State Budget Review: China’s Economic Policy, Digital Economy Could Benefit Indonesia

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JAKARTA (TheInsiderStories) – As President Joko Widodo looks to take the country’s economy to the next level, there two underlying global trends that the South East Asia’s largest economy can tap into.

First is the connectivity-based development policy, or in this case the China-backed belt and road initiative. Belt & Road Initiative, is an ambitious undertaking that seeks to put China at the centre of global economic activity through infrastructure projects like high-speed train, ports, highway and industrial estates.

Under President Widodo term office (2015-2019), infrastructure development plan will require US$450 billion, where state budget can cover only $135 billion, or roughly 30 percent of it. Unfortunately, state budget is not designed to include such creative financing, i.e grabbing potency from sharing economy.

In the 2018’s State budget that has been approved by parliament yesterday, government set Rp2,220.7 trillion ($163.5 billion) spending allocation –including Rp410.7 trillion ($30.2 billion) infrastructure spending–and Rp1,894.7 trillion ($139.5 billion) revenue target, where 85.4 percent of it, or Rp1,618,1 ($119.2 billion) will come from taxation.

During last Belt & Road Initiative Forum, Indonesia government indeed offers $28 billion worth of infrastructure projects like Kuala Tanjung and Sei Manke special economic zones, LRT in Palembang, Bitung international hub port and Pal Beach, Likupang, North Sulawesi.

But what China’s government offer in its Belt & Road Initiative mega project is way more than that as they want to connect Asia and Europe in a vast network of roads, railways, pipelines, airports, sea ports, transnational electrical grids and fiber optic lines of communication.

The initiative is catalyst for such extended creative financing. We might see Indonesia banking industry, collaborate with global lenders such as CDB, HSBC and Citi process financially complex deals that cross borders, currencies and cultures.

HSBC for example, already help China Communications Construction (CCC)’s $1 billion acquisition to Australian Engineer Contractor John Holland in 2015 and later helped to finance their first public-private partnership in Australia.

When the initiative get matured over time, some individual deals also might be joining China’s overarching pan-regional trade initiative. We might see mainland firm buys an Indonesian utility that constitute straightforward M&A, albeit led by corporate vassals of the Chinese state.

In Southeast Asia, the Belt part of the initiative comes into play in the field of high-speed rail. In July 2017, China’s railways operator secured its first major export order when Thailand approved a $5.5 billion high-speed service connecting southern China with Singapore.

A month later, Kuala Lumpur broke ground on a $13 billion rail project, built by China’s CCC, that will run from Malaysia’s eastern coast near its border with Thailand to its western coast on the Malacca Strait.

China also build Indonesian first High Speed Train Jakarta-Bandung through its joint company with Indonesia government PT Kereta Cepat Indonesia China. Still, in sharing economy era, no one can win the most.

China won’t have everything its way as Japan has signed deals to build high-speed rail lines in Thailand and India using its own Shinkansen bullet train technology and rumoured to be used in Indonesian’s Jakarta-Surabaya High Speed Train.

Digital Economy Boom

Second trend is the rise of digital economy, which in a country with a rising middle class and strong internet penetration like Indonesia offers an attractive possibility.

More straightforward M&A have been seen in recent China’s Alibaba and Tencent expansion in Indonesia market. Since government launch its 2017-2019 e-commerce roadmap (Presidential decreeNo.74/ 2017), the investment in the e-commerce sector has been widely open to foreigner.

Daniel Tumiwa, Supervisory Board Member of Indonesian e-commerce association (iDEA) welcoming the regulation and foreign investor to develop Indonesian e-commerce, as it can generate more multiplier effect on Indonesia economy.

“E-commerce roadmap that focuses on funding, taxation, consumer protection, is a good thing. And thanks its open for foreign investment whether its China, Saudi Arabia, Ukraine, Russia, doesn’t matter where investment come from as long as government regulate what they do (business activity) in Indonesia,” he told TheInsiderStories.

The losses, according to Tumiwa is domestic investor that seem didn’t appealed to invest in the sectors. “Softbank and Yahoo as Alibaba’s investor will win the most in Indonesia e-commerce market because there is no investment from domestic investors,” he added.

Tumiwa suggested government to be careful on things that might hurdles e-commerce development, like taxation. More developed country like U.S even act more soft about e-commerce taxation, and apply normal tax rate after 15 years of e-commerce development.

In addition, government should close loophole in so-called informal e-commerce activity that has been done through social media. It is important regarding currently there are about 112.6 million Indonesian are using internet and e-commerce transaction is expected to reach $130 billion in 2020 as the internet user increased

“Government should apply special income tax rate for e-commerce, like 0.2 percent or 0.5 percent for the next three or four year is okay so that the industry can be sustainable. I am afraid normal tax rate will lead to tax evasion through such informal e-commerce like whatsup, BBM, line, facebook and Instagram,” Tumiwa said.

Coordinating Minister of Economy Darmin Nasution admitted that fast growing digital economy activity make government un-sure to settle regulation, particularly in transition era of conventional business to technology based business.

“We need mature management and governance for both old player and new player in the industry. Even developed country like U.S still face unsettle regulation in digital business, we can learn from them how they deal with company like google, facebook etc. Yet every county need specific regulation and we can’t make generalization,” he said.

Writing by Yosi Winosa, Email: