Regional Economic and Financial Review

OC TO BER 20 2 1

V O L U M E 16 N U M B E R 4 ISSN: 2527 - 435X

Regional Economic and Financial Review

N U S A N TA R A
REPORT
OCTOBER 2021
 CONTENTS i
CONTENTS
FOREWORD iii

PART 1 1
Executive Summary

PART 2 3
Overview of Recent Regional Economic Developments

PART 3 13
Strategic Issue: Integrating MSMEs into the Global Market through the Global
Value Chain (GVC) and Global e-Commerce (GEC)

Box 1 19
Non-Equity Modes (NEM) as Alternatives for Corporations and SMEs in
Indonesia to Unlock Global Value Chains

i
NUSANTARA REPORT OCTOBER 2021
 “Intentionally blank page”

ii
NUSANTARA REPORT OCTOBER 2021
 V
arious aspects of the economy, including the regional
FOREWORD perspective, underlie the policymaking process at
Bank Indonesia. Bank Indonesia’s views on current
economic conditions from a regional perspective are
published in the Nusantara Report, which based on
comprehensive discussions between the Board of Governors
and all Bank Indonesia Representative Offices. The spatial
economic assessments by Bank Indonesia are organised into
five regions, namely Sumatra, Java, Kalimantan, Bali-Nusa
Tenggara (Balinusra) and Sulawesi-Maluku-Papua
(Sulampua).

The Nusantara Report is published on a quarterly basis by

Bank Indonesia in January, April, July, and October, providing
an overview of current regional economic dynamics and the
outlook. This edition of the Nusantara Report also raises the
strategic issue of “Integrating MSMEs into the Global Market
through the Global Value Chain (GVC) and Global e-
Commerce (GEC).” The Covid-19 pandemic has had a
deleterious impact on MSMEs, particularly businesses with a
high dependence on the domestic market and those with
limited capacity to utilise faster-than-expected global
economic recovery momentum. The pace of MSME recovery
remains a priority agenda considering that MSMEs absorb
more than 95% of the national labour force. Therefore, MSME
integration into the global market must be pursued,
especially to increase the inclusivity of the post-pandemic
economic recovery.

In closing, we sincerely expect the Nusantara Report to bring

benefits and valuable insight to all stakeholders and regional
economists as a tangible contribution of Bank Indonesia to
regional economic development. May God Almighty always
bless our path and bring a positive contribution to our
country towards Indonesia Maju (Indonesia Moving Forward).

Jakarta, 28th October 2021

Economic and Monetary Policy Department

Aida S. Budiman
Assistant Governor

iii
NUSANTARA REPORT OCTOBER 2021
 “Intentionally blank page”

iv
NUSANTARA REPORT OCTOBER 2021
 PART 1
Executive Summary

The economic recovery process in various regions is smelter development. Trade, accommodation, and food
expected to persist in the third quarter of 2021, though service activities recorded positive yet muted growth in
slower than previously forecasted. Economic response to tighter public activity restrictions to control
improvements are supported by solid non-oil and gas Covid-19 transmission at the beginning of the third quarter
exports of natural resources in line with growing external of 2021.
demand, particularly in China and India, accompanied by
Overall, in 2021, economic improvements in all regions
higher commodity prices. Strong export performance is
are expected to proceed in line with previous
driving the tradable sector in various regions of Indonesia,
projections. A flattening of the Covid-19 curve after
including the natural resource-based processing industry in
enforcement of restrictions in the third quarter of 2021 is
Sumatra and Sulampua as well as mining in Sulampua. In
expected to accelerate the economic recovery in all regions
addition, exports are also boosting non-building investment
until the end of the year on the demand and production
performance, along with increasing manufacturing industry
sides. Acceleration on vaccination program and the support
production capacity in various regions as well as investment
of fiscal stimuli and regional spending maintain solid
linked to global corporate relocation in various regions in
domestic demand, thus improving domestic-oriented
Java. Meanwhile, building investment is supported by
sectoral performance, particularly the secondary and tertiary
ongoing government infrastructure projects, smelter
sectors. Persistent external demand is also expected to drive
construction, and a comparatively strong demand for
export-oriented primary and secondary sectors. On the
residential properties amid stringent enforcement of public
other hand, tourism-related sectors required special
mobility restrictions and a refocusing of the state budget.
attention to facilitate a gradual recovery, particularly in the
On the other hand, domestic consumption will be squeezed
Balinusra region. Consistent with growing domestic and
by restrictions on public mobility and activity through
external demand, increasing capacity utilisation will, in turn,
tighter public activity restrictions to break the domestic
attract private investment, including investment in medium-
chain of Covid-19 transmission, coupled with suboptimal
high manufacturing technologies in the Java region as well
regional government spending.
as downstream processing of natural resources in various
Growing external demand is contributing to stronger regions. Broad-based positive developments in several
regional performance of major export oriented regions will support the national economic growth outlook
economic sectors oriented towards exports. Robust for 2021, which remains in line with the previous projection
mining industry growth is predicted due to solid demand in at 3.5-4.3%. Furthermore, Bank Indonesia predicts stronger
several Asian countries and high international commodity economic growth in 2022 on the back of greater public
prices. External demand is also shoring up the mobility facilitated by the vaccination program, persistently
manufacturing industry, particularly the CPO and nickel solid export performance, the gradual reopening of priority
industries in Sumatra and Sulampua, despite subdued sectors, and ongoing policy stimuli.
domestic-oriented performance caused by production
Expanding the economic role of MSMEs can strengthen
activity restrictions in essential sectors1 together with
the national economic recovery outlook. Departing from
compressed domestic demand. On the other hand,
previous economic crises, when MSMEs were the most
agriculture is expected to experience moderation due to
resistant business units to distress, the Covid-19 pandemic
lower palm oil production at several major production hubs
has had a more significant impact on MSMEs. High reliance
in Sumatra and Kalimantan, coupled with an earlier trekking
on the domestic market and the limited business scale of
season. Underpinned by investment, construction sector
MSMEs have precluded such enterprises from exploiting
performance remains sound in line with ongoing
faster global economic recovery momentum. The pace of
government infrastructure development projects in various
MSME recovery demands special attention, considering that
regions as well as private construction projects, including
MSMEs absorb more than 95% of the national workforce.

1
According to Minister of Home Affairs Instruction (Inmendagri)
No. 18 of 2021, export-oriented industries with valid operational
and mobility permits (IOMKI) can operate at a maximum of 50%
production capacity.

1
NUSANTARA REPORT OCTOBER 2021
Therefore, MSME integration with the global market is
essential, especially needed to improve the inclusivity of the
post-pandemic economic recovery. Various efforts to
integrate MSMEs into the global market are discussed in
Part III Strategic Issue: “Integrating MSMEs into the Global
Market through the Global Value Chain (GVC) and Global e-
Commerce (GEC).”

In terms of prices, inflation remained low in all regions

in the third quarter of 2021, in line with adequate supply
and orderly distribution amid a restrained demand
recovery. Mild inflationary pressures primarily stemmed
from persistently low core inflation in most regions given
compressed domestic demand, despite higher volatile food
(VF) and administered prices (AP) inflation in nearly all
regions. As a result, Bank Indonesia expects inflation will be
within the national target corridor of 3.0%±1% until the end
of 2021 in line with weak domestic demand. However, the
potential production and distribution risks will continue to
demand vigilance. In 2022, inflation is predicted within the
3.0%±1% target, supported by exchange rate stability and
anchored inflation expectations amid growing demand.
Bank Indonesia remains firmly committed to maintaining
price stability and strengthening policy coordination with
the central and regional governments through national and
regional inflation control teams (TPIP and TPID) to maintain
CPI inflation within the target corridor and support efforts
to accelerate the national economic recovery.

