Investors and business actors are on edge. The rupiah, which was at Rp15,390 per US$ at the beginning of 2024, has plummeted to Rp16,427 per US$ (as of June 27, 2024). The depreciation of the rupiah is indeed influenced by global situations, especially after the Federal Reserve refrained from cutting its benchmark interest rate three times this year. However, there are domestic fundamental factors that make the rupiah a fragile currency, namely the twin deficits.
Sumber : Istimewa
Investors and business actors are on edge. The rupiah, which was at Rp15,390 per US$ at the beginning of 2024, has plummeted to Rp16,427 per US$ (as of June 27, 2024). The depreciation of the rupiah is indeed influenced by global situations, especially after the Federal Reserve refrained from cutting its benchmark interest rate three times this year. However, there are domestic fundamental factors that make the rupiah a fragile currency, namely the twin deficits.
The twin deficits Indonesia is experiencing are: The first one is Current Account Deficit: This persists, reaching US$2.2 billion in the first quarter of 2024, double the fourth quarter of 2023. After experiencing deficits of 2.7% of GDP in 2019, 0.4% in 2020, and 0.3% in 2021, Indonesia’s current account recorded a surplus of 1.0% in 2022, then a deficit again of 0.4% in 2023. The IMF projects Indonesia’s current account deficit to increase to 2.2% of GDP by 2026. The wider the current account deficit, the stronger the signal of the government’s declining ability to pay foreign debt.
The second is Fiscal Deficit: Caused by aggressive government spending not matched by state revenue performance. To finance the deficit, the government continues to accumulate debt. During the first five years of President Joko Widodo’s ( Jokowi) administration, debt rose from Rp2,608 trillion to Rp4,514 trillion in 2019 and to Rp8,253 trillion this year. The market sees Prabowo Subianto as likely to continue Jokowi’s debt-driven administration. The large debt maturing at Rp434.29 trillion in 2024 and Rp800.33 trillion in 2025 makes investors nervous.
According to Infobank Research Bureau, due to ongoing structural issues, poverty and inequality continue to color Indonesia’s economy. The ratio index in 2023 was 0.388, the highest in the past five years. GDP growth of around 5.05% throughout 2023 and 5.11% in the first quarter of 2024 is only enjoyed by less than 1% of the top layer, which is why poverty targets are always unmet. They include: The first is High Net Worth Individuals; those with a minimum wealth of US$1 million, who are more resilient during tough times and even grow wealthier amid high interest rates. According to the Global Wealth 2023 report by Credit Suisse Research Institute, the number of HWNIs in Indonesia in 2023 was 176,757, of whom 1,155 had wealth exceeding US$50 million.
The second is the group with access to state resources, such as public officials, elite political party members supporting the government, and entrepreneurs connected to public officials managing natural resources like mining. They are the group embraced by the government to create mutual economic and sociopolitical stability.
The indicators that these two groups are benefiting from economic growth can be seen from the growth of funds in bank accounts with balances over Rp2 billion. According to data from the Deposit Insurance Corporation (LPS), funds in large accounts grew by 8.79% in March, strengthening to 10.11% growth in April 2024. This means wealthier individuals are accumulating money, and corporations prefer to wait and see rather than expand or invest.
Meanwhile, the plight of the lower-middle class is evident from the decreased growth in funds in bank accounts with balances below Rp100 million, which just grow 4.06% in April 2024. Business players, including micro, small, and medium enterprises (MSMEs) that rely on market demand, are increasingly under pressure. The condition of the general public has not been good for a long time but has been masked by government social assistance (bansos). The problem is, government social assistance merely serves to temporarily alleviate hunger for the poor and enhance political image without boosting purchasing power, let alone creating disposable income that can generate market demand for businesses.
Additionally, the middle class, indicated by bank deposits below Rp500 million, is also experiencing a slowdown. In addition to facing reduced consumption and market demand, the business world is battered by the burden of rising US dollars and higher interest rates. What the manufacturing industry is doing to minimize losses is reducing production capacity and cutting the number of employees. The weakening real sector and the threat of business bankruptcies ultimately affect the performance of the financial sector, including banking, multifinance, and insurance.
INSURANCE AND MULTIFINANCE FACING THE DRY SEASON
Business players in the multifinance and insurance sectors must brace themselves. They are facing a market under pressure from a scorching macroeconomic climate due to inflation, high interest rates, and the rupiah plummeting to Rp16,427 per US$. The multifinance industry must explore market opportunities beyond vehicle financing, which will decline again this year. “If new car sales in 2024 reach 850 thousand units, that would be good. So, the opportunity lies in refinancing or recycling debtors who pay on time by offering cash funds, including working capital and investment credit,” said Suwandi Wiratno, Chairman of the Indonesian Financial Services Association (APPI) to Infobank at the end of June.
Fortunately, the cleanup in the multifinance sector has been completed, and the Financial Services Authority (OJK) has issued a roadmap for the financing industry in three phases. Currently, financing companies must face tight competition while bearing high funding costs. The risks that need to be anticipated include defaults, fraud, and financial crimes that increase during tough times as some parties try to take advantage at the expense of others.
