1. Reassessing the Journey to a Sustainable Economy
Transitioning into a sustainable economy requires transforming not only environmental, but also economic and social aspects. Are we heading in the right direction?
2. Continuous Recovery in Indonesia's Real Economic Sector
The rolled-out economic stimuli packages have strongly supported the ongoing national economic recovery. How are the economic sectors responding to the stimulus? How do global authorities respond to a different pace of recovery?
3. Central Bank Digital Currency and Its Potential Impacts
With rapid crypto-assets adoption and
decentralized finance (De-Fi) transactions, many central banks have started to explore the possibility of issuing Central Bank Digital Currencies (CBDCs).
What are the potential impacts on the financial sector’s stability?
CHAPTER
01
This Quarter - III 2022
Report on Indonesia Financial Sector Development Q3 2022
The strongest connection between SDGs and the Paris Agreement is related to the environmental aspect (Planet).
However, the Paris Agreement also mentioned the importance of cooperation and compliance in achieving the climate target, which is similar to the spirit of Partnership.
Nevertheless, it is essential to acknowledge that the implementation of the Paris Agreement also requires economic and social transformation.
Research by Stockholm Environment Institute (2019)* has shown that SDGs strongly connect with the Paris Agreement, which is derived by countries into their NDCs. Yet, not all SDGs are equally addressed in countries’ NDCs. The strongest links are mostly related to the environmental aspect.
Here are examples of SDGs which are strongly and weakly addressed in countries’ NDCs:
Sustainable Development Goals (SDGs)
Connections between SDGs and the Paris Agreement
Reassessing the Journey to a Sustainable Economy
In 2015, countries agreed to support Sustainable Development Goals (SDGs) and the Paris Agreement. Since then, these agendas have dominated the global narrative of achieving a sustainable world. What do SDGs and the Paris Agreement aim to achieve? How do they correlate?
What is it? 17 interlinked goals designed to be the blueprint for countries to achieve a better and more sustainable future for all
A legally binding international treaty on climate change aiming to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre- industrial levels
How do countries implement it at the national level?
Countries develop a national sustainable development
strategy Countries develop their plans for climate action in the nationally determined
contributions (NDCs)
What about
Indonesia? Based on Presidential Decree 111/2022, the Minister of National Development Planning (Bappenas) will develop an updated Roadmap of SDGs 2017-2030 and coordinate the drafting of the SDGs Action Plan 2024.
In September 2022, Indonesia submitted its Enhanced NDCs, which increases the unconditional emission reduction target from 29% to 31.89% and from 41% to 43.2%
with international support in 2030. Indonesia stated that net zero emissions are expected to be achieved by 2060 or sooner.
Strong Connection Weak Connection SDG 7 (Affordable and Clean Energy)
links to energy access and efficiency as the key to reducing greenhouse gas emissions.
SDG 1 (No Poverty) – Only 2% of total NDC activities address SDG 1.
SDG 6 (Clean Water and Sanitation) relates to water efficiency and water ecosystem management.
SDG 10 (Reducing Inequality) – Only 23 out of 164 countries’ NDCs included activities related to SDG 10.
SDG 15 (Life on Land) reflects the role of forest management in climate change mitigation and adaptation.
SDG 16 (Peace, Justice and Strong Institutions) – Only a dozen of countries’
NDCs call for effective and accountable institutions.
*The research was conducted to see the connection between 17 SDGs and 164 NDCs that have been developed by countries around the world.
Source: UN Climate Change
People Partnership
Prosperity Planet Peace
Pillars of SDGs Key Aspects of the Paris Agreement
• Climate neutrality
• Climate change mitigation and adaptation
• Conservation of carbon sinks and reservoirs
• Voluntary cooperation
• Implementation and compliance
Paris Agreement
Related
Climate Action Tracker (CAT)
Climate Action Tracker
As one of the leading regions in sustainability, EU climate policies are still considered insufficient and will need substantial improvements to be consistent in meeting the Paris Agreement target.
