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Indonesia's coming digital disruption
INDONESIA'S digital economy is set to boom, helping its overall economy expand from US$1 trillion in 2017 to US$2.7 trillion by 2027.
Over the next 10 years, we expect online retail in Indonesia to increase 14-fold from just US$4.4 billion in 2017 to US$63.2 billion, or 19 per cent of total retail sales versus 3 per cent currently.
To support this growth, as well as the rise in e-services such as ride hailing, travel bookings and food delivery, we expect an equally rapid adoption of e-money from just 2 per cent of nation-wide transactions in 2017 to 24 per cent by 2027.
We are also seeing the emergence of fintech solutions such as peer-to-peer lending targeting the 44 per cent of the population who do not have access to banking services today.
The building blocks for all this growth in digitalisation are already in place. Demographics are supportive, with half the population below the age of 30 and a rapidly growing middle class. And the people are tech savvy - Indonesia is home to the fourth largest number of Facebook users in the world, at 130 million; it has the third highest number of Twitter accounts at more than 24 million. Smartphones, a key access tool, are already in the hands of half the population; by 2027, we think, penetration rates will be close to 95 per cent. Connectivity is also improving with the rollout of the government's 36,000 km intra-island fibre network, the Palapa Ring Project.
The government's infrastructure push, including transportation links, is helping to address bottlenecks around logistics, complementing a move by ride-hailing companies into last-mile delivery services.
Bank Indonesia and the Indonesian Financial Services Authority OJK are cooperating on a fintech regulatory roadmap, and Bank Indonesia announced plans last December for a new payments gateway similar to Singapore's Nets or JCB in Japan.
What's more, the government's 14th Economic Reform Package, announced in 2016, is focused on e-commerce with the aim of helping Indonesia become South-east Asia's largest digital economy by 2020.
Capital is increasingly available to help fund startups. We have already seen the emergence of four domestically created "unicorns" with over US$10 billion of investments in the past two years alone.
Digitalisation is benefiting the overall economy as well. Near term, we expect it to prove disinflationary - the so called "Amazon Effect".
Our price comparison checks between online and offline show a 12-18 per cent gap in favour of online pricing.
Digitalisation may also create jobs on the lower end, as new types of services are offered in an on-demand economy - for example, the popular ride-hailing service Go-Jek already has over a million riders on its platform.
In the longer term, we see a positive impact on economic growth with the adoption of digitalisation likely spurring growth in capital stock as capital investment is undertaken and potentially comes with better productivity growth.
But, all this digitalisation also brings a real risk of disruption.
In retail, there will likely be a loss of wallet share for offline businesses; case studies from other markets show that department stores are typically most affected.
For banks, we see a risk to returns from higher funding costs as non-banking e-payment platforms, such as Go-Pay, OVO and TokoCash gain scale and stickiness with customers.
To date, Bank Indonesia has issued 27 money licences with only 12 held by banks; current regulations allow for maximum deposit float of two million rupiah (S$195.50) per unregistered user, rising to 10 million rupiah for a registered user.
Banks could also miss an opportunity to provide lending products to the currently unbanked portion of the population as fintechs look to address this segment.
In real estate, the longer-term disruption risk sits with shopping malls, we believe, though this will take time to materialise; in the meanwhile, we are continuing to see more money being invested in warehouses.
For equity markets, we think the outcome is bittersweet. The bitter is likely to be in the near term. We have long viewed the business environment in Indonesia as oligopolistic in nature, helping to support higher-than-average returns. In fact, at 17 per cent, MSCI Indonesia companies' returns on equity are among the highest in the world, making them ripe for disruption as digitalisation helps to break down competitive barriers to entry and disintermediate the middleman economy.
Longer term, we see the outcome as sweet. We believe digitalisation, along with the delivery of infrastructure projects, will drive sustained double-digit earnings growth for the market, helping to boost the overall market capitalisation of listed equities from US$500 billion in 2017 to US$1.5 trillion by 2027, raising its relevance for foreign investors.
We also cannot rule out the listing of high-growth, new economy companies, which could help transform the composition of the index over time.
- The writer is Asean equity strategist at Morgan Stanley