With its 133-year history of operating in Indonesia, global financial giant HSBC appreciates the need to see the longer-term picture. As the first foreign bank to become fully locally incorporated, the bank is now betting big on Indonesia for the next half century. By Shoeb Kagda
No country or economy moves in a straight line. In Indonesia’s case, the country has enjoyed more than a decade of stable, if not spectacular, economic growth following a decade of stagnation after the 1998 financial crisis. As it looks forward to the immediate future, the World Bank projects that the Indonesian economy will expand by 5.3% in 2018, just slightly higher than the 5.2% gross domestic product growth expected in 2017. Such growth rates would be greatly welcomed by just about any other country bar a few fast-growing economies in Asia.
Beyond economic growth, Indonesia also offers political and social stability, which in turn have created a fast-growing middle class. Taken together, these factors put Indonesia at the forefront of countries that offer global investors enormous opportunities despite the domestic challenges. It is Indonesia’s long-term potential that prompted global financial services giant HSBC to invest $1 billion to integrate its Indonesian services with Bank Ekonomi Raharja under the new name PT Bank HSBC Indonesia. The move makes HSBC the first foreign bank to be incorporated as an Indonesian entity. “Very few countries today offer the social, religious and political stability that Indonesia gives to businesses and banks,” says Sumit Dutta, president director of PT Bank HSBC Indonesia. “There is a lot of money waiting for a place to go and Indonesia can be one of the destinations.”
Casting his eye around the globe, Dutta notes that Britain and the European Union have stability concerns; the United States is gradually improving economically but too many headlines have spooked investors; while the BRIC states (Brazil, Russia, India and China) have not lived up to their promise. “That is why investors are going to Asia to deploy their funds,” he adds. “People have been investing in China for 20 years but now there are alternatives. In size, scale and stability, its hard to look beyond Indonesia.”
Role As a Conduit The question, however, is how does Indonesia turn potential into performance? This is where Dutta is confident that HSBC can play a strategic role in helping the country realize its potential by acting as a conduit. As a global institution, HSBC has offices and connections around the globe. “We work very closely with BKPM (the Indonesia Investment Coordinating Board) and its chairman Tom Lembong to help attract funds to Indonesia,” Dutta notes. “The government of Indonesia is behind HSBC because its part of my job to bring money to Indonesia.”
“We can link our customers around the world with the right opportunities in Indonesia,” he adds. “Many of the opportunities are already in Indonesia but there are also opportunities outside Indonesia so we have to link both ends.” Indonesia, Dutta says, should be able to achieve double digit economic growth but in order for the country to grow at such levels, many different factors need to come together. The country is already rich in natural resources so it should continue to develop this sector but it also needs to boost its manufacturing capabilities and the quality of its human capital. Going forward, the economy will be heavily reliant on the government’s infrastructure expansion program. “The infrastructure story is here to stay,” says Dutta. “Now that the government is moving forward on its program, it will give rise to additional economic activity and once completed, the infrastructure will provide new growth.”
President Joko Widodo has made building infrastructure one of the top priorities of his government. The country needs $500 billion over the next five years to build roads, ports, bridges and airports to connect the sprawling archipelago and bring down business costs. As a result, President Widodo has increased government spending on infrastructure to more than 60% of the annual budget since taking office in 2014. He has tied his re-election prospects to the program which is also meant to improve living standards for the poor. “The next 15-20 years will see significant improvements and upgrade in Indonesia’s economic potential,” notes Dutta. “It is good for a country to have potential but better to have performance and Indonesia has all the elements to move forward.” That prediction is premised also on the country’s low total debt-to-GDP ratio, which Dutta says is the lowest in Asia at below 100%. “That is a tribute to the government’s prudent fiscal management. Our economists say that Indonesia is one of the safest countries in the world to invest in.”
Right to Win Indonesia is not short of banks. In fact the country has a number of large domestic banks that are well run, profitable and have a wide network of branches. So how does HSBC compete domestically and more importantly why does Indonesia need banks such as HSBC? Finding the answer to that question is the key to positioning HSBC within the country’s banking landscape and servicing its customers well. “We want to participate in those sectors we have a right to win,” says Dutta. “Our right to win comes in the moment a customer wants to have a global presence and has international aspirations.”
With its global footprint in more than 70 markets and a wide range of financial products, HSBC can offer its Indonesian clients access to other markets as well as source foreign funds to drive growth at home. “We are making a long-term investment in Indonesia. As a global bank, we want to invest in countries that are sustainable to give us maximum growth,” says Dutta. “Our job is to build the foundation for the bank that will allow it to prosper and flourish for the next 50 years when Indonesia will come into its own.” Bank HSBC Indonesia is this investing heavily in its retail banking network as well its wealth management business. With the integration now completed, the bank will have a far deeper reach into the Indonesian heartland and a larger cross section of the population. “Lending to Indonesian corporations has always been one of our core strengths but now we can access corporations sitting in Balikpapan, Kudus and Makassar,” he adds. Apart from lending, Bank HSBC Indonesia can also offer its customers foreign currency retail products.
Challenges Remain While the longer-term outlook for banks in Indonesia remains bright, short-term challenges need to be tackled. With retail spending slowing, banks will have to be vigilant. Dutta also notes that regulations should not choke off businesses and reforms need to move faster. The country still ranks poorly on the Ease of Doing Business list and needs to do more to help entrepreneurs start companies.
“I see the macro-economic situation being really good but the micro-economics puzzle me,” he notes. This is because there is no economic reason for GDP growth to be slow. “Its just sentiment,” he says. But turning around that sentiment will be critical for Indonesia and the financial sector going forward.