Indonesia 39% Debt to GDP Ratio vs. Singapore, Free School Lunch Program & Capital City Move from Jakarta to Nusantara with Gita Sjahrir - E461

Gita Sjahrir, Head of Investment at BNI Ventures, and Jeremy Au talked about three main themes:

1. Indonesia 39% Debt to GDP Ratio vs. Singapore: Jeremy and Gita delved into the policy debate behind Prabowo's decision to increase Indonesia's debt-to-GDP ratio from 39% to 50%, and invest towards achieving an aggressive growth rate of 8% through a nickel-led industrial strategy coupled with expansive public spending. They tackled the broader implications of borrowing for a developing nation and the importance of maintaining fiscal credibility. Gita critiqued common misconceptions about national vs. personal debt and highlighted the international double standards in debt perception. They also compared Indonesia's fiscal strategy against USA, Singapore, Korea, Japan, Malaysia, Thailand and the Philippines.

2. Free School Lunch Program: They discussed Prabowo's popular school lunch program initiative that seeks to address childhood malnutrition, reduce growth stunting and improve educational outcomes for Indonesian children. Despite its potential, the program's implementation and funding mechanisms have ignited political debate. The potential to significantly boost student health and learning capabilities are contrasted against the risks of inefficiency and potential corruption. They deliberated on whether the anticipated improvements in public health would justify the public spending, with lessons from America and Japan's programs.

3. Capital City Move from Jakarta to Nusantara: The planned relocation of Indonesia's capital from Jakarta to Nusantara faces logistical and political challenges, which are natural for the extensive infrastructural developments. The discussion underscored the strategic necessity of such a move, considering Jakarta’s environmental and congestion issues. However, the media's critiques of overly-optimistic timelines and potential underestimations of required investments should be compared with the 30-40 years that it took for Washington DC to become the new capital city of America.

Jeremy and Gita also covered the role of global trade flows, protectionist policies’ implications on economic growth, and the critical role of accountability in government spending.

Please forward this insight or invite friends at https://whatsapp.com/channel/0029VakR55X6BIElUEvkN02e

Join us at Geeks on a Beach!

You don't want to miss Geeks On A Beach, the unique premier startup conference in the region! Join us from November 13 to 15, 2024, at JPark Island Resort in Mactan, Cebu. This event brings together tech enthusiasts, investors, and entrepreneurs for three days of workshops, talks, and networking. Register at geeksonabeach.com and use code BRAVESEA for a 45% discount for the first 10 registrations, and 35% off for the next ones.

(01:48) Jeremy Au:

Hey Gita.

(01:49) Gita Sjahrir:

Hey, how are you?

(01:51) Jeremy Au:

Good. I just got back from a 24-hour flight effectively from SF.

(01:57) Gita Sjahrir:

Yeah, that'll take a while.

(01:58) Jeremy Au:

Yeah, I mean, it was like a one week business trip. So it was like pretty much like one day in five days of work and then one day out. And I was just like crashed this morning, but at least I got my sleep in and excited to have this discussion with you about the Indonesia economy. The Economist, ever since moving their correspondent, I think, to Singapore from Hong Kong has been, like, really upping their game on the coverage of Southeast Asia so. So the big piece they had here, and, we're both chuckling about it, was The Economist and, I think a point of view on the speculation around the Prabowo president elect administration. I'm going to kind of give the high level gist, but the headline is pretty much "lofty goals for Indonesia growth, current growth rate is around 5% year in year, but if President elect Prabowo has his way, Indonesia's growth will pick up rapidly with a target of 8% in the first three years based on a new nickel lead industrial policy and more generous public spending. This obviously is a target. Analysts are worried that Prabowo will not follow the current relatively orthodox fiscal policy, putting Indonesia's fiscal credibility at risk. Mr. Prabowo may raise the debt to GDP ratio from its current 39% to more likely 50%." And then two other articles very much basically saying, part of that spending is whether the move from Jakarta to the new capital sister city will take place or not. And the spending with that. And the second part would be the school lunch program, which has his own share of controversy. That's, kind of like a high level view. What are your initial thoughts?