A Discrepancy between the Action Plan and New Reality On May 18, 2022, the European Commission published ‘REPowerEU’, a plan that sets out how to eliminate dependency on Russian fossil fuels and tackle the climate crisis. EU officials claim the plan will still be compatible with the EU’s green deal to decarbonize the economy.
However, the EU’s coal consumption in the first semester of 2022 increased by 10% compared to last year, whereas global consumption decreased by 0.5%. This has drawn critics from environmentalists.
Are We Heading in the Right Direction?
Advanced Economies (AEs)
Emerging Market and Developing Economies (EMDEs)
EMDEs are showing slower progress in climate action compared to Advanced Economies. In October 2022, 37% EMDEs were considered
‘Highly Insufficient’.
Highly Insufficient rating indicates
inconsistency between a country’s climate policies and the Paris Agreement target. Policies and commitments can lead to rising, rather than falling, emissions.
EMDEs are still facing common issues in implementing their climate action:
1. Focusing to Achieve Basic Development Aspects
Including providing access to energy, improving health, growing jobs, etc.
2. Insufficient Green Financing and Infrastructure
OECD estimated that advanced economies failed to meet their climate funding goal to mobilize an annual target of $100 bn climate funds to help EMDEs by 2020.
3. Heavy Reliance on Coal to Boost Economic Growth
Coal is a relatively affordable energy source for economic development.
Source: OECD (2022), Climate Action Tracker (2022)
Coal Hard Facts for Emerging Economies
A coal phase-out is considered one of many ways to achieve a sustainable economy.
However, with the limited availability of alternative energy and countries’ dependence on fossil fuels to generate income, energy, and employment, a hasty fossil fuel reduction can lead to catastrophic effects.
Transitioning Process
The latest developments have shown that coal phasing-out cannot be implemented too rapidly, as coals remain an affordable growth engine for emerging economies and reliable access to renewable energy is not widely available.
The renewable energy ecosystem and infrastructure are also in need of further development. Some advanced economies are even revisiting their phasing-out scheme due to the recent energy supply shortage.
Therefore, countries should formulate the transition stages to guarantee energy security before entirely shifting to renewable energy.
The Savior of the Nation’s Trade Balance
INDONESIA • Between January and September 2022, Indonesia’s trade balance recorded a surplus of $39.86 billion, mostly supported by non-oil and gas export (94.46% of the total export).
• The export value of the mining industry between Jan- Sep 2022 increased by 91.98% compared to the same period last year, supported by the coal sector.
• Strong export performance becomes a cushion for the domestic economy while other economic sectors are still recovering from the effects of the pandemic.
219.352,80 179.486,30
39.866,50 10.000
60.000 110.000 160.000 210.000
Total Expo rt Total Import Trade B alance Total Expo rt Total Import Trade B alance
*between January and September 2022 Source: BPS (2022)
The Generator of Jobs and Revenues
INDIA • Coal accounted for over 50% of the country’s primary energy consumption and 70% of electricity generation.
• Nearly 40% of Indian districts are dependent on the coal sector for jobs and revenues.
• The industry provides job opportunities to 4 million Indians directly or indirectly.
• Brookings Institutions estimated that coal will still produce the majority of electricity in India by the end of 2030.
Source: CSIS (2021), Brookings Institution (2019)
Source: Climate Action Tracker (2022), EU Calls (2022), Bruegel (2022)
Here are examples of short-term initiatives to begin the transition - whereas the ideal stages of transformation will be explained in the next slide.
1. Encouraging the adoption of Clean Coal Technology (CCT) and High-Efficiency Low Emission (HELE) technology in power plants as a temporary solution.
2. Enhancing renewable energy financing and developing power plant infrastructure to provide abundant and reliable sources of renewable energy.