Similarly, the general insurance industry might see an increase in claims due to various factors, one of which is claim fraud. According to the Infobank Research Bureau, the significant rise in general insurance claim costs, which skyrocketed by 37.43% to Rp34.74 trillion in 2023, seems likely to continue this year. As of April 2024, general insurance claim expenses increased by 22.65% to Rp12.03 trillion.
This was also mentioned by Budi Herawan, Chairman of the Indonesian General Insurance Association (AAUI). “What needs to be anticipated is the current economic condition where general insurance will face claims beyond expectations. Therefore, it is essential to maintain net underwriting results and investment returns while also pressing down acquisition costs,” said the President Director of Asuransi Candi Utama to Infobank at the end of June.
The general insurance industry’s premium income has actually been pressured by the dry season. This is because the retail sector and micro, small, and medium enterprises (MSMEs) lack purchasing power. The corporate sector is also weakening. An Infobank source stated that the 24.80% year-on-year growth in gross premiums as of April was influenced by two factors: first, the shifting of premium records from last year to the first quarter of 2024, and second, the role of captive markets in the corporate segment held by major players like Sinarmas, Astra Buana, or Tugu Pratama. “If those group premiums are excluded, general insurance premium production actually did not grow,” said the Infobank source last June.
According to the Infobank Research Bureau’s study in the 2024 Rating of 114 Insurance Companies, the general insurance industry’s gross premium income grew by 27.18% to Rp99.35 trillion throughout 2023, but 12 companies saw their premiums decline, and four companies were unaccounted for as they did not release their financial reports. In this year’s rating, 40 insurance companies performed Very Well, and three general insurance companies had Poor Performance ratings.
Meanwhile, out of the 47 life insurance companies, only 19 performed Very Well, and five were rated Poor. Amid the industry’s gross premium income contraction of 7.43%, 28 life insurance companies managed to achieve gross premium growth. (See the Table Rating).
Just as the general insurance business growth is predicted to slow down this year, the life insurance industry, which has experienced consecutive declines in recent years, may continue to do so. This is because signs of a recovery in trust towards the life insurance industry, which has been tarnished by numerous default cases over the past five years, face a bad precedent after PT Duta Makmur Sejahtera and Michael Steven’s victory over the Financial Services Authority (OJK) at the appeal level in the Jakarta Administrative Court (PTUN) last June. OJK seems to lack the authority to close problematic insurance companies like Kresna Life, which has been in turmoil since 2020.
Pension Fund Supervision at OJK, stated that OJK’s decision to revoke Kresna Life’s business license was in accordance with the procedures and regulations in place and aimed to protect consumers. However, they respect the Jakarta Administrative Court judge’s decision and are preparing for a cassation appeal. “OJK will take the necessary legal steps in accordance with applicable regulations,” said Ogi, as quoted by Infobanknews.com.
The closure of insurance companies that default and cannot meet the applicable regulations aims to prevent greater losses and to build public trust in the industry. It should be noted that amid the disappointment of policyholders in several life insurance companies that failed to fulfill their promises, the industry has seen a decline in gross premium income in 2020, 2022, and 2023. When public trust in life insurance was beginning to recover, with gross premium income growing by 2.78% as of April 2024, there was a bad precedent due to OJK’s defeat in a lawsuit filed by a defaulting insurance company and its unable owner.
In terms of assets, the performance of life insurance was also pressured by the falling capital market as its investment vaults were embedded in stocks and mutual funds, which had been eroded. As of April 2024, life insurance investments fell by 0.86% to Rp510.82 trillion. This decline was influenced by the performance of stocks and mutual funds, which accounted for 40% of the total investments and experienced a value shrinkage of 17.14% to Rp204.70 trillion. Meanwhile, the general insurance industry, which enjoyed 23.72% growth in 2013 and increased by 21.26% as of April 2024, faces challenges from the sluggish real sector. Likewise, the multifinance industry, whose assets are beginning to be scrutinized due to the rising trend of non-performing financing (NPF) from 2.32% in 2022 to 2.44% in 2023, and as of March 2024, increased again to 2.45%.
Due to the complex challenges faced, insurance and multifinance companies have no choice but to strengthen their foundations and resist the temptation to take “shortcuts” to achieve high growth by targeting high-risk segments and products. Until the end of 2024, the challenges for financial companies are not only to anticipate the risk of default but also to strengthen capital, adapt to the era of high[1]interest rates and changing market needs, and handle increasingly complex risks, including financial crimes.
The twin deficits Indonesia is experiencing are: The first one is Current Account Deficit: This persists, reaching US$2.2 billion in the first quarter of 2024, double the fourth quarter of 2023. After experiencing deficits of 2.7% of GDP in 2019, 0.4% in 2020, and 0.3% in 2021, Indonesia’s current account recorded a surplus of 1.0% in 2022, then a deficit again of 0.4% in 2023. The IMF projects Indonesia’s current account deficit to increase to 2.2% of GDP by 2026. The wider the current account deficit, the stronger the signal of the government’s declining ability to pay foreign debt.
