The trade tensions between the United States and China have dragged down global economic growth and resulted in the relocation of many production facilities.
In the financial market, high-yielding emerging market assets have become the destination to invest in for global funds, as central banks in countries around the world embark on an easing cycle by cutting benchmark interest rates.
Fitch Group president and chief executive officer Paul Taylor talked about these issues with The Jakarta Post’s Vincent Lingga, Esther Samboh and Riska Rahman, and how Fitch positions itself in the middle of such economic conditions. The following are edited excerpts of the interview.
Question: How is Indonesia positioned with regard to the rest of the world in this time of very uncertain economic conditions and against the backdrop of the trade war and Brexit uncertainties?
Answer: Our overall view is that we will see an economic slowdown next year. I think what’s a little bit unusual about next year is that it’s going to be a coordinated slowdown because we see in 19 out of the world’s 20 biggest economies’ GDP growth will decline next year.
(The trade war) is a big issue not just between the US and China, it’s the secondary effects that we think is the biggest problem. If you look at Europe at the moment, Europe has very slow growth, struggling with growth. Partly to do with Brexit, but it’s actually more to do with how open the big European economies are and how they have been affected by the slowdown in China. The impact of the trade dispute is not just in the US, not just in China, it spreads out across the world.
Interestingly in this region, in this case Indonesia, one of the fall-out effects we’ve seen here is to see a lot of movement of industrial capacity to other countries. Vietnam, in particular, has benefited. Thailand has benefited. I don’t think Indonesia has benefited up until now. There has to be an opportunity because the trade dispute is not going away.
Indonesia has to get its act together. If it can deliver all the things [the government] has been talking about, then that will attract in some of that foreign investment and start moving the economy quicker. There will be a big dislocation of companies doing things in different markets and the countries that we just talked about are really going to benefit from it.
The things President Joko Widodo talked about on focusing on human capital, having better infrastructure and making it easier to do business is sensible to me. If Indonesia can get all of that right and deliver all of them, then that will attract in some of that foreign investment and start moving the economy quicker.
In Fitch’s view, what is the best-case scenario of an economy or a market that Indonesia can model upon to benefit from the world’s transformation, including relocation of factories driven by the trade war?
I should also stress one of the advantages you have is that Indonesia doesn’t have that much debt. One thing that happened since the global financial crisis, many emerging markets took on a huge amount of debt, particularly dollar debt. The number of emerging markets, if you look at Latin America in particular, they’re not in a good position to take advantage because they have piled on debt.
Not all emerging markets have the same opportunity, they absolutely don’t. We’ve got some fairly unique attributes that should allow you [Indonesia] to be ahead. In the meetings I’ve had with the government yesterday and today, I’ve received the same message, which is great. People are saying the same thing, that’s important. There’s alignment, there’s no over-promising, which is impressive and quite realistic. They also have a vision on the path forward and understandings on how hard it’s going to be to make things work.
I’ve been encouraged from the alignment of the messages and then the high understanding from the people on the things out there and that they still have a tough task to do over the next several weeks. Of course there is stuff that is going to happen and disrupt it, but overall it has been encouraging.
How do you see the global economic situation affecting the bond market, as there’s a general trend for central banks around the world to lower benchmark interest rates to boost growth?
I struggle with understanding negative interest rates. We’re in a very unusual place globally. It’s obviously not healthy for the long term because of problems with long term savings and many of the developed market economies, you have ageing populations, people living longer, so there’s a building problem, which is increased with lower negative interest rates. How are you going to pay for the services those people need in the future?
I understand they’re doing it to stimulate economic growth, but I think the sooner it can come to an end the better. The other thing it’s doing, which is a good thing for the Indonesian market, is it’s really pushing investors to find yield. They are rushing all over the place to find yield.
There’s US$220 trillion of fixed income debt globally. That number has gone up very quickly since the financial crisis. The number went very quickly until last year where it declined by 4 percent after it hit a plateau over a long time. I think this year is either going to be flat or slightly down. Next year it’s going to be flat or up by 1 to 2 percent. It doesn’t move that much because these are huge numbers. There will be a constant flow of debt, always active and a big market.
You may not be the biggest of the three credit rating agencies, but you were the first to come to Indonesia and the only foreign credit rating operating in Indonesia until now. What is your vision behind this and what are the group’s top priorities going forward?
We’re very much the challenger in the business. Since 2000 when modern Fitch was created, we’ve made fantastic progress in competing with the two big players. Our market share has been increasing consistently for the last seven or eight years. When it comes to this region (Asia Pacific), we’re on par with S&P and Moody’s. We set up in 2006 (in Indonesia). My guess would be, depending on what’s happening in Europe and the growth, I suspect within three to four years, our business in Asia will be bigger than our business in Europe.
There’s a big emphasis on technology. As you know, there’s a whole technological revolution going around with artificial intelligence, machine learning, natural language processing and the data that are available. Right now, we’re working on a technology solution that pulls out the key points from the big, thick reports from our analysts with just a push of a button so investors can easily find what they are looking for.
We’re capturing more data on the environment, social and governance (ESG) as investors are very focused on those issues, so we have to do more along those lines. We’re using our brand label platform to build up more data products.