2
NUSANTARA REPORT OCTOBER 2021
 PART 2
Overview of Recent Regional Economic Developments and
Outlook

manufacturing exports from Java remain in positive territory

Regional Economic Growth
Economic improvements in various regions are expected to
persist, though more restrained than previously predicted.
As of the third quarter of 2021, ongoing economic gains in
most regions were primarily supported by non-oil and gas
exports of natural resources. Strong export performance is
driving the tradable sector in various regions, including the
natural resource-based processing industry in Sumatra and
Sulampua, as well as mining in Sulampua.
Economic improvements are expected to endure in all
regions in response to a flattening of the Covid-19 curve and
government measures to relax public activity restrictions.
Domestic demand will gradually recover in line with the
faster vaccination program rollout, accompanied by
regional fiscal stimuli and spending. Furthermore, strong
external demand is expected to persist and boost sectoral
performance, particularly export-oriented sectors.
Consistent with growing domestic and external demand,
increasing capacity utilisation will, in turn, attract private
investment, including investment in medium-high
manufacturing technologies in the Java region as well as
downstream processing of natural resources in various
regions. Broad-based positive developments in several
regions will support the national economic growth outlook
for 2021, which remains in line with the previous projection
at 3.5%-4.3%. Furthermore, Bank Indonesia predicts
stronger economic growth in 2022 on the back of greater
public mobility facilitated by the vaccination program,
persistently solid export performance, the gradual
reopening of priority sectors, and ongoing policy stimuli.
Demand Side Performance
Exports
Persistently solid non-oil and gas export performance in
various regions continues to prop up the national
economy overall. Strong demand in China and India for
natural resources is driving export performance in Sumatra
and Kalimantan, particularly from where coal and CPO
exports have increased, primarily to China. In the Sulampua
region, higher production capacity in the copper, as well as
iron and steel industries, is fulfilling persistently strong
demand for exports. In contrast, however, copper
concentrate exports from Balinusra region are still restrained
by a lower production rate at major mines. Meanwhile,
as a result of efforts to optimise production at the end of
the third quarter of 2021 after the government loosened
public activity restrictions, despite the emerging issue of
higher global container freight rates.
Non-oil and gas exports in various regions in the third
quarter of 2021 maintained solid growth (Figure II.1).
Export performance in the Sumatra region increased in the
third quarter of 2021 due to strong CPO demand, primarily
in China and India, during preparations for Golden Week
and Diwali festivities. In addition, policy to adjust export levy
on CPO in July 2021 amid high international prices provide
incentiver tax exporters to increase exports in the third
quarter of 2021. Nevertheless, further gains were stifled by
lower-than-expected production of fresh fruit bunches (FFB)
owing to constraints caused by a late dry season in 2019 and
delayed harvesting season to the fourth quarter of 2021.
Export performance in the Sumatra region was also
supported by coal, pulp and waste paper, mainly bound for
China as well as positive rubber exports. In Kalimantan,
exports soared significantly on the back of coal and
briquettes destined for China, accompanied by rising prices.
Strong demand in China was consistent with expansive
industrial activity amid limited domestic coal production,
exacerbated by geopolitical tensions with Australia.
Meanwhile, CPO exports from Kalimantan also increased,
primarily to China and India. In Sulampua region, exports
recorded potent growth, predominantly driven by iron and
steel to China as well as copper concentrate to Japan. Solid
regional exports from Kalimantan were also supported by
increasing production capacity in several iron and steel
production hubs. Copper exports supported positive
performance in Balinusra region despite experiencing
moderation due to a lower recovery rate of copper
concentrate at major mines. Exports from Java region also
maintained positive performance in line with efforts to
optimise production towards the end of the third quarter of
2021 after tight public activity restrictions were introduced
to overcome the spike in Covid-19 cases. Manufacturing
exports from Java were primarily bolstered by footwear after
several global orders were diverted to Indonesia due to
factory closures in Vietnam. Nevertheless, the impact of high
container freight rates is an emerging risk that could stifle
further manufacturing export gains from the Java region,
particularly for non-FOB exporters as well as small and

3
NUSANTARA REPORT OCTOBER 2021
 medium industries and micro, small and medium China, despite the potential for gradual decline in China's
enterprises (MSMEs). construction activity. In addition, production restrictions
affecting the iron and steel industry in China represent
Moving forward, stronger regional export performance
another risk for exporters of intermediate products from
is expected to persist in the fourth quarter of 2021
Sulampua. On the other hand, copper export performance
despite several downside risks. The outlook of higher
should improve in line with increasing mining activity in the
world trade volume and international commodity prices
Balinusra region. Meanwhile, the easing of public activity
remains intact, which is expected to help maintain export
restrictions and broader reopening of priority sectors in the
performance in various regions. Exports of natural
Java region will increase production and export activities for
resources, particularly CPO and coal from Sumatra and
various manufacturing products, including textiles and
Kalimantan are anticipated to continue gaining momentum.
textile products, footwear, and automotive products, against
Nevertheless, the latest developments point to several
a prospective backdrop of persistently strong demand in the
emerging risks, primarily in the form of weather constraints
US and China. Overall, the export outlook in most regions is
and the availability of heavy equipment, which could impact
solid for 2022, in line with the ongoing global economic
production activity and challenge the quota of 625 million
recovery. Yet the impact of supply chain disruptions and
tons targeted for 2021. Iron and steel exports from the
energy constraints continues to demand vigilance.
Sulampua region will be maintained, particularly bound for

Source: Directorate General of Customs and Excise (DJBC), processed (Q3/2021 data as of August 2021)
Figure II.1. Map of Regional Non-Oil and Gas Export Growth in Q3/2021 (% yoy)

Private Consumption consumption. In addition, the reopening of several travel

destinations, coupled with plans to host a number of
Positive private consumption growth is predicted to
international events and the upcoming Christmas and New
persist in the third quarter of 2021, though limited.
Year national religious holidays (HBKN), will further boost
Private consumption is primarily influenced by tighter
private consumption gains. Such optimism is also supported
mobility and activity restrictions through public activity
by ongoing social aid program (bansos) disbursements and
restrictions to contain and control Covid-19 transmission.
fiscal incentives to revive consumption, including the sales
Nevertheless, the government's gradual relaxation of policy
tax exemption on luxury goods for motor vehicles and the
towards the end of the third quarter of 2021 as Covid-19
government component of value-added tax (VAT) on the
cases began to flatten is elevating private consumption in
residential property until the end of 2021. Moving forward,
various regions, as reflected by several regional
Bank Indonesia projects a faster vaccination program rollout
consumption indicators, including public mobility, retail
and broader reopening of economic sectors to continue
sales, consumer confidence and job availability (Graph II.1
driving private consumption in 2022, while applying strict
and Graph II.2).
health protocols and maintaining policy stimuli.
Private consumption is expected to improve throughout
2021, although lower than initially predicted. The
government continues to relax restrictions gradually as
Covid-19 cases flatten and the vaccination program rollout
is accelerated, which is increasing public mobility and