(03:20) Gita Sjahrir:

Oh boy. The 8% promise is one of those things that the Prabowo and Gibran campaign talked a lot about. And yes, it is led by the nickel lead focus, but that is something that was also talked a lot about in the campaign. So throughout the entire campaign, this entire nickel lead economy was discussed very extensively. Of course, whether or not we can actually hit 8%, which is very high, by the way, is a different question. And that gets even more controversial because of the changing debt to GDP ratio that might happen soon, which also gets very controversial later on, because the question is more, if you're going to have a higher debt to GDP ratio, where is the money going to?

And so regarding the debt to GDP ratio, I'm just going to explain a little bit how a typical Indonesian person looks at it. So again, I need to remind people that it's still a developing economy. It's technically only less than 30 years old, I think about 26 years old as an electoral democracy. Therefore, a lot of understanding about how public finance works is very different. Like how does national debt count? How is it paid off? How are those things working? They're often very misunderstood. Like in general by the by the mass, right? So we've kept a fairly conservative spending throughout the last 20 something years. A lot of it is to, rebuild ourselves after the financial crisis of '98 but then, of course, to just get back to good fundamentals, right? As best as you can as a developing country.

The idea of increasing your debt to GDP ratio is just very, very not popular. I think because of a misunderstanding of how national debt works, so a lot of people assume national debt works a lot like private, like personal debt, which is obviously not the case. But again, we are dealing with that. But to be super fair too, it's also not unfounded, right? Again, this question of like double standards because the U. S. can have more than 100 percent that GDP ratio, but they're okay. No other nation can do it, right? But then if another nation does it, they tend to get a lot of criticism. And I think the same thing is actually happening to Indonesia because if you look at it, our debt to GDP ratio right now is less than 40 percent and it's trying to be upped to around 50%, which is still pretty healthy if you compare it to other countries, but again, how a country is evaluated according to how much debt it takes on and what the debt is used for, you can meet double standards like around the world, right? Like, oh, that country can do it. But not that country. And then don't be surprised if also the the metrics in which your judge, it applies to one country, but it's somehow just doesn't apply to another country.

And I think that is the problem here. So I'm not really sure how that could, debt to GDP ratio itself. Could make Indonesia's financial credibility at risk unless then there are accountability problems, which I mean, let's be real. It does happen in developing nations. And so I think the challenge will be, how do you keep your accountability high? How do you keep your integrity high? How do you prove and you stop? Show that the investment into public infrastructure into health into nutrition into all of that will pay off in the long run Inc or the short run, right? So I think all of that will be the real challenge not necessarily just because you increase your debt to GDP ratio.

(06:41) Jeremy Au:

Yeah, I think this is actually great, because we're talking about the macro before we zoom into exact spending programs. I think what we're saying here is everybody wants a country that grows quickly rather than grow slowly. And I think recently we just looked at the Angsana council report which was initiated by Monk's Hill Ventures, Bain Company, and DBS, and they called it navigating high winds. So maybe I'll just write off some numbers historically based on the GDP rate. Obviously the goal is for Indonesia to hit 80% So I think I'm just listing out the numbers for the past 10 years from 2013 to 2023. So Vietnam grew at 6%, Singapore at 3%, Malaysia at 4%, Philippines at 4.7%, Indonesia at 4.2%, and Thailand at 1.8%. In contrast, during this time period, China grew at 6% and India grew at 5.7%. So I think basically what I'm trying to say a little bit here is 6% probably is the upper bound, probably like best in class. That's Vietnam and China for annual growth rates for GDP.

And then, the worst performing right now is about 1.8% of Thailand. So I think this is just a good way for, I have that, that banding for what that is. So the question is like, what is it that China and India is doing well? What is it that Vietnam is doing well? That lets them grow quickly. I would say my quick reaction to that is it makes sense to borrow if you believe that it's going to create an infrastructure and gives you future growth. So if you're spending it on things that work well, you should do it. I mean, China build a lot of railways. They build ports, they build infrastructure. Education has been a big part about it as well. I think if you look at Vietnam, they should probably have a pretty similar policy. But I wouldn't say they necessarily borrowed, but I think they use a lot of foreign direct investments, invested it into all of this infrastructure as well. So I think that's kind of like the crux of it is, are we borrowing for a good reason? Are we borrowing for a bad reason?

