Market Update Bancassurance June 2021

Article / 22 June 2021

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New economy sector has become a hot topic of discussion in Indonesia stock market in line with the IPO plans for technology companies in Indonesia. What exactly is meant by new economy sectors?

Basically new economy sector is a new sector in an economy that has the potential to become new sources of economic growth due to technological developments or structural changes in demographics. Examples of new economy sectors may vary from country to country, depending on the conditions of the country. For example, in China, what is considered a new economy is sectors such as consumer goods, health services, education, and information technology, in accordance with structural changes in China's economy and demographics from a manufacturing-based economy to a service-based economy. Meanwhile in Indonesia new economy sector is associated with technology and commodity sectors for renewable energy. These two sectors are seen as sectors that can bring about great changes on Indonesia's business landscape because of the impact it can have on the structure of the economy and social.
The development of new economy can be a transformative period for economy. For example, in the 18th and 19th centuries, industrial revolution occurred along with technological developments such as the invention of steam engine, electrification, telephones, railroads, etc. that created new economy and increased the productivity of world economy. Industrial revolution brought wide changes both economically and socially. Economically, industrial revolution brought economic progress, create jobs, while socially changes also happened that drove urbanization trends and increased people's living standards. New economy sector today, especially in the field of information technology, is seen as a new industrial revolution that has the potential to bring a period of change and progress in economic productivity to a more advanced level like the previous industrial revolution. Therefore, this new economy sector gets attention from investors globally because of its revolutionary aspect that can create enormous potential.

How is Indonesia’s potential in this new economy sector?

Indonesia has advantages that can be the main capital in the development of new economy sector. In renewable energy sector, Indonesia has the potential to have an important role in global supply chains because we are the main producer of raw materials for renewable energy technologies, such as nickel, copper and bauxite. Both in terms of production quantity as well as the amount of reserves, Indonesia is a top producer for commodities that are used as raw materials for renewable energy technologies. For digital economy, we have a market that has great potential because of its large, young, and productive population, so that naturally Indonesia has its own attraction for various technology and start-up companies to invest and develop its business in Indonesia. So actually Indonesia has very strong capital to play a major role in the development of the economy sector in the future. If Indonesia can maximize its competitive advantage well, the new economy sector can become a strong driver of Indonesia's economic growth in the future. Research from Google and Temasek estimated that Indonesia's digital economy can grow 23% per year from USD44 billion in 2020 to USD124 billion in 2025, much higher than Indonesia's nominal GDP growth.

There is an opinion that the development of digital economy can hurt conventional industries and cause job loss. What is your opinion?

On the one side digital economy can pose challenges for conventional industry today. We have seen Covid-19 pandemic causes massive acceleration of digital service adoption. Google survey shows that there are 37% new users of digital services in Indonesia in 2020, with 93% of them intending to continue post-pandemic use. These data indicate that digital adoption is an inevitable trend. Conventional businesses must be able to adapt to changing consumer behavior to remain relevant and competitive. On the other hand, the positive thing is so far the progress in Indonesia is relatively good where many conventional industries are synergizing with technology companies to add value to each other. We also see conventional businesses start to develop their digital services such as what is happening banking sector.
Development of digitalization and automation can also cause disruption to the workforce. A research by McKinsey estimates digitization and automation will lead to 23 million jobs disrupted until 2030 in Indonesia. But this isn’t a problem for Indonesia alone, this is a global trend, about 15% of jobs (400 million workers) in the world is expected to be disrupted due to digitalization and automation. On the plus side, jobs that are affected can be replaced by the emergence of millions of new jobs. In Indonesia, until 2030 it is estimated that there will be 27 – 46 million new jobs created from various sectors due to economic advances from digitalization and automation. The challenge for Indonesia is to prepare human resource competencies in order to adapt to the new era.

What are the challenges for Indonesia in the development of digital economy?

Some challenges to watch out for:
• Internet access. Indonesia is ranked 57 out of 100 countries based on The Economist's 2020 Inclusive Internet Index rated on availability, price, and community readiness to access the internet. This issue mainly occurs to locations outside of big cities that struggle to get reliable internet access.
• Logistics. Indonesia is a large archipelagic country, so the logistics costs are relatively higher than other countries. World Bank's Logistics Performance Index places Indonesia is ranked 46th in the world, lower than other ASEAN countries such as Malaysia (41), Vietnam (39), Thailand (32), and Singapore (7).
• Consumer trust and cyber security. Acceleration of digital adoption also depends on consumer trust and data security. Risk of leaked consumer data can hinder the acceleration of digital adoption in Indonesia.
• Human resources. As discussed previously, the preparation of human resources competencies is an important key in dealing with changing industrial trends towards the digitalization era. Ministry of Communication and Information stated that there is a gap of 9 million digital workforce by 2030 between what is needed by the industry with the available manpower.

Let’s turn to the Indonesia stock market, how large is the technology sector stocks in Indonesia stock market?

In contrast to Indonesia's real economy where technology companies have developed, in the Indonesia stock market exposure to technology sector is still very low. Not many large technology companies have gone public in Indonesia market yet. The weight of technology sector in JCI is only about 0.8%, much less than that in the United States market, for example, which reaches 27% in the S&P 500 index, or 18% in the MSCI Asia Pacific index. This is also one of the factors why Indonesia stock market underperformed compared to regional stock markets in recent years, because global investor’s interest in technology sector is very high, so that investor’s funds to Asia flow into stock markets of countries with high exposure to technology sector such as China, Taiwan, and South Korea.

IPOs of several large Indonesian technology companies, how do you view the impact on the Indonesia stock market?

We view positively the IPO plan of several Indonesia technology stocks, because this can be a catalyst that attracts investors, both foreign and domestic, to re-enter the Indonesia stock market. With the huge potential of digital economy in Indonesia, the stocks of Indonesia technology companies will grab the attention of investors globally, especially after the share of foreign investors has decreased in recent years which has opened up the potential for foreign fund flows re-entered Indonesia stock market and had a positive impact on JCI performance. Not only for stock market, potential portfolio flows can also have positive impact on Indonesia's balance of payments ahead.

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