The Role of Central Bank in Navigating Digital Economy

Transcription

1 International Seminar on Navigating Digital Economy: Challenges and Policy Strategy Jakarta, 11 April 2018 The Role of Central Bank in Navigating Digital Economy Perry Warjiyo, Ph.D Deputy Governor

2 Contents Economic Challenges and Central Bank Policy Mix: Lessons Learned Post GFC Digital Economy: Development, Potential Gains and Disruptive Effect Policy Responses on Digital Economy

3 01 Economic Challenges and Central Bank Policy Mix: Lessons Learned Post GFC

4 Lessons from GFC 2008/2009 To achieve macro stability, it is not enough to only maintain monetary (price) stability, but also need to address financial stability Financial Stability Mandate Capital Flow Management Macroprudential Policy Monetary Stability and Financial Stability are complementary Without taking into account financial stability, monetary policy may cause instability in financial system and economy stability is destabilizing. Financial stability strengthens the effectiveness of monetary policy transmission. Volatile Capital Inflows Macroeconomic risk: excessive lending, BoP imbalances, volatile exchange rate. Financial system instability due to exchange rate and maturity risk. Risk of capital reversal and sudden stops. The Need for Macroprudential Policy Monetary policy cannot fully address procyclicality and systemic risk Microprudential is not able to address macro-financial linkages, and only focusing on individual bank soundness. Monitoring individual financial institution s health is not enough Financial procyclicality due to financial accelerator Spreading of systemic risk through financial interconnection and network Contagion effect due to herding behavior and asymmetric information Threatens Financial Stability & Causes Crisis 4

5 Bank Indonesia Policy Mix: Main Framework Rationale: to ensure all monetary transmission channels (interest rate, exchange rate, liquidity, credit, expectation) function smoothly in order to achieve price stability and in line with financial system stability for supporting sustainable growth. The essence: Policy instruments based on market mechanism supported by policy instruments that may overcome financial market imperfection. Interest rate policy Macroprudential Policy Monetary Policy & Macroprudential Price Stability for Sustainable Growth Effective Transmission Interest Rate Exchange Rate Money & credit Expectation Coordination Communication, Crisis Protocol FX Intervention Capital Flows Management Exchange Rate Stability & Capital Flows Strategy: Monetary and Macroprudential Policy Mix 1.Interest rate Policy: BI Rate Corridor and term structure 2.Exchange Rate Policy Consistent fundamental exchange rate ( Exchange Rate Path ) Short term volatility 3.Capital Flows Management Support exchange rate stability, and liquidity management 4.Macroprudential Policy Support the effectiveness of interest rate, exchange rate, and liquidity transmission (money and credit) 5.Policy Coordination and Communication TPI and TPID FKSSK Communication for managing expectation 5

6 National Policy Mix: Coordination with Fiscal Policy and Structural Reforms To achieve high, sustainable and inclusive growth with macroeconomic and financial stability, it is important to have close coordination between central policy, fiscal policy and structural reforms. Central bank policy mix Maintaining price stability and supporting financial stability Policy mix of interest rate, exchange rate, capital flow management and macroprudential measures. Central bank policy Structural Reforms Fiscal Policy Fiscal policy Macroeconomic stability through sustainable fiscal deficit and public debt. Tax policy and allocation of productive spending for stimulating higher and inclusive growth Structural reforms Achieving higher growth through productivicity of capital, labor, and technological change Reforms in infrastructure, investment climate, product and market, and labor. 6

7 Indonesia: Recent Economic Development Continued economic recovery since mid 2015 Economic growth improving, nationally and regionally. Supported by fiscal stimulus, export, and investment. Going forward, stimulus from infrastructure development and structural reform Maintained macroeconomic stability Low and controlled inflation Maintained exchange rate stability Sustaineable Current Account Deficit Ample FX Reserves Sound financial system stability High CAR, and managed NPL Improved financial performance of corp. Low lending growth Increased non-bank financing Monetary policy loosening Policy rate cut (2%) Reduced RR (1,5%) Macroprudential policy relaxation Lowered DP on property and automotive Maintaining exchange rate stability Financial market deepening (FX and Rp) Coordination on inflation control 527 TPID at provinces and regencies/cities Coordination on monetary policy and fiscal State budget, and real sector Coordination of financial system stability KSSK with government, OJK, and LPS Coordination on structural reform 7