(08:22) Gita Sjahrir:

Yeah. So that goes back to how are nations really judged? And I think a really big challenge for a developing country like Indonesia again is how do you maintain your accountability? How do you ensure that your spending is productive and it's effective, and it has a lot to do with the macros as a whole. It has a lot to do with what are your public policies in place? Are you a place where there's increased competition and that the consumer will be benefited from that increased competition? Do you have pro business policies that allow newcomers to enter the market? Do you have an ease of doing business indicator that is higher so that people or anyone can start businesses there and really jumpstart the economy. So it's more of a larger question than just a simple, if they borrow money, that's bad. Or if they borrow money, that's good. The question again is, even if you have that higher investment, or you have higher FDI, or you have higher debt to GDP ratio, is your entire public policy and your environment set up to be able to absorb and use it as effectively and transparently as possible?

And that is, honestly, it's still going to be a challenge for Indonesia moving forward because again, I think so much of the protectionist policies, it's a policy hangover from many years ago. Yeah, they were done when the context was just very different, when the economy was also based on only several things and it's mainly natural resources. Now, as the world gets more globalized, data becomes its own asset, then we're going to have to start looking at different ways of ensuring that our spending is effective, transparent, and as high integrity as it can.

(10:01) Jeremy Au:

Yeah, I think, Asia is very focused on trade. And I think, the part about it is like, is the biggest, part of everybody's flows because trade between China, India, and America and Europe has always gone through Southeast Asia. So this is not even a 2020s kind of thing. This is like, probably goes back like 3,000 to 4,000 years of trade based on the monsoon wind. Southeast Asia has always been trade-oriented and as a result, kind of like a multicultural melting pot of all the various immigrants and diasporas trying to trade and make money between these trade flows. So it's always kind of interesting to deal with that understanding that everybody's tied to that global trade flow. And then there's also that internal protectionist sentiment that's also happening in Singapore as well. So it's kind of like interesting contrast, to do all of that.

(10:43) Gita Sjahrir:

I think one of the things people keep forgetting, too, is that I was talking about this with a bunch of friends of mine when we heard some political news earlier today. Why do people tend to make very long term decisions based only on the way things are right now and not even what it'll be next year? Or like three years from now, right? And one of the things I said to you earlier was that Singapore's public administrators at least have the ability to think, hey, what is it going to be like 50 years from now? I'm not saying it's going to be correct, or even just 50% accurate, most likely none of us will be very accurate, even 10 years forward, 20 years forward, but it's at least the foresight to think very long term in order to understand, Hey, what could be the knock on effects of this?

Because a lot of Indonesia's protectionist policies, and we've talked about this, we've talked about, the, TikTok ban. We've talked about a lot of other things in the past. They're very knee-jerk reaction to an extent, right? They tend to be implemented fairly quickly. They tend to be lobbied also in a very short amount of time, usually, and a lot of it is just coming from a knee jerk reaction of needing to protect ourselves rather than the question of, Hey, what are the negative externalities this could have, like what is the follow on effect to other industries? So let's say, this goes beyond social commerce. Let's say this can affect our mining industry, then what would you do about it? And I think that is one of the challenges that Indonesia still has until today is that other than creating really quick policies, do we really think about the follow on effects and if there are any trickle down effects to other industries or other parts of our economy by creating these protectionist stances.

(12:25) Jeremy Au:

Yeah. I think that's very kind of the way you described the Singapore government, and actually circles back to the debt to GDP piece. There is a perception that Singapore policymakers, because of the governance structure, and the party of the People's Action Party has been in power so long, and believes that it'll be in power for quite some time to come, they're able to take a bit of a longer term point of view on infrastructure investments. And I think that circles back nicely to the question about debt to GDP. And as of today, this is a snapshot. We'll provide the statistics in a table above my head right now on the video. But basically like, perhaps Indonesia's debt to GDP ratio is 39%, Singapore is 163% today. Japan is at 264%. And the US is at 129%. And then, rest of Southeast Asia, Asia for example, would be, South Korea would be at 46%. Malaysia at 66%, Thailand at 65%, and the Philippines at 60%. So I think this is all kind of helpful because I think based on what you just shared, I think first of all Indonesia does feel low compared to the other Southeast Asia countries.