3. Preparing regulatory and legal frameworks and energy system planning to ensure a just transition.
Report on Indonesia Financial Sector Development Q3 2022
Social Innovation
Cross-cutting Elements Environmental Innovation
Economic Innovation
Conditions For a Just Transition
1. Resource Efficiency
Governments and companies should strive to decouple economic activities and societal developments from negative environmental impacts.
2. Life Cycle Approach
A life cycle approach that involves further minimizing the environmental footprint of all economic activities should be developed.
1. Finance and Investment
Governments and companies should provide funds and invest in low-emission and sustainable projects.
Another important aspect is the availability of policy and regulatory frameworks that stimulate new demand for innovative businesses.
2. Accounting and Reporting
Indicators, metrics, and better disclosure and reporting must be developed for a sustainable economy to become operational.
Further, governments should ensure that climate-related disclosures by companies also include disclosure of employment risks and just transition plans to address them.
1. Awareness
All actors, including the government, international bodies, and the public should share the same understanding for setting priorities and actions to shift into a sustainable economy.
2. Education and Skills
Policymakers, academia, and businesses must enhance education to ensure workers have the skills for a successful transition.
3. Employment
A sustainable economy promotes decent employment opportunities to overcome poverty.
As countries have agreed to move in a sustainable direction, creating a just and smooth transition to a sustainable world is as important, if not more. A just transition not only ensures environmental protection, but also decent work, social inclusion, and poverty eradication.
How to Create A Smooth Transition to a Sustainable Economy?
1. Integrated Environmental, Social, and Economic Policy and Decision Making
A sustainable economy requires a holistic approach, which integrates and balances policies concerning environmental, social, and economic priorities.
To this end, governments must ensure the establishment of formal social dialogue mechanisms so that just transition strategies can be designed at all levels.
2. Governance and Partnerships
A sustainable economy is based on a governance structure that allows all local, national, and global actors to collaborate and meet their shared responsibilities.
Source: International Chamber of Commerce (2011), Just Transition Centre (2017).
As policy responses to the pandemic, Government and authorities rolled out various stimuli and relief for the hardest-hit economic sectors. While monitoring the dynamics of the recovery rate, some stimulus packages remain ongoing while others are unextended.
Continuous Recovery in Indonesia’s Real Economic Sector
Stimulus to Maintain the Stability of Real Economic Sectors
Snapshot of the real economic sectors’ performance
13,47 17,88
5,01 2,32 2,41
0 5 10 15 20 25
Mining and
Quarry ing Manuf acturing Transportation and Storage Accomodation
and Food &
Beverages Real Estate Q4-2019 Q4-2020 Q4-2021 Q2-2022 Q3-2022
-20%
0%
20%
40%
60%
Sep-19 Sep-20 Sep-21 Sep-22
Provision o f Accomodatio n, Foo d and B everages Transpor tation
Min ing Manufacturing Source: Ministry of Finance, Bank Indonesia, OJK, BPS
Sectors Contribution to GDP (%) Banking Loan (YoY, %) Multifinance Financing (YoY, %)
Ongoing
• Reducing RWA for vehicle loan;
• Allowing banks and multifinance with certain health profile to provide loan with DP 0%;
• Giving one pillar loan quality assessment regulation exemption for a loan to electric vehicle.
Ongoing
Ongoing
• Lowering minimum down payment for green automotive loans.
March’21 – Sept’22
• Giving discount on luxury goods sales tax (PPnBM) to vehicle loans with certain criteria
Jul’20 – Dec’20
• Providing interest subsidy of vehicle loan for debtor with productive businesses
Unextended
Mar’21 – Dec’21
• Cutting VAT rates for landed houses and flats;
• Reducing the income tax rate on luxury housing;
• Reducing final income tax rate for land/building leases.
Unextended Ongoing
Relaxing LTV/FTV for mortgage and vehicle loans, starts from
Ongoing
Reducing the credit RWA for residential property mortgages depending on the LTV ratio.