8 Three Challenges in Safeguarding the Economy 1 M aintaining stablity amidst increasing global uncertainty Monetary policy normalization in AEs Protectionism in AEs Oil price increase 2 Policy synergy for supporting grow th Risks: capital reversal, Rp depreciation, and inflation Monetary policy for stability Growth acceleration and job creation still uneven and constrained 3 Policy Synergy between BI, Fiscal Policy, and Structural Reform: - Bank Indonesia policy: macroprudential policy relaxation and innovation, payment system, financial market deepening, sharia economic and finance for promoting growth. - Fiscal policy: fiscal space optimization allocation and composition of capital spending and social spending. - Structural reform policy: priority sectors e.g. Investment climate, infrastructure, tourism, export, SMEs, agribusiness, manufacturing. Building national capacity to utilize digital economy and finance Benefits: e-commerce and Fintech to empower people s economy and SMEs. Challenges: job creation, shadow banking, cyber attack, consumer protection, data protection, and foreign participation. The need to formulate and establish national strateegy and committee on digital economy and finance for policy synergy on: i. SMEs empowerment and national logistics; ii. Start-ups innovation for Fintech and e-commerce; iii. Fintech and traditional financial institutions linkage; iv. Business synergy and interconnection of technology platform between e-commerce and Fintech 8

9 Bank Indonesia Strategic Policies Objective Maintaining stability, promoting growth, and navigating digital economy and finance Bank Indonesia Strategic Policies 1. Strengthening monetary policy effectiveness to control inflation and maintain exchange rate stability 2. Macroprudential policy relaxation to support bank intermediaton 3. Financial market deepening, particularly for infrastructure financing 4. Developing payment system for digital economy and finance 5. Developing Sharia economic and finance 6. Strengthening coordination with government, OJK, and the parliament 7. Strengthening organization and human resources 9 9

10 02 Digital Economy: Development, Potential Gains and Disruptive Effect

11 Indonesia: The Rise of Financial Technology Potential growth of digital economy consistence with the development of mobile phone and internet user as well as young generation.. 126% MOBILE PHONE Ratio to adult population (Jan 2016) 1 51,8% INTERNET user to adult population (Nov 2016) 2 Young Generation (10-29 year) 3 26,4% (2010) 24,9% (2016) (estimation) UMKM ,2 Total million unit Share 60,34% Total PDB Source: 1 Kominfo, 2016; 2 APJII, 2016; 3 BPS, 2013; 4 Kementerian KUKM, 2016 dan BI, CNN 11 11

12 Indonesia: New Players Are Coming and Growing 12 12

13 TECHNOLOGY: POTENTIAL GAINS AND DISRUPTIVE EFFECT Real Economy Potential to bring large productivity gains. Erosion of cost advantage of EMEs in low-tech manufacturing. Disruptions for EMEs that rely on industrialization. This will have big effects on skills demand, the structure of employment and labor market functioning. Central Bank Lower cost for printing money Crypto-currency Blockchain / Distributed Ledger Technology (DLT) Industry Revolution 4.0 Financial Services Faster, simpler, cost-saving retail services Emerging competition with traditional financial institutions, particularly banks Cross Border Transactions Increase Cross border trade and investment Cross border financial services: technology utilization reduces entry barrier More immediate and swift spillovers across countries 13 13

14 TECHNOLOGY: POTENTIAL GAINS AND DISRUPTIVE EFFECT Changes on How Real Economy Works Benefits Efficiency increase Cost reduction More opportinities for SMEs Closer distribution of SME products Accelerators of market movement Risks Disruption to formal markets, both retail and wholesale Unemployment, especially in Advanced Economies Strategy National champions in digital economy Re-skilling of impacted labor Changes on How Financial Services Function Benefits Increase efficiency Supporting economy Financial inclusion Accelerators of market movement Risks New threats to established FIs Cyber risks Procyclicality Regulatory arbitrage Contagion risks Strategy Support digital companies to flourish (big data, API, QR code & cloud) Payment system and macroprudential supervision Encourage fintech providers to collaborate with traditional FIs preventing excessive shadow banking 14

15 TECHNOLOGY: POTENTIAL GAINS AND DISRUPTIVE EFFECT Changes on How Central Banks Operate Implications Undermining existence of fiat money and central banks Possibilities of future changes in CBs operation: (i) definition of money, (ii) monetary policy transmission, (iii) effectiveness of CB policies Strategy Central bank should develop Central Bank Digital Curency (CBDC) Central banks and IMF are still developing best framework of CBDC to bring trust, interoperability, and stability. Changes on How Cross-Border Transactions Flow More challenging to guard boundaries: Customs, FDIs More pressures on capital inflows: targeting direct retails Trading-off: improved cross border trade and investment vs. disrupted labor market Balancing between market access grant and protection Racing between technology and regulation Will this be the origin of the next crisis? Strategy Improving domestic and regional resilience cyber resilience financial resillience 15