4
NUSANTARA REPORT OCTOBER 2021

Source: Bank Indonesia
Graph II.1. Consumer Confidence Index (CCI)
Source: Bank Indonesia
Graph II.2. Job Availability Index
Investment
Investment performance in the third quarter of 2021 is
expected to remain positive in various regions, primarily
supported by non-building investment. Such
developments were confirmed by high imports of capital
goods in the third quarter of 2021 in most regions (Graph
II.3). An increase of non-building investment in Java region
is predominantly in line with the heavy equipment and
information technology industries, as well as the electronics
and automotive industries, including ongoing corporate
relocation efforts. The steel industry is the main contributor
to non-building investment in Sulampua, while
Kalimantan, non-building investment is supported by the
mining sector on solid exports. In Sumatra region, non-
building investment is primarily linked to the alumina
industry, electronics, paper, and electrical power delivery
infrastructure projects. Meanwhile, building investment
continues to perform in line with ongoing government
infrastructure projects, strong demand for residential
property, and smelters' construction. Notwithstanding, the
enforcement of strict public mobility restrictions has
delayed the completion of various construction projects,
including several regional strategic projects, because of
budget refocusing.
Investment performance is expected to continue
improving throughout the region in 2021. In Java,
investment is supported by the ongoing completion of
infrastructure projects, particularly national strategic
NUSANTARA REPORT OCTOBER 2021
projects, and international firms' relocation to areas in the
region. In Sumatra, investment is buoyed by the realisation
of aluminium smelters and oil refineries, as well as
completion of the Trans-Sumatra Toll Road and electrical
power delivery infrastructure projects. Similar development
projects will support stronger investment in Kalimantan
region, supported by private investment in the basic
chemicals industry, such as the development and expansion
of ammonium nitrate and biodiesel manufacturers, as well
as oil and gas mining in East Kalimantan. Investment in
Sulampua region stems from smelter development in
Sulawesi and Maluku, underground copper mining
development in Papua and civil engineering projects, such
as dams, seaports, and electrical power delivery, in various
areas of the Sulampua region. Regional investment in
Balinusra is primarily influenced by completing several
strategic projects in the tourism sector, including the Benoa
Port, National Tourism Strategic Areas (KSPN), and
Mandalika International Circuit. Investment is predicted to
continue gaining momentum in 2022, supported by
government commitment to improve the investment
climate, including efforts to optimise implementation of
Online Single Submission Risk-Based Approach (OSS RBS).
The outlook is also consistent with a higher completion
target for national strategic projects, coupled with private
investment realisation in response to strong domestic and
global demand.
in
Source: Directorate General of Customs and Excise (DJBC), processed
*as of August 2021
Graph II.3. Imports of Capital Goods
Regional Government Consumption
Stimulus spending by the central government continues
to increase despite restrained spending at the local
government level. Central government spending
realisation increased in the third quarter of 2021, primarily
driven by capital spending for basic infrastructure and
connectivity projects as well as the vaccination program
rollout and government assistance programs for the
economic recovery. On the other hand, the realisation of
local government spending remains limited due to
suboptimal regional transfers and village fund
disbursements, especially the Physical Special Allocation
5
 Fund (DAK) and Profit Sharing Fund (DBH) - (Table II.1).
Regional transfers and village fund disbursements are
suboptimal due to tighter disbursement requirements for
local government to ensure the quality of regional spending
after a period of looser requirements one year earlier to
expedite Covid-19 containment efforts.
Table II.1. Regional Transfers and Village Fund Disbursements
(TKDD)
Source: Ministry of Finance, processed
Relatively subdued Regional Revenue and Expenditure
Budget (APBN) spending realisation is expected in the
third quarter of 2021 before accelerating towards the
end of the year. Preliminary data shows that the
percentage of regional fiscal spending to the outstanding
budget is lower this year as an aggregate despite early signs
of improvement in terms of value. Regional fiscal spending
is supported by procurement, which was previously
postponed until the middle of the year due to amendments
to supporting regulations in several regions. In addition,
previous budget refocusing has impacted the realisation of
regional fiscal spending. Efforts to improve regional fiscal
spending amid lower regional transfers and village fund
disbursements were reflected in the lower position of local
government deposits in the banking industry in August
2021 compared with conditions in the same period one year
earlier (Graph II.4).
Source: Bank Indonesia
*as of August 2021
Graph II.4. Local Government Deposits
Notwithstanding, regional fiscal spending is expected to
accelerate in the fourth quarter of 2021 in line with historical
trends, supported by greater realisation of social aid
program (bansos) disbursements and the health budget,
6
NUSANTARA REPORT OCTOBER 2021
including regional Covid-19 containment measures.
Regional fiscal spending will be accompanied by local
government efforts to meet the disbursement requirements
for regional transfers and village funds, assisted by the
relevant government ministries. Moving forward, larger
regional transfers and village fund allocations in the 2022
State Revenue and Expenditure Budget (APBN) will support
regional fiscal spending, particularly for the economic
recovery, while simultaneously improving the quality of
regional fiscal spending.
Sectoral Performance
Agriculture
Agricultural sector growth is expected to grow slower
than expected in the third quarter of 2021, particularly
in Sumatra and Kalimantan regions. Palm oil production
at several major production hubs in Sumatra and
Kalimantan was lower in the third quarter of 2021, coupled
with an earlier trekking season. Such conditions are primarily
explained by the impact of a delayed dry season and forest
fires in 2019. Horticultural production is also expected to
decrease as several production centres enter the planting
season. Similarly, large waves have lowered fishing
production and impacted fishing activities in several
regions, including Sumatra and Sulampua. In contrast, the
onset of the rice harvesting season at several production
hubs in Java and Sumatra as well as food estates in
Kalimantan and Balinusra, have propped up agricultural
performance.
For the year, the agricultural sector is expected to
maintain positive momentum in 2021, though slower
than previously expected. Such developments are
consistent with lower palm oil production during the
harvesting season than previously projected, impacted by a
delayed dry season and forest fires in 2019. However, food
crop production is expected to pick up on the back of
harvesting seasons during the first half of 2021. Likewise,
horticultural production will remain positive, including
various chili varieties and shallots, supported by higher
productivity. In addition, fishing production is predicted to
expand in 2021 based on production realisation in the first
half of the year. Nonetheless, weather factors and stronger
indications of La Niña in the fourth quarter of 2021 could
restrain agricultural productivity. Moving forward,
agricultural sector performance is expected to gain
momentum in 2022, primarily supported by higher
production of palm oil after productivity was improved by
replanting, coupled with increasing food crop production,
including food crops produced through the development of
food estates.
Mining weather conditions and the availability of heavy equipment,
which could stifle further mining sector gains in 2021.
The mining sector in various regions is expected to
maintain solid growth in the third quarter of 2021on the
back of external demand. Demand in various Asian
countries remains strong, accompanied by high
international commodity prices, boosting national exports
of various mining communities (Graph II.5). The introduction
of public activity restrictions has had a minimal impact on
production, considering that most large mining
corporations are categorised as critical industries. In
Sumatra and Kalimantan, solid mining performance is
primarily supported by high demand from China for coal
Source: Directorate General of Customs and Excise (DJBC)
from both regions. High demand from China for coal stems Graph II.5. Mining Export Value
predominantly from comparatively low domestic coal
production in line with restrictions on coal-fired power
stations that pave the way for a transition towards
renewable energy optimisation. Amid solid export demand
and rising international commodity prices as incentives to
increase coal production, the government also continues to
balance fulfilling domestic needs by tightening domestic
market obligations (DMO)2. In Sulampua, the mining
sector’s performance is supported by increasing copper
concentrate and nickel concentrate activity in line with
additional smelter production capacity and persistently high Source: Ministry of Energy and Mineral Resources (ESDM), processed
Chinese demand for iron and steel. Similarly, copper Graph II.6. Coal and Copper Reference Prices
concentrate production in Balinusra region is also increases
to offset a depleted recovery rate in the main mines. Moving forward, early signs of a faster global transition
towards the green economy demand vigilance. In the
Overall, the mining sector’s performance in 2021 is medium term, global demand for coal is expected to fade,
expected to improve on the previous projection. External replaced by greener renewable energy sources. This has
demand is still strong, as reflected by persistently high potential implications for national export performance,
national mining commodity prices at the beginning of the particularly in regions reliant on coal exports for economic
fourth quarter of 2021 (Graph II.6). Copper concentrate survival. On the other hand, Indonesia is committed to
production activity in the Sulampua and Balinusra regions is reducing the adverse spillover of economic activity on the
also expected to remain solid, along with nickel, due to high environment3, including commitments to reach a 23% share
demand for raw materials in the iron and steel industry. In of renewable energy in the national energy mix by 20254. To
Sumatra and Kalimantan, coal production is predicted to that end, more substantial efforts to accelerate downstream
persist on high export demand and international prices. In processing and development of renewable energy sources
addition, the energy crisis that has befallen several are required. Faster development of the coal gasification
countries, including China and India as major coal trading industry is a priority option, serving as an off-taker for
partners of Indonesia, offers an opportunity for domestic domestic coal production moving forward while
coal producers to increase exports. Nevertheless, several simultaneously providing a greener energy source5.
production constraints continue to emerge, including Therefore, increasing investment in coal gasification is

