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How millennials can help Indonesia's financial market

Tamma Febrian
Tamma Febrian

Associate director at Fitch Ratings Singapore

Singapore | Wed, September 6, 2017 | 09:26 am
How millennials can help Indonesia's financial market

Those who invest in the financial markets are actually helping the country develop its severely underdeveloped capital market. (Shutterstock/*)

Many of us millennials think we require a substantial degree of power and status to effect meaningful change.

While having a certain status certainly helps, you really don’t need to be a president or CEO to make a meaningful contribution to social progress. Remember the phrase “It’s the little things that count”? Well, the same applies here.  

Here’s how you can start:

Save your money

Let’s start off with saving our money. Based on the latest CEIC data, Indonesia’s gross savings rate stood at around 34.6 percent of its GDP as of June 2017. This number also includes savings of private Indonesian companies, the government and our older colleagues at work.

A more realistic rate for millennials would probably hover around 5-15 percent of our income. Before we start patting ourselves on the back, we have to be mindful that conventional wisdom requires a 20 percent rate, which means we are still short-handed.

So, calculate your average savings rate, and if you haven’t saved enough, well, save more!

Read also: Millenials spend more on coffee than saving for retirement: Survey

Beware of inflation

Now you already have money saved up, but the battle is not won.

Saving in itself is actually not productive if it is not invested well, since for every rupiah you deposit in a current account with a bank you are actually losing money. The culprit behind this is the invisible force that continuously reduces the value of your money – inflation.

Inflation in a very basic sense is the increase in prices of consumer goods. This figure basically points out that the consumer goods you normally purchase are actually 4 percent more expensive, on average, than they were a year ago. If you had put your money in your bank last year, your money would actually be worth 3 percent less now, assuming your bank only gives you 1 percent interest for the money deposited in your current account. 

In order to have more money, you should put it to work.

Choose your investment

There is this general – unfounded – belief that to invest, you need to have massive capital. You can actually start off by simply putting some of your current savings into a bank’s term deposits instead of a normal savings account. Term deposit interest rate would usually hover above the inflation rate, which means you are actually growing your money already. The only drawback is that you may not easily withdraw the money from an ATM, as it is meant to be kept in bank’s coffers for certain durations. You can break the contract off, but you will usually need to pay up for a penalty.

Read also: Saving is (not) hard

The property market is also generally seen as a good investment bet, due to the assumption that property prices will always go up, since everyone needs a home. But property prices have skyrocketed in recent years, pretty much marginalising a large part of us from participating in the sector actively. Also, one just needs to look at what happened in the US property market in the aftermath of the 2008 global financial crisis as well as in Singapore currently to see that the short-to-medium trend is not always up.

For those who are more investment savvy, the stock market is another venue. Investing in stocks has its risks, because your investment is not principally protected – which means that when the share price of a company you invested in tanks or if the company defaults, you are bound to lose much or all of the money you invested. While this may look unnerving, the fact is that you actually stand to grow your money much faster by investing in stocks than by keeping it passively in the bank.

We just need to look at the performance of Jakarta’s stock market index, the JCI, to back up this claim. The JCI’s performance has been relatively outstanding, with average annual returns of 10.5 percent over the last seven years. This compares favourably to annual inflation of 5 percent over the same period and also better than when you invest in property (5.5 percent).

There are a number of other, more exotic instruments out there, if you are keen to further diversify your investments. Real estate investment trusts (REITS), mutual funds and exchange-traded funds (ETFs) are a few. Bear in mind that when you put your money into these funds, you are actually entrusting your money to be managed by an investment manager, who likely knows the market better than you do. But, of course, this comes at a fee. Some of these funds would charge you around 0.5-4 percent in management fees, on top of other fees, which you should also take into account when you forecast your investment returns.

How do millennials’ savings and investments help the country’s economy?

Let’s go back to the money your deposit in the bank. After receiving your money, banks will usually channel these deposits to companies who need capital to grow their business, which will then provide more employment for the economy.

Let’s also imagine that all of us are able to save at around the national savings rate of 35 percent. Given that there are currently 54 million working millennials (defined as those above 15 and under the age of 35) in Indonesia who earn roughly Rp 2.1 million (US$157.5), on average, per month, the nation could actually obtain an additional Rp 403 trillion of fresh funds annually for companies to use just by saving more. This amounts to approximately 43 percent of the funds required annually by the country for its infrastructure projects based on National Development Planning Agency (Bappenas) estimates.

Those who invest in the financial markets are actually helping the country develop its severely underdeveloped capital market. Indonesia’s stock market capitalization – a basic indicator of how established a country’s capital market is – stood at only around 41 percent of GDP, well below the peer median of 74 percent according to the IMF. This hampers efforts of companies and to a certain extent of the government, too, to source funding, especially at a time when the nation is in dire need of fresh capital for priority infrastructure projects.

Of course, your direct participation in saving more of your income would not directly translate into higher economic growth, as this would depend on the confluence of multiple factors, including business sentiment, credit intermediary efficiency, politics, the global economy and, more importantly, how productively your money can be used. But you can now at least be confident that all of your small efforts do add up in aiding the country to move into the right direction.

What if the economy still underperforms? Well, at least you know that your future and love life will be in a much better position if you save more, according to Bloomberg. (dev/kes)

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The writer is associate director at Fitch Ratings Singapore, covering banks and financial institutions around ASEAN region.

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