16 03 Policy Responses on Digital Economy

17 Payment System Development for Digital Economy and Finance Objective Developing payment system for digital economy and finance to support financial inclusion and national economy, particularly SMEs and people s economy 1 Developing National Payment Gateway Objective: to integrate payment instruments, delivery channels, and transactions through interconnection and interoperability of domestic transaction to be more efficient and faster using any instrument in any financial institution. 2 Accelerating Electronification in the Economy Electronification for social transfer, government operation, mode of transportation, remittance, billing payment, and invoice. 3 Developing Fintech in the area of Payment System Promoting Fintech innovation while at the same time taking into account consumer protection and prudential principles: Regulatory Sandbox. Coordination with government and OJK to develop e-commerc and Fintech as digital market for SMEs financing and people s economy

18 National Payment Gateway Launching - 4 December 2017 National Branding for domestic card & transactions Develop interconnectedness, interoperability and domestic transaction processing capability to serve national payment NPG Arrangement Before NPG Not Interconnected After NPG Interconnected Domestic transactions are required to be processed/routing in domestic NPG operators consist of Standard, Switching, Services Interconnectedness among switches and requirement to connect to minimum 2 NPG Switching to create interoperability of payment instrument and delivery channel Fair and efficient pricing policy Domestic branding for national identity 18 18

19 Electronification Strengthen the electronification that synergizes with various government programs and continues to support government efforts to improve efficiency and governance of financial transactions Policy Social Assistance Program Expansion of social assistance program electronically to 10 million beneficiaries of poor families and 3,9 million beneficiaries of food aid fund. Toll Road Supports the expansion of toll road interconnection by implementation of Electronic Toll Collection (ETC) and Multi Lane Free Flow (MLFF) implementation Transportation Interoperability and interconnection electronic payment system among modes of transportation Cash Management System Electronification of all payment and government spending (i.e. Village fund, School fund) Realization (Feb 18) Nominal Social Funds for Poor Family Rp billion Food Aid Funds for Poor Family Nominal Rp billion Toll Road Implementation of electronification in toll road has achieved 98% of total national toll road

20 The Role of Bank Indonesia in Fintech General Principle Scope Registration Obligation Striking the right balance: policies to nurture the digital innovation while preserving stability and integrity AML CFT Virtual Currency 20 20

21 Fintech Initiatives Registration FinTechs in Payment are required to register to the central bank. Other types of FinTech will be registered by related authority Registration started on January 2018 End of Feb 2018: 90 Fintechs have discussed with BI for registration process 15 Fintechs is being registered (on going process) Regulatory Sandbox A 'safe space' where businesses can test innovative products, services, technology, and business models with some limitation (number of user, transaction value, area of services, etc. The duration of BI Regulatory Sandbox is 6 (six) months Will be kicked off on March 2018 FintechVil FintechVil facilitate and educate SME to sell their product on the e- commerce website (also receive payment electronically) In 2017, BI started FintechVil Pilot Project in several cities in DKI Jakarta, West Java (Bandung, Tasikmalaya, Cirebon), and Banten, in collaboration with e-commerce player In 2018, BI will expand the FintechVil initiatives to 7 cities* in Indonesia *) Jambi, Palembang, Bandung, Jogjakarta, Pontianak, Mataram, Denpasar 21 21

22 Stance on Virtual Currency Forbid: BI Stance on Virtual Currency all payment system operator (principal, switching operator, clearing operator, final settlement operator, issuer, acquirer, payment gateway operator, electronic wallet operator, money transfer operator) and financial technology operators in Indonesia, both bank and nonbank institution to process transactions using virtual currency Warn: all parties not to sell, buy, or trade virtual currency Ownership of virtual currency is highly risky and loaded with speculations, considering there is no authority responsible, no official administrator, no underlying assets to base the virtual currency price, and that the trade value is highly volatile. Virtual currencies are vulnerable to bubble risks, and susceptible to be used for money laundering and terrorism financing, therefore can potentially impact financial system stability and cause financial harm to society 22 22

23 Cyber Security: Policy Measures As a regulator, Bank Indonesia continuingly pursues improvement on security aspect in the industry through framework of cyber resilience. FSB Stocktake of Publicly Released Cybersecurity Regulations, Guidance and Supervisory Practices recommend the importance of establishment of Regulations and Guidance targeted to CyberSecurity and/or IT Risk. Indonesia is required to establish National Strategy and Future Plans on Cybersecurity Regulations, Guidance and Supervisory Practices. All of Supervisory and Regulatory Agency in Indonesia should develop the cybersecurity guideline. Cyber Resilience Framework BI as Regulator Regulatory Approach Developing Guidelines Supervisory Approach Entry policy; Risk management IT Audit; AML CFT Liability to use chip and 6 Digit Online PIN, 2 factor authentication Operator certification Hardware spesification Fraud Detection System Enhancing oversight system through data and reporting integration Hybrid framework The closure of illegal activities 23 23

24 International Seminar on Navigating Digital Economy: Challenges and Policy Strategy Jakarta, 11 April 2018 The Role of Central Bank in Navigating Digital Economy Perry Warjiyo, Ph.D Deputy Governor