2
Minister of Energy and Mineral Resources (ESDM) Decree No. 4
Presidential Regulation (Perpres) No. 22 of 2017 concerning the
139.k/HK.02/MEM.B/2021, dated 4 th August 2021, concerning the National Energy General Plan (RUEN).
Fulfilment of Coal DMO. 5
Proceedings of the National Academy of Sciences of the United
3
Act No. 16 of 2016 concerning Enactment of Paris Agreement to States of America (PNAS), 2018. Using appropriate technologies,
the United Nations Framework Convention on Climate Change, Act the use of coal as a raw material for gasification to replace steam-
No. 11 of 2020 on Job Creation, Presidential Regulation (Perpres) electric power stations could reduce carbon emissions by 9.3%.
No. 8 of 2020 concerning the Medium-Term National Development
Plan (RPJMN) 2020-2024, ESDM Ministerial Regulation No. 22 of
2019 concerning Guidelines for the Implementation of Greenhouse
Gas Inventorying and Mitigation in the Energy Sector.

7
NUSANTARA REPORT OCTOBER 2021
 required, including through fiscal incentives
promotional efforts for renewable energy investment.
Manufacturing Industry
Manufacturing industry gains persisted in the third
quarter of 2021, though not as strong as predicted,
particularly in Java and Kalimantan. The temporary
introduction of emergency public activity restrictions to
overcome a surge of Covid-19 cases at the beginning of the
third quarter of 2021 squeezed domestic demand and
restrained production activity in essential sectors6,
particularly in Java as the centre of the national
manufacturing industry. Nonetheless, efforts to optimise
production at the end of the third quarter of 2021 after the
government relaxed public activity restrictions will support
manufacturing industry performance. Such conditions,
supported by solid external demand, triggered significant
improvements in terms of manufacturing exports in August
2021 (Graph II.7).
Source: Directorate General of Customs and Excise (DJBC), processed
Graph II.7. Manufacturing Industry Exports
In Java region, the introduction of emergency public activity
restrictions in July 2021 primarily impacted the main
industries in essential sectors, despite rebounding in the
middle of the third quarter of 2021 after the government
relaxed mobility restrictions, coupled with solid export
demand. Furthermore, manufacturing exports from Java
were also bolstered after several global orders were diverted
to Indonesia due to factory closures in Vietnam. In addition,
the chemical and pharmaceutical industry is expected to
maintain strong growth on the back of demand for vaccines
and Covid-19 medicaments. In Sumatra, manufacturing
industry performance is predominantly supported by solid
export demand and high CPO prices on the international
market amid domestic demand compressed by mobility
restrictions. Notwithstanding, lower palm oil production
than previously predicted after a delayed dry season and
forest fires in 2019 has stifled further CPO industry
6
According to Minister of Home Affairs Instruction (Inmendagri)
No. 18 of 2021, export-oriented industries with valid operational
and mobility permits (IOMKI) can operate at a maximum of 50%
production capacity.
NUSANTARA REPORT OCTOBER 2021
and improvements. Mirroring such conditions, Kalimantan’s CPO
industry is facing raw material constraints despite solid
export demand. In addition, the alumina industry is
maintaining relatively stable performance on strong exports.
Solid manufacturing industry performance is projected for
Sulampua region in line with high production capacity
utilisation in the new nickel downstream processing industry
to meet external demand.
For the year, manufacturing industry growth in 2021 is
expected to beat the previous projection, elevated by
persistently solid export demand and growing domestic
demand as the government controls Covid-19, coupled with
fiscal incentives. Production activity is also supported by the
disciplined implementation of operational and mobility
permits (IOMKI), which more than 16,000 corporations have
obtained as of the beginning of the fourth quarter of 2021,
together with faster vaccination of industry workers. In Java,
the footwear industry will support manufacturing
performance throughout 2021 on solid external demand
amid subdued textile industry gains. In addition, the
extension of sales tax exemptions on luxury goods for motor
vehicles will drive automotive production until the end of
the year. Meanwhile, increasing production capacity in
Sulampua’s downstream nickel industry could boost
manufacturing industry performance beyond previous
projections. In contrast, CPO industry performance in
Sumatra and Kalimantan is weaker than previously expected
due to suboptimal palm oil production during the peak of
the harvesting season.
The manufacturing industry recovery is expected to persist
in 2022, supported by a promising domestic and global
demand outlook. Liaison reports have also indicated
increasing investment by manufacturing firms in the fourth
quarter of 2021 in response to the favourable demand
outlook moving forward. Notwithstanding, several risks to
the supply of raw materials have emerged concerning the
energy crisis in China, along with higher logistics costs for
container and shipping freight, which demand vigilance,
particularly the impact on small and medium industries as
well as MSMEs. Seeking to mitigate those risks, small and
medium industries as well as MSMEs can optimise the role
of aggregators to consolidate export commodities and
simultaneously unlock greater opportunities for integration
in the export market (refer to Part III Strategic Issue:
Integrating MSMEs into the Global Market through the
Global Value Chain and Global e-Commerce).
8
 Trade
Positive trade sector growth is predicted in all regions,
exceeding the previous projection. Pressures on trade
sector performance caused by tighter public activity
restrictions to break the domestic chain of Covid-19
transmission at the beginning of the third sector of 2021 are
gradually dissipating. This is supported by a flattening of the
Covid-19 curve and the gradual loosening of public activity
restrictions. Such conditions are reflected by incrementally
stronger retail sales performance in several regions (Graph
II.8) along with automotive sales, which approached the
sales target for 2021 in September 2021, supported by sales
tax exemptions on luxury goods for motor vehicles. In
addition, strong export performance will further support
trade sector gains.
Source: Bank Indonesia
Graph II.8. Retail Sales Index
Ongoing improvements in the trade sector are expected
to persist throughout 2021 as consumption increases. A
flattening of the Covid-19 curve, accompanied by looser
public activity restrictions and a faster vaccination program
rollout, will increase public mobility and trade activity. Trade
sector gains will also be supported by the policy incentive of
sales tax exemptions on luxury goods for motor vehicles
extended until the end of the year, growing consumer
confidence and higher incomes as economic activity
continues to return. In addition, the upcoming Christmas
and New Year festive period is expected to boost year-end
retail sales. Moving forward, trade sector performance in
2022 is predicted to improve in line with private
consumption and the solid export outlook.
Accommodation and Food Service Activities
Accommodation and food service activities are
expected to maintain growth in the third quarter of
2021 despite moderation, particularly in the Java and
Balinusra regions after the government introduced
tighter public activity restrictions. Efforts to control
Covid-19 through public activity restrictions limited public
mobility as well as accommodation and food service
activities, especially hotels-restaurants-cafés (horeka).
Notwithstanding, looser restrictions and the gradual
9
NUSANTARA REPORT OCTOBER 2021
reopening of travel destinations at the end of the third
quarter of 2021 offset further declines in terms of
accommodation and food service activities. This was also
confirmed by several indicators, such as increasing public
mobility in large cities, growing consumer optimism, and
early signs of improving hotel occupancy rates in and
around tourist destinations.
For the year, accommodation and food service activities
are expected to track an improving trend throughout
2021, driven by greater public mobility and domestic
travellers, particularly in the first half of the year.
Furthermore, accommodation and food service activities are
expected to regain momentum in the fourth quarter of 2021
after the government relaxes restrictions policy, including
horeka activities and restrictions on air travel. In addition,
the gradual reopening of travel destinations with a
disciplined application of health protocols, the reopening of
Bali to international travellers from 14th October 2021, and
several international events, such as the World Superbike
2021 race in West Nusa Tenggara and the 1st FCBD G20
Meeting in Bali, will help drive accommodation and food
service activities during the year-end national religious
holidays (HBKN). Looking ahead, accommodation and food
service activities will continue gaining momentum in 2022
on greater public mobility. This will be supported by a faster
national vaccination program rollout and disciplined
application of health protocols, including a higher
percentage of employees working from office, campus-
based learning, and broader access to tourist destinations.
In addition, ongoing programs to restart the tourism
industry and government assistance will underpin sectoral
performance in 2022.
Construction
The construction sector is expected to remain in
expansionary territory, particularly in the Sulampua
region, in the third quarter of 2021 despite tighter
public activity restrictions. Expansion is supported by
ongoing government infrastructure development projects
in various regions as well as private sector smelter and
mining development construction projects in the Sulampua
region. In addition, policy support through incentives to
purchase residential property will trigger demand in many
regions, as reflected by several large developers' upward
revision of the residential property sales target for 2021,
coupled with a surge of housing loans (Graph II.9).
Notwithstanding, tight public activity restrictions have
delayed completion of several construction projects, while
budget refocusing in a number of regions has led to the
postponement of some projects. Such conditions are also
reflected in lower cement sales in the third quarter of 2021
(Graph II.10).
 completion increases to 56, with planned private sector
investment on growing domestic demand, a promising
global demand outlook, and improvements to the national
investment climate.

