections.
Speaker: So you mentioned EV, supply chain, is obviously very positive for the energy transition agenda, for climate change.
Speaker: You know, really Indonesia is tapping into this particular trend, supplying potentially batteries to regional car makers, Chinese car makers, of course, being very, very prominent in this area.
Speaker: But where does energy transition domestically come in for Indonesia?
Speaker: Because it's been traditionally reliant on coal, for example, enormously polluting in terms of energy generation.
Speaker: Do you see any movements for Indonesia to move more towards green energy domestically, apart from the EV story, which is very positive?
Speaker: What else is happening there?
Speaker: Yeah, that's a great question.
Speaker: If you just look at the EV story and the processed metal story,
Speaker: our sense is that Indonesia's ability to grow in the next five years could be much higher, as in potential growth could rise from 5.3% to 5.8%, which is very interesting because it's an emerging economy where potential growth in the next decade will be higher than the kind of growth we got in the last decade.
Speaker: But there are a couple of risks to the story, as you mentioned, and one of them is Indonesia's carbon footprint.
Speaker: Now, processing nickel,
Speaker: can have a very large carbon footprint and eventually you need to move more towards renewables or have better technology that actually reduces the carbon footprint of processing.
Speaker: And I think those are areas where Indonesia really has to move very quickly if it really wants to be a big exporter of EV batteries or EV cars.
Speaker: I think the second challenge that Indonesia is facing
Speaker: is a competing metal, lithium.
Speaker: You can also make EV batteries using either nickel or lithium.
Speaker: And right now, lithium seems to be the one which is more in demand for many reasons.
Speaker: One of them being it can be cheaper.
Speaker: But my sense is that nickel story could also pick up in a couple of years, especially because nickel batteries can be more long lasting.
Speaker: But yet, Indonesia has to grapple with the fact that there are competing metals out there.
Speaker: These are some of the challenges in the entire story.
Speaker: So some challenges, but obviously also promising developments.
Speaker: I want to zoom out a little bit away from the EV sector, nickel mining, because sometimes it feels Indonesia's story is kind of just seen through that lens.
Speaker: But it's obviously a very large economy, a huge domestic consumer market.
Speaker: Tell us a little bit about some of the other sectors that are exciting in Indonesia.
Speaker: First of all, largest economy in Southeast Asia, how many consumers are we talking about?
Speaker: How attractive a market is this?
Speaker: And what are some of the other growth areas that you're seeing?
Speaker: Yeah, I think, you know, like India, Indonesia has, you know, very strong consumer demand, given its large population.
Speaker: It's probably the most populous Asian economy after China and India.
Speaker: And then what happens with that is, you know, even if the global environment is
Speaker: a little tricky and trade is a little weak, you have this strong domestic demand that can keep growth going.
Speaker: And I think that's one of the reasons why Indonesia, like India, remained an attractive market over the last couple of years, even when global trade was going up and down.
Speaker: And I think that's to Indonesia's strength.
Speaker: In the past, whenever Indonesia used to grow rapidly,
Speaker: It used to hit the ceiling of all kinds of things like inflation and the twin deficits.
Speaker: But after 10 years of very careful planning and lots of important steps, I think Indonesia's capacity to grow while still keeping macro stability intact has also risen to a large extent.
Speaker: So it has a little bit of everything.
Speaker: It has domestic demand.
Speaker: It has external demand for nickel and everything that we explained.
Speaker: And then it also has macro stability.
Speaker: So growth can continue for longer.
Speaker: So that really, you paint a picture of an economy that has been transformed over the last 10 years because some of the old bugbears that we had in Indonesia, high inflation, volatile exchange rate, lack of domestic investment, those are really something that has stabilized, has improved under the
Speaker: previous administration.
Speaker: So that brings us back then to the politics.
Speaker: This is a key, key change in presidential leadership.
Speaker: And of course, with that comes the risk that some of these anchors may not be attended to.
Speaker: enough to push that story forward.
Speaker: But it sounds like you're relatively positive that we really carry on with this Indonesia story.
Speaker: And I believe you also hinted at the fact that we might see faster growth.
Speaker: And one of the few economies where we increased really the trend growth forecast over the coming years.
Speaker: Give us a sense of where do you think growth will land if we kind of continue with these relatively steady policies that we've seen in recent years.
Speaker: Yeah, my sense is that Indonesia's potential growth, its ability to grow without creating inflation is about 5.3% right now.
Speaker: And it could rise by about 50 basis points to about 5.8% over the next five to six years.
Speaker: And I think that's quite an incredible story.
Speaker: As in not in too many countries around the world, we're seeing potential growth actually rise.
Speaker: And I think all of this is coming from the new sectors of processed metals, manufacturing, EVs,
Speaker: for which there's a lot of global demand at this point.
Speaker: So I think that is to Indonesia's strength.
Speaker: Are there some risks that would worry you as you look ahead?
Speaker: It's a very positive story, of course.
Speaker: What are some of the key risks that you would highlight to this?
Speaker: Something that maybe investors and Indonesia watchers will need to pay attention to, to make sure that those risks don't come to pass.
Speaker: Yeah, commodity prices.
Speaker: Indonesia still remains a big exporter of coal and palm oil.
Speaker: And if prices crash there, that hurts their export revenues.
Speaker: That's one.
Speaker: The other, my sense is, you know, global volatility.
Speaker: You know, we've seen whatever's happened over the last couple of years and the monetary policy in Indonesia had to remain very tight to ensure Indonesia's macro stability remains intact.
Speaker: Then there's climate change.
Speaker: We're seeing rains becoming much more erratic, which can be a problem for agricultural production.
Speaker: around the world.
Speaker: We've seen the El Nino in 2023.
Speaker: So these are some of the risks which Indonesia and I would say any emerging market is facing these days.
Speaker: Yeah, you sum it up nicely, I think, not just Indonesia, but other economies certainly facing very common challenges these days.
Speaker: And I'm glad you mentioned climate change, because I think that is, of course, sort of a quiet risk that we often don't pay enough attention to.
Speaker: But it's certainly very powerful impact.
Speaker: The current capital, Jakarta, obviously being faced with climate change.
Speaker: rising seas and that requires enormous investment to protect Jakarta, which would detract from investment in other areas, for example.
Speaker: So I think Indonesia fits that category very well of a climate-vulnerable economy, ultimately.
Speaker: Pranj, I want to thank you for this.
Speaker: We're going to, of course, watch the elections very, very closely.
Speaker: And I think we might bring you back in the coming months just to give us a sense of how the elections planned out and what really the trajectory is for Indonesia going forward.
Speaker: So thank you very much for joining us.
Speaker: And I know it's early in Mumbai.
Speaker: So all the more thank you for taking the time.
Speaker: Thank you for having me.
Speaker: Great to be here.
Speaker: Well, ladies and gentlemen, this is a wrap for today.
Speaker: Thanks to Pranjal Bhandari for enlightening us on the Indonesian economy.
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Speaker: And of course, check out our sister podcast, The Macro Reef.
Speaker: We'll be back again next week, putting Asian markets and economics in context.
Speaker: Until then, take care.
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