• DP 0-30% (LTV ≥70%): RWA 35%;
• DP 30-50% (LTV 50-70%): RWA 25%;
• DP ≥ 50% (LTV ≤ 50%): RWA 20%.
Providing stimuli for low-income people with subsidized housing ownership:
• 10-year interest rate margin subsidy (interest rate >5%);
• Down payment subsidies
Ongoing
Feb’20-to date
• Providing grants through National Economic Recovery (PEN) program;
• Giving interest subsidy, credit restructuring, and Working Capital Loan (KUR) for tourism industry;
• Expanding the Pre-Work Card program for tourism industry.
Unextended
Mar’20 – Dec’21
• Exemption on income tax collection for manufacturing workers Automotive
Manufacturing
Property Tourism
Report on Indonesia Financial Sector Development Q3 2022
Sector Countries Extending the
Stimulus Duration Measures Countries Unextending Stimulus
Accommodation/
Food and Beverages Germany 10.03.2021 – 31.12.2022 Reduction of the VAT rate for meals in restaurants
from 19% to the reduced rate of 7% Argentina, Russia, Canada, UK Tourism Russia 29.01.2022 – 31.12.2022 The extension of reduced contribution to the reserve
fund of the association of tour for outbound tourism:
tour operators only pay annual contributions in a reduced amount of 0.25% of the total price of a tourist product.
United Kingdom, Canada, Spain, Italy, India, and France
Automotive Russia 28.12.2020 – 31.12.2023 The government extended concessional car loan programs where it allocated 8.87 billion rubles for preferential car loans, and 3.84 billion rubles for preferential leasing. The discount for obtaining a loan for a new car made in Russia is from 10 to 25% of its cost.
Mexico, Argentina, France, Italy, South Korea, Singapore, Turkey, UK, India, US, Thailand
Real Estate Sector Italy 07.01.2020 – 31.02.2025 The authorities rolled out ‘Superbonus' scheme of tax deduction for delayed construction work. The 110%
tax deduction is valid for works carried out from 2020 to 2023. The tax deduction will be dropping to 70% in 2024 and then 65% in 2025.
Argentina, Turkey, Singapore, Mexico, Russia, India, Canada, South Korea, China
Business Services Thailand 10.04.2021 – 09.04.2023 Special loan facility totalling 250 billion baht to
support viable SMEs affected by the COVID-19 crisis. South Korea, Mexico, Russia, Singapore, Spain, Turkey, United Kingdom, Argentina, India, Netherlands, Italy, Germany
Recovery progress of COVID-19 pandemics has been divergent across countries due to the different cyclical and structural factors. Economic sectoral relief has been unextended in many jurisdictions. However, some FSB members extend their measures to be more targeted sectors to prevent mass insolvencies and cushion the domestic economy. Here are some examples of stimulus policies across jurisdictions.
Global Sectoral Stimulus Progress
Source: FSB
Source: FSB
Is it the right time to unwind?
Considerations to adjust or potentially exit support measures are advised to support global economic recovery in the near term, as well as prevent COVID- related financial stability impacts and scarring effects over long term. To this end, authorities should consider several issues:
1. Ensuring the effectiveness of domestic policies
• Identifying targeted policy measures with appropriate timing
• Identifying interaction and trade-offs between policy measures
• Effective communication and outreach
2. Aware of potential spillovers Considering spillover effects:
Spillovers in domestic financial sector might occur as a result of the exit from financial support measures.
3. Mitigating debt overhang issues Assessing Viable and Non-Viable Companies More targeted measures could help in providing private sector lenders with proper incentives to distinguish between viable and unviable firm
Unbacked Cryptocurrency
and Token Stablecoin Central Bank Digital Currency
Definition Transferable assets as a means of exchange or rights of access to services or securities products.
Example: Bitcoin
A cryptocurrency that pegs their market value relative to a specified asset (like dollar), or a pool of assets to have a stable price value.