Payment System and Rupiah Currency

Management
Digital economic and financial transactions continue to
increase rapidly in line with greater public adaptation to
Source: Bank Indonesia the new normal lifestyle. Such developments are
Graph II.9. Housing Loans influenced by a growing public preference for online retail
during the pandemic and an expansion of digital payment
channels (Graph II.11). As a result, at the end of the third
quarter of 2021, the value of digital banking transactions
soared 67.1% (yoy), while the value of transactions using
card-based payment instruments grew 8.2% (yoy) and the
value of e-money transactions increased 52.5% (yoy).

The value of transactions processed through the National

Clearing System (SKNBI) increased 14.8% (yoy) in the third
quarter of 2021, while high-value transactions through the
Source: Indonesia Cement Association (ASI) Bank Indonesia – Real Time Gross Settlement (BI-RTGS)
Graph II.10. Cement Sales system increased 12.9% (yoy). Bank Indonesia will continue
efforts to develop an inclusive and efficient digital financial
Moving forward, construction sector performance is ecosystem by accelerating and expanding QRIS uptake
projected to improve, though not as previously among merchants in terms of value and volume through
expected due to the postponed completion of several synergy between associations, the industry, and relevant
infrastructure projects. Construction sector performance is government ministries/agencies (Graph II.12).
supported by ongoing government infrastructure
development projects, which will accelerate in the fourth
quarter of 2021 in pursuit of completion targets for several
large-scale infrastructure projects, such as the Trans-
Sumatra Toll Road, Phase II MRT and LRT transportation
infrastructure projects in Jabodebek, the integrated
industrial zone in Batang (Grand Batang City), the Patimban,
Cigatas and Cisumdawu toll road sections in Java, as well as
projects aimed at supporting tourism activity in Balinusra,
including the special economic zone in Bali and supporting
infrastructure in Mandalika (Lombok International Airport Source: Bank Indonesia
Graph II.11. Digital Banking Transactions
Bypass (BIL), special economic zone and race circuit) in West
Nusa Tenggara. In addition, incentives to purchase
residential property, namely the lower loan-to-value (LTV)
ratio and extension of the government's VAT subsidy, will
also boost demand for residential property. Nonetheless,
the latest developments indicate construction sector
performance below the previous projection due to delayed
completion of infrastructure projects caused by budget
refocusing, delayed completion of 3 out of 33 national
strategic projects, and the postponement of several regional
infrastructure projects. Nevertheless, construction sector
Source: Bank Indonesia
performance is expected to accelerate in 2022 as the
Graph II.12. QRIS Transactions
number of national strategic projects targeted for

10
NUSANTARA REPORT OCTOBER 2021

Regional Inflation
Low inflation persisted in all regions in the third quarter
of 2021 in line with adequate supply and uninterrupted
distribution amid a subdued demand recovery.
Nationally, low inflation was recorded in the third quarter of
2021 at 1.60% (yoy), despite increasing from 1.33% (yoy) in
the second quarter of 2021. CPI inflation was edged up by
pressures on volatile food (VF) and administered prices (AP)
amid low core inflation. As a result, higher inflation was
realised in all regions except Sulampua (Figure II.2).
Core inflation remains low in most regions as a corollary
of compressed domestic demand. In addition, maintained
exchange rate stability, limited exchange rate passthrough
and policy consistency by Bank Indonesia to anchor inflation
expectations to the target corridor have also led to low core
inflation, along with deflationary pressures on gold jewellery
in line with the global gold price despite a build-up of
inflationary pressures on rental residential properties in all
regions.
Inflationary pressures on volatile food have increased
synchronously in all regions. The main inflation
contributors in the reporting period were various fish
commodities, particularly in the Balinusra, Kalimantan, and
Sulampua regions, due to limited production caused by
inclement weather and several structural constraints in the
capture fisheries. VF pressures also stemmed from rising
cooking oil prices in line with the higher international CPO
price and purebred chicken meat prompted by government
efforts to reduce oversupply. Nevertheless, higher VF
inflation was offset by deflationary pressures on rice in all
regions after the harvesting season replenished stocks,
coupled with optimisation efforts concerning supply and
price stability by the Indonesian Bureau of Logistics (Bulog).
Source: BPS-Statistics Indonesia, processed
Figure II.2. Regional Inflation Map, Q3/2021 (yoy)
11
NUSANTARA REPORT OCTOBER 2021
Inflationary pressures on administered prices (AP)
intensified in all regions, except Kalimantan, as a policy
to raise the tobacco excise tax fed through to higher
cigarette prices. In addition, AP inflation also stemmed from
higher non-subsidised fuel and household fuel prices in all
regions after the government relaxed public activity
restrictions at the end of the third quarter of 2021, thus
stoking demand for fuel. Nonetheless, lower electricity rates
offset higher AP inflation, with minimal government
intervention in energy prices. In Kalimantan, lower AP
inflation stemmed from deflationary pressures on
transportation fares, including airfares, in line with limited
demand.
Moving forward, inflation in 2021 is predicted below the
midpoint of the 3.0%±1% target corridor and within the
target for 2022. Low inflation is anticipated until the end of
2021 in response to weak domestic demand.
Notwithstanding, a build-up of inflationary pressures on
volatile food is expected after the harvesting season towards
year-end, together with indications of a stronger La Niña
weather phenomenon that could hamper production and
distribution. In addition, the disincentive risks for farmers
associated with low prices and structural constraints
concerning planting techniques demand vigilance.
Meanwhile, the prospect of maintaining inflation in 2022
within the target corridor will support exchange rate stability
and anchor inflation expectations to the target corridor
despite growing demand. Bank Indonesia remains firmly
committed to maintaining price stability and strengthening
policy coordination with the central and local governments
through the national and regional inflation task forces (TPIP
and TPID) to maintain headline inflation within the target
range and support efforts to accelerate the national
economic recovery.
At the National Coordination Meeting on Inflation
Control, the President of Indonesia reiterated three
salient measures for TPIP and TPID to support the
economic recovery and maintain price stability. First,
maintain supply and price stability, particularly staple goods,
by overcoming existing regional production and distribution
constraints. Second, maintain efforts that focus on price
stability and actively promote productive growth of
economic sectors. This is achieved by increasing the
productivity of farmers and fishermen while strengthening
the MSME sector to survive and level up. Third, increase
value-added in the agricultural sector to provide a larger
contribution as a locomotive of economic growth. To that
end, farmer institutions must be strengthened, access to
marketing expanded through digital platforms and
technology, and the microcredit program (KUR) optimised
by accelerating disbursements in line with the bespoke
characteristics of farming businesses, supported by farm
intensification efforts.