I don't think, if you ask me, my qualitative point of view would be, yeah, that doesn't seem like a crazy thing to increase that ratio, it feels like. That's one. And then of course, I think everybody knows that America's debt to GDP ratio is really quite unsustainable the way that they are spending it. I think that's the point of view. Of course, I think what's interesting is that Japan and Singapore is like way higher. So people should be like, pushing the red button?

(13:42) Jeremy Au:

Okay ,Japan is one thing. I'm probably of the default to a Japanese person and expert talking about this, about their strategy. I think people do feel like it's very high depth versus their GDP. I think for the Singapore side, the argument that the Singapore government has, and I think it's a bit qualitatively different is that almost all of the borrowing is for investment purposes. So infrastructure for investment. And actually the government does have a surplus that they had run pretty much effectively every season. So I think that the key thing is that America's debt in recent years doesn't feel, it's not the same. So even though we look at the numbers, the structure of that is different. So I think it's interesting to see the conversations about debt. And I think the crux of it is if you increase your debt to GDP ratio in a short term, your current administration benefits because it gets to spend more and do less trade offs because you get a borrow.

(14:28) Gita Sjahrir:

Right. Again, it'll go back to, will the people in Indonesia and also people overseas, will they see that the spending is amounting to net positive investment in the future. And one of those investments will also be manpower, will also be humans. It'll be people. Because the thing with our nickel led economy, it was all meant to jumpstart, higher manpower, higher human resources, skills and a lot of other more specialized service focused skills in the future. For example, one of the investments that we're thinking about is nutrition and again, the question will be, will that be considered net positive in the future?

(15:08) Jeremy Au:

Yeah. And I think I've read about the school meals program. And it feels like it makes a lot of sense, right? I mean, we've discussed in previous episodes about how much stunting and malnourishment is really happening in Indonesia, especially in rural areas but also for the urban poor. So yeah, if you give them right nutrients and vitamins, then they get more IQ points, right? And economists actually wrote a whole article about how, like, for example, better nutrition for expecting parents and mothers especially, and for young kids is important because you get more IQ points, you have a better educated outcomes, and then you have a more skilled workforce and they can move up the value chain, right? So it feels like one of those no brainer programs, but it's weird because I keep reading that it's apparently very controversial. It's not very, so I don't know what's going on here.

(15:48) Gita Sjahrir:

Yeah. Again, that depends who you're asking. So I think overall, according to my very non-scientific circle of friends living overseas, for the most part, they see it as something very positive because it should, right? It makes sense that if you give people better nutrition, higher protein, they have more IQ points. Therefore, you have a more capable, like higher intelligence mass. And right now, the problem with Indonesia is we have quite a low median IQ. I think our median IQ is like 78 and that's not great. That's like an average person in a developed nation is supposed to have around almost a hundred and that's considered quite, I would say, considered normal IQ, whatever normal is, of course, but, the problem with Indonesia isn't necessarily, oh, are you all just a country full of people who can't think? That's not the problem. The problem is the economy, right? The problem is poverty, lack of nutrition, stunting is a massive problem, and I've been very blessed to travel around Indonesia and see that, yeah, like a lot of people don't have access to quality foods, quality protein for many reasons. It's actually very systemic and it's very tough. So I think the problem isn't just why can't people choose better. The problem is they don't even have access for it. So nutrition programs technically should be a popular thing. People love it. That's actually why they did so well during the campaign.

The Prabowo campaign talked a lot about free lunch, free food, and that over time became the running promise. When I talk to other people in Indonesia, especially, political observers or public policy specialists, a lot of them find this controversial and they lament the whole concept. And you're probably wondering, that makes no sense. Shouldn't they want better nutrition? Yes, of course, they want better nutrition. But again, this boils down to a question of, is this the best use of our money? And the question is, of course, it's the best use because nutrition is good for you, but this is where it gets very localized. And the question is, how do you execute it? So one of the problems that happens a lot in developing countries, including Indonesia, is how is it executed on the ground? And are you sure that the funding will then result in healthy, nutritious lunches for people as promised? That is the real question.