Example: USD Coin (USDC)
The digital form of a country’s fiat currency, which is a direct liability of the central bank.
Example: eNaira (Nigeria)
Is it centralized? Centralized stablecoins are usually fiat
collateralized off-chain, which are directly linked to a third-party custodian, such as a bank
Issued and controlled by a central bank
Is it decentralized? Decentralized stablecoins are fully
transparent and non-custodial. They can be divided into two parts – crypto collateralized and algorithmic
The rapid growth of crypto-assets and Decentralized Finance (De-Fi) transactions have brought more attention as they pose potential risks to financial stability. In response, central banks have started to consider issuing Central Bank Digital Currencies (CBDCs). Where do CBDCs stand in the crypto-assets ecosystem?
Central Bank Digital Currency and Its Potential Impacts
Decentralized or Centralized Finance?
Source: IMF, FSB
Crypto-Assets Ecosystem
Crypto-assets are all digital assets stored on a blockchain that uses cryptographic techniques to generate a medium of exchange. Different types of crypto- assets include cryptocurrencies (unbacked crypto-assets, stablecoins, CBDCs) and non-currency assets, such as utility and security tokens.
Decentralized vs. Centralized Finance
Decentralized Finance (De-Fi) is a set of alternative financial systems that use smart contracts to replace the intermediary role in Centralized Finance (Ce-Fi) and allow direct peer-to-peer financial transactions.
De -F i
Blockchain Technology
A distributed ledger system across a peer-to-peer network that stores all information in blocks that are linked (permanent and unalterable).
Smart Contracts
Self-executing programs stored on a blockchain and run when predetermined conditions are met to automate the execution of transactions and agreements.
Features of De-Fi
Transactions are executed by a Smart Contract Protocol and stored on a Blockchain
Ce -F i
Intermediaries takefull custody of the funds and execute the transactions
Side Note
In light of recent development, De-Fi and particularly crypto-asset players and partners are inclined towards increasing transparency, setting global digital-asset standards, and working closely with regulators to grow more robust in a stable way.
Report on Indonesia Financial Sector Development Q3 2022
Wholesale and Retail CBDC
Driving Factors of CBDC Development
Potential Impacts of the Use of Retail CBDC on Financial Intermediaries
Enhancing efficiency and innovation in payments As a building block for
better cross-border payments Improving the
availability and usability of central bank money Meeting future
payment needs in a digital economy Avoiding the risks of
new forms of private
money creation 2 3 4 5
1
Source: BoE
Source: BIS, ECB
Types of CBDC
Source: BIS, ECB
Wholesale Retail
Definition A CBDC with restricted use only for financial institutions and wholesale entities, similar to the existing digital central bank reserves
A CBDC that can be used by everyone and held in electronic wallets by the non-bank public and other end users
Purpose For the settlement of interbank transfers, related wholesale transactions in central bank reserves, and cross-border payments
For conducting daily transactions by average consumers and the general public
Benefits Increase the efficiency of payments and securities settlements and reduce counterparty credit and liquidity risks for banks
Improve transparency in retail transactions and financial access for wider population through mobile phone apps
Stakeholders Banks or central securities depositories Legislators, the retail payments ecosystem, and the broader public
Banking Balance Sheet Potential shifts from deposits to retail CBDCs can reduce both the assets and liabilities of the bank and shrink the bank’s balance sheet
Systemic Bank Runs In a crisis, the availability of CBDCs would induce deposit holders to shift their holdings from the commercial banking system to the CBDC, thus increasing the risk of systemic bank runs
Higher Cost of Funds Absent limits to individual holdings of retail CBDCs could lead to a decrease in deposits. This may limit banks’ access to funding and increase the cost of funds for banks
New Opportunities for Innovation
The introduction of CBDCs could enable banks and other intermediaries to offer innovative payment services or more diverse forms of finance to their customers