12
NUSANTARA REPORT OCTOBER 2021
 PART 3
Strategic Issue: Integrating MSMEs into the Global Market
through the Global Value Chain (GVC) and Global e-
Commerce (GEC)

important priority agenda. The Government has

Introduction
prioritised efforts to level up MSMEs through various
As the backbone of the economy, the contribution of
facilities to grow such enterprises, including strategic
micro, small and medium enterprises (MSMEs) has
partnerships with large corporations to unlock the global
greater potential. Absorbing 96.9% of the national
supply chain and use of e-commerce applications. Bank
workforce and dominating 99.9% of total business units in
Indonesia considers MSMEs an important new source of
Indonesia, MSMEs contribute only 60.51% of GDP and
economic growth towards vision of Indonesia Maju (Onward
15.65% of exports (Ministry of Cooperatives and SMEs,
Indonesia).
2019). Regarding business scale, value-added remains
limited at small and medium enterprises, indicating a hollow
in the middle phenomenon, where small and medium
enterprises’s value added is significantly smaller than micro
and large enterprises.7 The Ministry of Cooperatives and
SMEs noted that in 2019, small and medium enterprises only
contributed 9.5% and 13.6% respectively to GDP, notably
lower than the 37.3% and 39.5% contributed by micro and
large enterprises (Graph III.1).

Source: Asian Development Bank (ADB), Asia SME Monitor, 2020

Graph III.2. Comparison of MSME Export Share in Indonesia and
Peer Countries

One initiative to increase SME competitiveness is by

Source: Ministry of Cooperatives and Small and Medium Enterprises
(SMEs), 2019
Graph III.1. Value Added of MSMEs and Large Enterprises to GDP
In addition, the export share of MSMEs in Indonesia is
considered low compared with other peer countries,
thus reflecting lower global competitiveness. MSMEs
accounted for just 14.4% of total Indonesian exports in 2018,
lower than the 17.3% and 28.7% recorded in Malaysia and
Thailand, respectively (Graph III.2).
Consequently, improving MSMEs, particularly levelling
up small and medium enterprises in, is regarded as an
exploiting the opportunity of integration into the global
market through the global value chain (GVC) and global
e-commerce (GEC). SME participation in global value
chains is achieved by consolidating exports through
domestic aggregators or foreign affiliates. In its 2021
publication, the Asian Development Bank (ADB) showed
that SMEs integrated into GVCs enjoy faster development
and superior characteristics,8 leading to greater global
competitiveness. Supporting those findings, a survey
conducted by Bank Indonesia9 also found that during the
pandemic, export-oriented SMEs10 were more resilient and
optimistic concerning economic recovery than non-export
SMEs (Graph III.3 and Graph III.4).
The rapid growth of the domestic and global e-
commerce space has also unlocked broader market

7
Definition of business scale refers to Act No. 20 of 2008
concerning Micro, Small and Medium Enterprises.
8
Asian Development Bank (March 2021). Enhancing SME
Participation in Global Value Chains: Determinants, Challenges and
Policy Recommendations.
9
An internal survey conducted by Bank Indonesia with a sample of
1,093 small and medium enterprises as respondents concerning
SME participation in global value chains and e-commerce
(September 2021).
10
Export-oriented SMEs are those that have engaged in export
activity directly or indirectly (as suppliers to exporters).

13
NUSANTARA REPORT OCTOBER 2021
 opportunities for SMEs. The Gross Merchandise Value
(GMP) of e-commerce in six ASEAN countries is predicted to
grow by 32% (CAGR) in 2025,11 with Indonesia a primary
driver of growth due to massive smartphone penetration
and expanding internet user base.
Source: Bank Indonesia Survey
Graph III.3. SME Turnover during Pandemic
(August 2021 compared with December 2020)
Source: Bank Indonesia Survey
Graph III.4. SME Expectations of Economic Recovery
Empirically, e-commerce utilization can enhance the
competitiveness of SMEs. An IMF study published in 2019
stated that businesses using e-commerce had a higher
productivity and export market share than businesses
eschewing e-commerce platforms.12 In addition, e-
commerce also provides a strategy for SMEs to survive the
pandemic. A Bank Indonesia survey showed that 39% of
SMEs applied an online sales strategy to help overcome the
deleterious economic impact of the Covid-19 pandemic.
Taxonomy of SME Integration towards
Global Markets
SMEs can access global markets through various modes,
11
Google, Temasek and Bain & Company (2019). e-Conomy SEA
Report (Indonesia, Singapore, Malaysia, the Philippines, Thailand
and Vietnam).
12
Kinda, T. (2019). E-Commerce as a Potential New Engine for
Growth in Asia. IMF working Paper 19 (135).
14
NUSANTARA REPORT OCTOBER 2021
including direct exports13 and indirect exports through
partnership schemes (GVC) and e-commerce (GEC)
(Figure III.1). There are at least four partnership schemes
identified for SME integration into GVCs as follows:
1) GVC-1 is a partnership scheme for SMEs associated with
domestic firms affiliated to a global multinational
corporation or a joint venture firm.
2) GVC-2 is a partnership scheme for SMEs associated with
domestic firms having Non-Equity Mode (NEM)
partnerships with a global multinational corporation.
3) GVC-3 is a partnership scheme for SMEs in the form of
direct NEM with a global multinational corporation.
4) GVC-4 is a partnership scheme for SMEs associated with
domestic firms applying a sold flat mechanism.
A partnership scheme based on Non-Equity Modes (NEM) is
a contractual relationship between SMEs or a domestic firm
with a global multinational corporation (MNC). This scheme
has become particularly pertinent in the Covid-19 era, in
addition to foreign direct investment (FDI) that requires
physical investment from global MNC and direct export
(trade). NEM partnerships represent an alternative for SMEs
to unlock the global market. Based on a Bank Indonesia
assessment, SMEs can integrate into the MNC global supply
chain through domestic/local companies (GVC-2 scheme) or
directly (GVC-3 scheme). NEM is explored in more depth in
Box 1.
Meanwhile, for SME integration into global e-commerce
(GEC), at least five business models have been identified as
follows:
1) GEC-1, through e-commerce with a B2C (Business to
Consumer) scheme at the retail level.
2) GEC-2, through aggregators that have marketing
channels via digital platforms to international
consumers.
3) GEC-3, through global e-commerce with a B2B (Business
to Business) scheme at the wholesale level.
4) GEC-4, through aggregators using a consignment
mechanism.
5) GEC-5, through B2B e-commerce, applying a sold flat
mechanism.
13
SMEs are considered direct exporters if the export process
(payments, customs and delivery) is performed by the SME itself.
Source: Bank Indonesia
Figure III.1. Taxonomy of SME Integration in Global Markets
From the various modes of SME integration towards
global markets, the keys to success through GEC and
GVC have emerged. A study conducted by Bank Indonesia
showed that the supporting factors for successful SME
integration through GVCs are as follows: (i) SME mentorship
by the business partner, (ii) commitment to fulfilling quality,
cost, and delivery (QCD) standards, (iii) commitment to
strengthen human resources, and (iv) business matching
facilitation between SMEs and large/medium enterprises.
Meanwhile, the factors of successful SME integration into
global e-commerce are as follows: (i) omnichannel digital
marketing through diversification of digital marketing and
strengthening digital branding, (ii) understanding of market
information and export procedures, (iii) marketplace
support in terms of curation and facilitating exports, and (iv)
consistent quality and adequate production capacity. In
addition, the success factors must be underpinned by
regulations and government programs as well as support on
the financing side.
Partnerships in Global Value Chains
SMEs can unlock global markets through partnerships
with export-oriented large/medium enterprises, thus
linking it into the global value chain (GVC). To penetrate
global markets, SMEs typically partner with large/medium
enterprises as part of the supply chain or local value chain
(LVC). Strengthening the role of SMEs in the local value
chain is a preliminary measure to build global value chains
(GVC) in order to establish more competitive SMEs. An
assessment conducted by Bank Indonesia showed that
partnerships with large/medium enterprises or becoming
part of the local value chain could be driven by import
15
NUSANTARA REPORT OCTOBER 2021
substitution. LVC affords a number of advantages for SMEs,
including market exposure as a learning experience for
capacity building to become part of the GVC. Since Covid-
19 outbreak, opportunities for SMEs to substitute imports
has grown due to enforcement of cross-border restrictions.
SMEs are already taking advantage of this opportunity,
including a manufacturing firm, for example, during the
cross-border restrictions affecting various countries in 2020,
which hampered the flow of imported goods, including
engine spare parts from various large industries. Domestic
SMEs manufacturing machinery began to supply spare parts
to large industries, thus securing a twofold increase of
revenue during the pandemic and demonstrating that SMEs
can increase import substitution towards the government’s
target of 35% in 2022. The additional revenue generated
from import substitution has helped level up the
participating SMEs and reduced the hollow in the middle
phenomenon.
The success of SME partnerships is also linked to LVC
development initiatives by large/medium enterprises,
which have a critical role in building partnerships with SMEs
as the off-taker, providing assistance, and facilitating them
to markets. As buyers, therefore, large/medium enterprises,
and SMEs, benefit from a number of advantages. For
example, in the automotive industry, large/medium
enterprises as buyers can help localise components, protect
against currency risk, and offer aftersales service.
Furthermore, the advantages for SMEs being a part of the
supply chain include industry exposure, broader market
access, and opportunities to develop and level up.
QCD standards are, however, a prerequisite for SME
partnerships with large/medium enterprises. In general, international e-commerce. Despite limited SME
large/medium enterprises as buyers will seek SMEs that can competencies, aggregator platforms provide global
produce high-quality products at low cost with a reliable marketing services for SME products to reach international
delivery schedule. Therefore, SMEs must meet QCD e-commerce. Aggregator platforms provide marketing
standards and integrate into the supply chain for large facilities through digital channels, account management
industries. Therefore, QCD aspects, including quality services in international e-commerce, and logistics services
management certification, should be the focus of SME for SME products to the international market.
development programs for partnership with large/medium
enterprises. At the same time, policy support to encourage
SME partnerships is necessary, including incentives for
large/medium enterprises to partner with SMEs in
accordance with the Job Creation Act and Government
Regulation No. 7 of 2021 concerning the Ease, Protection
and Empowerment of Cooperatives and MSMEs.
Furthermore, beyond incentives to improve the ease of
doing business, partnerships are also encouraged by
Presidential Regulation No.10 of 2021 concerning Business
Capital Investment, which requires partnerships with MSMEs Source: UNESCAP, 2020
Graph III.5. Global Cross-Border e-Commerce Transactions
to unlock investment/fiscal facilities.