And also that's already a problem from a stance of, okay, but we have so many things that we still need to fix. Is this also the best use of our money? So two things. One, will you actually use it for that? Will it get down to it? Or is there going to be a high level of graft and corruption? And then the second is, with everything else surrounding us, every problem that we have, is this the best use of the money? Is the money, for example, better used to ensure that, for example, we have better running hospitals, better running healthcare solutions, right? Because again, remember we have national healthcare for 285 million people. That's a lot of people. That's also a lot of healthcare. And we don't have enough doctors in the country. Or are you better off making more employment possibilities for people? I mean, when you're in a developing nation, you have literally like a thousand emergencies. So it's fair to say why people say, Hey, why don't we take care of those a thousand emergencies rather than add one more into the mix. But principally, yes, it's a great idea. Principally, you should address nutrition problems, but then again, devil is in the details. Are you going to execute it? And is it going to boil down?

Here's one more problem. Recently, they say, Oh, we can get the cost down so that it costs 7,500 rupiah per lunch, which is the equivalent of 75 cents Singapore per lunch. And then the question after that is what, with 75 cents per lunch and the 75 cents Singapore, which would be like less in US dollars, what kind of nutrition, what kind of high quality protein you can get with that?

(19:45) Jeremy Au:

Yeah, that's not an easy piece. From my perspective is, I mean, it's, it's understandable the concern about graft, right? I mean, Southeast Asia is not renowned Like zero graft, for example, I think only Singapore, I think, has had that benefit of being seen as clean and transparent about all the business dealings. And I think it's understandable to be concerned about graft. I just take a step back and I'm like, still, I think it makes sense. So it's like, why don't you do the program and try to make sure there's no graft rather than kill all programs that have the potential of graft, which is, pretty much almost every program I can think of that you can do in Southeast Asia has the potential for graft, so you end up doing nothing. And I think maybe now we're saying that as well is I think there's a lot of key levels already there, right? Because we already know that the United States does it, India does it, Brazil does it. And what a lot of these countries have in common as well is that, they have an agricultural base, right?

You already have your agricultural, locally sourced, whereas Singapore doing is kind of bonkers a little bit because, it doesn't stimulate local agriculture economy because there's none, right? I mean, it's kind of like it stimulates the whole economy, right? It's just a stimulus program, one for agriculture, the other one for school meals. I think I'm less worried about the quantum, I would say, because, I think it doesn't exist yet. So sometimes, you sneak in a lower price first, you get a program up, people like it. And they work it outwards, the protein. So I think surviving the first program is key and political negotiations are like, nobody's happy, right? So maybe that's the way to do it. And I think even for something's better than nothing and smaller, something is more beneficial for the people at the bottom of the pyramid, right? Because in general, it's a flat program.

Yeah, I, I'm not, I'm not adverse to it, the fact that it's lower cost, but I guess what I'm trying to say here is like, if you ask me, Jeremy, as a n external person who doesn't vote in Indonesia elections, I'll be like, yeah, it makes sense to me. I mean, malnourishment is bad. This is a long term thing and it's highly progressive because 75 Singapore cents of food is very beneficial for the bottom 20%. And it means very little for the top 20%. So this is a highly progressive scheme. And it goes to children because, instead of going to parents or going to adults, you're giving them IQ points. So it feels like a great long term play, but yeah.

(21:46) Gita Sjahrir:

Look, principally, I'm with you. I get it. I think principally it makes sense from a fundamental perspective because if you're thinking about human resources, you're thinking about upskilling people, first and foremost is, are people even getting the right nutrition to develop their cognitive ability? That's number one, but I can also understand why there's just such heavy criticism in this because I think every time there's a large type of policy about to be passed, people are on high alert, right? Because there's just a natural distrust in a way with large public spending in the country and so I also get that. I understand that perspective. And I also understand the idea of we have so many things wrong, why are we adding another layer of spending? And that's a very common thing. But again, that is very much related to the debt to GDP ratio and also a lot of people's perceptive of what it is like a lot of people's perspective on it is, I think, still tied to what they assume is similar to personal debt.

