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Jakarta Post

Financial market in digital era

  • Bhayu Purnomo
    Bhayu Purnomo

    Analyst at the Finance Ministry’s Fiscal Policy Agency

Jakarta   /   Thu, February 28, 2019   /   02:03 pm
Financial market in digital era Illustration of digital era. (Shutterstock/File)

Financial market liquidity helps finance growth through credit lines while providing interest income for capital owners. Derivation of this liquidity is commonly viewed at two key figures: money supply scales and banks’ third-party funds.

In theory, a low level of liquidity could constrain growth potential. Accordingly, too high of a liquidity level could induce inflationary risks.

In 2018, Indonesian liquidity indicators were under pressure, going lower as compared to 2017. The culprits in this situation could include a low level of capital inflow, slowing foreign direct investment flow, crowding-out effects and the development of new transaction instruments in the digital era.

The last issue is surely an interesting and unconventional factor to examine. Not only has it shaped the global economic landscape in the last decade, but also it is almost impossible to pinpoint how far it will play a part in the future.

We are well accustomed to what is called the opportunity cost of holding money. We put our income in saving and/or investment instruments, predominantly in the banking sector, to help us in our transactions (transaction motive), to make it safe for future needs (precautionary motive) and to gain interest (income motive).

Banks, stand-ins for intermediary agents, reroute this money to the economy as lines of credit. This liquidity-creation system has been in the financial market from the early days of banks.

With the rise of the digital era, these motives become less relevant, including in Indonesia. With a digital payment system, for example, the need for conventional money for the transaction motive is rapidly decreasing. Digital wallets are the millennial representation of banknotes and cards.

Moreover, the changing nature of individuals leads to new types of precautionary and income motives. As more educated Indonesians join the income-generating class, the idea of investing for precautionary and income motives has not only risen but moved farther from conventional banking instruments.

The registered number of stock market investors in Indonesia is at its historically highest level.

A rather streamlined business model supported by technology and relatively moderate regulations gave many start-ups and new investment instruments an advantage in terms of cost efficiencies compared to conventional banks.

In a more consumption-driven society, functionality and efficiencies provide the best incentives. Cash back and discounts are the new gems.

The loss of cash back and discounts for not using new payment instruments, for example, is slowly becoming the new definition of “cost of holding traditional money”.

We are now, voluntarily, putting a larger portion of our income into our e-money, OVO, GoPay, etc., reducing the amount that was traditionally stored in conventional saving or checking accounts in banks. Moreover, stock market transactions can now easily be done through our smartphones.

If monetary and business theory holds, shocks from new instruments should be relevant in the short term. As these instruments mature the level of interest should diminish. Nevertheless, in the new digital era, the level of business maturity and the learning curve is drastically skewed.

New products, with new offers, could easily spawn even before the incumbents reach maturity. Additionally, technology also helps borrowers, including public institutions, to tap new sources of funding.

The online retail bonds, for example, have provided both new financing sources for the Indonesian government and a lucrative investment instrument for Indonesians in addition to regular savings and time deposits.

The fact that the Indonesian government still running a budget deficit means the crowding-out effect for liquidity is largely feasible.

The relaxed reserve ratio and loan-to-deposit ratio policies implemented by the Indonesian monetary authorities are surely great for easing the effects of liquidity constraints. The private sector has also reacted. We could see how banks are now pumping up more revenue through the non-interest income avenues.

However, these general textbook steps are naturally short-term and moving at an aggregate level.

Lagging behind the rapid change of business structure is a common peculiarity for policymakers. Even after a few years, policymakers around the world still find it hard to define ride-hailing start-ups as tech companies, service companies or transportation companies.

One thing that is not impossible, however, is to focus on policies of financial liquidity to safely navigate the economy wherever this new era of digital era leads. Liquidity in the digital era is no longer solely a monetary issue. Like any other modern public policy issues, it links to a broad audience.

Similar to the simplicity technology brings to our doorsteps, future policies do not need to be complex, like developing blockchains technology for liquidity management.

It could be as simple as providing a more open means of interaction between policy developers and the business sector to craft a level economic playing field.

The great thing about the digital era is that we can just “Google” options of solutions for many issues. The challenge, however, lies in implementing these solutions through a policy framework without getting trapped by the traditional nature of policy developments.


The writer is an analyst at the Finance Ministry’s Fiscal Policy Agency. The views expressed are his own.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.