Integration through Global e- Financing

Commerce SME integration to the global market requires financing.
Internal funds and bank loans still dominate sources of
Cross-border e-commerce is inevitable, as reflected by
SME financing. Based on a survey conducted by Bank
the increasing value of retail sales globally (Graph III.5).
Indonesia, most SME exporters (49%) used internal funds
Furthermore, e-commerce utilization has reduced
and 23% turned to the banking industry as a source of
transaction costs, facilitated SME integration into global
finance (Graph III.6). The same survey also indicated that
markets, and increased productivity. Various e-commerce
nearly all respondents (88%) had not applied for loan
platforms owned by the private and public sectors have
facilities from the banking industry in the past two years,
launched various features focusing on marketing local
citing lack of need, the burden of interest rates, and complex
products to international markets. Notwithstanding, the use
procedures as the main impediments. In addition, 12% of
of e-commerce for exports remains limited. A survey
respondents stated constraints related to inadequate
conducted by Bank Indonesia shows that only 14% of
collateral, poor track record with financial institutions, and
respondents who are SMEs14 have used e-commerce
lack of formal documentation (Graph III.7).
platforms to export products, dominated by processed food
and beverages, textiles and fashion, furniture and processed
wood, and agricultural products.

E-commerce export business models for SMEs are

diverse, depending on the platform used. At least five
business models have been identified based on the type of
platform. The use of e-commerce platforms offers an
alternative export model which is more convenient for SMEs.
Several e-commerce platforms now offer export facilitation
and assistance programs. In addition, through its IDNStore
platform (global B2B2C), the Ministry of Trade facilitates Source: Internal Bank Indonesia Survey concerning SME Participation
in Global Markets (September 2021), processed
SME exports to China, Hong Kong and Taiwan.
Notes: More than one response permitted
A number of aggregator platforms also provides global Graph III.6. Sources of Finance for SME Exports

marketing facilities to help market SME products in

14
An internal survey conducted by Bank Indonesia with a sample of
1,093 small and medium enterprises as respondents concerning
direct and indirect exports (global value chain partnerships and e-
commerce) (September 2021).

16
NUSANTARA REPORT OCTOBER 2021
The support of innovative SME financing is required to be encouraged for SME transactions. Moving forward, the
expand the banking industry’s role in SME finance. potential development of data capturing in the payment
Through Bank Indonesia Regulation (PBI) No. system, supported by a data hub of financial transactions
23/13/PBI/2021 concerning the Macroprudential Inclusive from various sources, including the National Open API
Financing Ratio (RPIM), Bank Indonesia has driven the Payment Standard (SNAP), can be used to strengthen credit
banking industry to increase its participation in SME infrastructure for SMEs.
financing directly or indirectly through broader bank
partnerships to allocate SME financing as well as a broader
definition of SME financing as inclusive financing that
includes the subsistence SMEs category. Banks unable to
allocate inclusive financing have also been given the option
to purchase SME securities (Figure III.2).

Access to SME finance can also be expanded through the

development of innovative financial market
instruments. Inclusive Commercial Paper (SBK), Asset-
Backed Commercial Paper (ABCP), acceleration board stock,
crowdfunding and venture capital schemes are instruments
that could be further developed to bring advantages for
SMEs. In addition, loan guarantee programs can also
facilitate credit enhancement in the SME space, including Source: Internal Bank Indonesia Survey concerning SME Participation
the MSME Working Capital Loan Guarantee Program. in Global Markets (September 2021), processed
Notes: respondents may response more than one reason of refusal of
Similarly, the use of diverse payment infrastructure, bank financing facilities
including the Bank Indonesia – Real Time Gross Settlement Graph III.7. Export-Oriented SME Constraints and Challenges
(BI-RTGS) system, National Clearing System (SKNBI), and when Applying for Bank Financing
Quick Response Code Indonesian Standard (QRIS), should

Source: Bank Indonesia

Figure III.2. Macroprudential Inclusive Financing Ratio (RPIM) Policy

Bank Indonesia assessment revealed various alternative
financing options for SMEs to unlock global markets,
including Indonesia Eximbank, the Revolving Fund
Management Institution (LPBD), revolving funds from
cooperatives and investment agents. This can be
accompanied by the credit-plus-capacity model for SMEs
based on purchase orders (PO) facilitated by the banking
industry, including regional government banks (BPD),
particularly for commodity export-oriented SMEs.
Policy Recommendations
The SME development program is based on the
principles of utilisation, taking into account the role of
small and medium enterprises in the economy.
Development to create globally competitive SMEs should
focus on SME ability to meet domestic market demand as