So this idea that the debt has a shorter tenure, that it gets repaid in much more straightforward way. And I think this is the part where conversations about debt to GDP ratio in a lot of Indonesian media and a lot of Indonesian discussions get very muddy, like right here, just because of people's perspective of it, like people's opinion on if you say that word, even in Indonesian debt. It has a very negative connotation. And that's, I think is also another challenge, right? With socializing any public policy in the country.

(23:22) Jeremy Au:

Yeah, I think that, I think the policy makes sense, and I think that Asians don't really like debt, right? And I don't think it's unfair I mean, it's, like you said, the government definition of what debt is is totally different from what people think it is. And I think basically, I think, like you said, it's also common to be like, hey, how about all these other policies that we have to push through, and I think the big one is the move of the Jakarta, and I think people feel like it's at risk right now in terms of the move. There's a bunch of reports coming out about things are not there or perfect. And then, it shows that Jokowi has already begun to move to kind of like set up and do some work there. But anyway, what are your thoughts about that?

(23:56) Gita Sjahrir:

Look, from the beginning, the new capital has always been a tough sell, and it's just always been challenging. Just period. The end. I've always said it was going to be a very, very, very long term thing. I am talking at least 30 years and up. But, unfortunately, one of the things that Indonesian administrators like to do is to advertise that something can happen quickly when in reality, there really is no model for that. And usually it doesn't happen in that short of a timeframe. So now what's happening is because they're not following the timeline that they said, people are just piling on it, right? So a lot of journalists and a lot of media are covering in a very negative light because they said, ha-ha, see, it didn't work in just two years because it was never meant to work in just two years. That's impossible. I've never seen any capital city in the entire world that can get it done in less than decades. So I think the problem is This is not one of those stories that are done now. You should probably take a look at it much later on in the future because if it's just right now, then I think you can only do as best as time can afford you. And that's about it.

So basically I think at best they can move a couple of tens of thousands of people, which is already, by the way, a lot of people into the new capital to start administrative work, but there's just so much homework to be done in terms of infrastructure, airport, like flights there, health care and all the other necessities that require working society. So that's it. I mean, again, this is a question of timing and also it's a question of does the country have the policies and also the environment to allow businesses to naturally pop up there and make it more vibrant and make it more of a destination. So having people vote with their feet, going there because they believe it's the better option or not.

(25:49) Jeremy Au:

Yeah, I mean, I think I love what you say, which is that, it always gonna is to take a long time. And I think there's been the story of pretty much every capital city build out, right? I mean, even Washington, D. C. took about 20 years up to get selected and initially built. I think, it's going to be natural for the Indonesia capital to take time to build out. So like I said expectations, I think are important. And I feel like what you said is totally fair. People are jumping on it and I don't think it was really feasible for it to be, have happened over the timeframe that was promised.

(26:15) Gita Sjahrir:

No, I don't think it would be possible for pretty much any government unless you're in a country that is like less than a million people.

(26:24) Jeremy Au:

Yeah.

(26:24) Gita Sjahrir:

But even then, I'm not sure either.

(26:26) Jeremy Au:

If you have less than a million people, why would you have a new capital city?

(26:29) Gita Sjahrir:

Yeah, exactly. I mean, I don't know. Because it's just also, it's just such a big project. And again, the question is, how do you do it so that people vote with their feet? How do you create an entire thing, like an entire city where people naturally want to move there because that really is what makes cities vibrant, right? You don't force people to go there. You create the conditions necessary so that people start thinking, this is the better place to go. And the problem with that is it requires a lot of systemic thinking. It requires making policies and creating environments where people naturally will think, Hey, I'm better off living there than living here.

(27:08) Jeremy Au:

Yeah, makes sense. On that note, thank you so much for taking the time to do that. I guess the three big takeaways to go from this conversation was debt to GDP ratios, the second being the school lunch program, and then thirdly, of course, is the move of the capital city. On that note, see you next time.

(27:23) Gita Sjahrir:

Yay. See you.