17
NUSANTARA REPORT OCTOBER 2021
well as to substitute import. Next, SME potential should be learning modules as guidelines for SME onboarding to
identified and mapped to encourage direct and indirect e-commerce platforms, as well as utilising the BI Live
exports through integration in GEC or GVCs. In the near Sandbox Space (BLISS) currently under development by
term, the development of export-oriented SMEs should be Bank Indonesia.
directed towards maintaining direct exports while 4) Access to innovative finance through business matching
strengthening GEC integration. SME integration in GEC is and developing value chain financial instruments,
available to all business sectors by strengthening digital including merchant invoice financing.
competencies and e-commerce aggregators. In the
This ecosystem towards global e-commerce (GEC) requires
medium-long term, however, partnership models between
the support of e-commerce and government synergy to
SMEs and large corporations should be replicated and
overcome and eliminate SME barriers to global e-commerce
adjusted in line with sectoral potential and the regional
integration.
availability of large corporations. In this case, the active role
of large corporations as off-takers is required to build the
local value chain (LVC) regionally in conjunction with SMEs.
Therefore, SME partnerships with large corporations aim to
strengthen the export value chain within the GVC, and
simultaneously create import substitution in the context of
LVC strengthening.

SME development can be achieved via two salient

strategies integrating SMEs into the global market
through GVCs and GEC. The first strategy, to integrate
SMEs in the GVC through developing an ecosystem that
comprises four aspects as follows:
1) Institutional strengthening through clusters and formal
business groups.
2) Strengthening QCD standards through certification,
partnerships with vocational colleges and universities,
and understanding exports using standardised export
modules.
3) Facilitating partnerships with aggregators/large
corporations to connect SMEs with aggregators/large
corporations.

Access to innovative financing through business matching

and strengthening business models in the banking industry,
including regional government banks, to finance the supply
chain between SMEs and large corporations.

This ecosystem approach towards global value chains

requires the support of local and central government
synergy to strengthen the business climate regionally and
create an enabling environment.

The second strategy, to integrate SMEs in GEC through

developing an ecosystem that comprises the following
aspects:
1) Formal institutions through facilitation and mentoring to
establish business legality and fulfil e-commerce
requirements.
2) Curation, including curation, certification, and technical
assistance facilities.
3) Development of a Digital Starter Kit, namely standard

18
NUSANTARA REPORT OCTOBER 2021
 BOX 1

Non-Equity Modes (NEM) as Alternatives for Corporations and

SMEs in Indonesia to Unlock Global Value Chains
The Covid-19 pandemic has presented numerous is not gained through ownership, such as in the case of FDI.
lessons learned, one of which is the effectiveness of Control according to NEM is applied through contracts and
offshoring investment or foreign direct investment bargaining power between the TNC and domestic
(FDI). Cross-border restrictions during the pandemic corporation.
disrupted supply chains across all industries, including
NEM and FDI can become substitutional or mutually
transnational corporations (TNC) with affiliated supply chain
complementary. Substitution occurs when a TNC has a
networks in various jurisdictions. In addition, global flows of
modality choice and can compare the advantages of both
foreign direct investment (FDI) are projected to continue on
modalities. For example, in the electronics industry, wherein
a downward trajectory due to lower TNC profits, with many
the construction of new factories in the host country is no
companies reviewing their investment plans due to ongoing
longer relevant or efficient amid the availability of
physical activity restrictions. Although the impact varies by
competent manufacturing firms to receive global contracts.
region, developing economies are expected to experience
On the other hand, both modes are mutually
the largest FDI decline (UNCTAD, 2021). 15
complementary when a TNC has access to an integrated
In line with the current TNC internationalisation trend global production network comprising of affiliates and third
impeding FDI/physical investment, domestic parties (domestic SME/corporation) using a Non-Equity
SMEs/corporations in Indonesia must prepare for alternative Mode (NEM) contract (UNCTAD, 2011).16
cooperation opportunities other than FDI, namely Non-
Table III.1. NEM Modes Variations and Related Sectors
Equity Modes (NEM). The NEM approach offers alternative
modalities to increase exposure to global markets beyond
FDI and trade. NEM is a contractual relationship between an
SME or domestic firm and a transnational corporation (TNC)
without direct capital investment.

Source: UNCTAD World Investment Report (2011), Bank Indonesia,

processed

NEM can be applied to various economic sectors and

stages of the value chain in differing forms, including
Source: UNCTAD World Investment Report (2011)
contract manufacturing/services outsourcing, licensing,
Figure III.3. NEM Concept: Middle Ground between FDI and Arm’s
Length Trade contract farming, franchising, management contracts,
concessions,and strategic alliances or contractual joint
NEM represents an intersection of FDI and arm's length ventures. Being contract-based, domestic
trade. In this case, TNC enters the middle ground (Figure SMEs/corporations in Indonesia require adequate
III.3) of the global supply chain in the host country contractual management capacity to attract TNC partners
(investment destination of TNC) by outsourcing some through NEM. In Indonesia, NEM provides an alternative for
business processes but maintaining control over the SMEs to unlock global markets indirectly. A Bank Indonesia
procedures and technical specifications. Therefore, the TNC assessment showed that several SMEs had developed NEM
retains stronger control than arm's length trade, yet control through contract farming between medium/large

15
UNCTAD Article (2021). Global Foreign Direct Investment Fell by 16
UNCTAD (2011). World Investment Report: Non-Equity Modes of
42% in 2020, outlook remains weak. Available from International Production & Development. United Nations
https://unctad.org/news/global-foreign-direct-investment-fell-42- Conference on Trade and Development.
2020-outlook-remains-weak. United Nations Conference on Trade
and Development.

19
NUSANTARA REPORT OCTOBER 2021
corporations and farmers, farmer cooperatives/clusters, and
subcontracts with TNC. NEM modes variations and related
sectors are recapitulated in Table III.1.

There are several determinants for TNC to enter NEM

contracts, including the availability of local partners
with adequate QCD capabilities and capacity. Therefore,
domestic SMEs/corporations in Indonesia require adequate
managerial skills and expertise, including adopting
technology and meeting sufficient capacity considering that
TNC support for NEM remains limited, unlike FDI. Moreover,
contractual agreements with TNC are generally unstable
and short-term in nature with an extension option. This may
become a risk for domestic SMEs/corporations because the
contract can be terminated at any time. Nevertheless, if
domestic SMEs/corporations can build competencies and
offer unique, high-quality products and services, they will
enjoy stronger bargaining power and negotiate contracts
with higher value-added. Finally, contractual management
at domestic SMEs/corporations in Indonesia a solid
regulatory foundation for commercial contracts, and the
legal basis for related industries in the host country are also
prerequisites for the success of NEM in terms of integrating
SMEs into global markets.

20
NUSANTARA REPORT OCTOBER 2021
EDITORIAL TEAM

Steering Committee
Aida S. Budiman

Editorial Coordinators
IGP Wira Kusuma
Widi Agustin S.

Authors
Economic and Monetary Policy Department
Macroprudential Policy Department
Bank Indonesia Representative Office of North Sumatra Province
Bank Indonesia Representative Office of East Java Province
Bank Indonesia Representative Office of South Kalimantan Province
Bank Indonesia Representative Office of Bali Province
Bank Indonesia Representative Office of South Sulawesi Province

For further information please contacting:

BANK INDONESIA
Economic and Monetary Policy Department
Sectoral and Regional Group
Ph. +6221 - 2981 8119, 2981 8868
Fax. +6221 - 3452 489, 231 0553
Jl. MH. Thamrin No.2 Jakarta 10350 – Indonesia www.bi.go.id