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Are Indonesia’s economic prospects bright for 2024?

Are Indonesia’s economic prospects bright for 2024

Brief overview of Indonesia’s economic landscape

Indonesia’s economic prospects for 2024 show promise, albeit with some accompanying risks and challenges. The anticipated growth trajectory suggests a 4.8% expansion in 2024, followed by a modest increase to 5.0% in 2025, as the commodity boom tapers off and domestic demand stabilizes. Notably, private consumption is poised to lead this growth surge, buoyed by a resurgence in tourism, remittances, and enhanced consumer confidence. Moreover, reforms and new government initiatives are expected to catalyze business investment and spur public spending, further propelling economic activity.

In terms of inflation, the outlook suggests a moderation to 3.2% in 2024 from an average of 3.7% in the preceding year, aligning within the target range set by Bank Indonesia. This downtrend in inflation is attributed to softening commodity prices and a return to normalized growth rates in domestic demand post-pandemic. However, there remains a degree of upward pressure on food prices due to the El-Niño weather pattern, which could disrupt food production in certain regions.

The external balance of Indonesia’s economy foresees a mixed picture, with services exports poised for growth amidst a recovering tourism sector, while goods exports face headwinds due to lower commodity prices and global economic softness. The current account deficit is anticipated to marginally widen to 1.9% of GDP in 2024, though it remains manageable, supported by foreign direct investment and portfolio inflows. The stability of the exchange rate and sufficient foreign exchange reserves further bolster the country’s external position.

Fiscal policy is expected to strengthen, with government revenues projected to rise owing to tax reforms, while spending gradually returns to pre-pandemic levels. The fiscal deficit is slated to narrow to 3.5% of GDP in 2024, adhering to fiscal rules that limit deficits to 3% of GDP by 2025. Moreover, Indonesia’s government debt-to-GDP ratio is forecasted to peak at 39.5% in 2024 before declining, comfortably below the legal threshold of 60%.

Monetary policy is anticipated to remain accommodative in 2024, with Bank Indonesia maintaining a policy rate of 3.5% unless inflationary pressures escalate. Continued collaboration between the central bank, government, and financial sector is expected to uphold economic recovery and financial stability. However, risks loom, particularly from external factors such as prolonged high interest rates in major economies and global geopolitical uncertainties, which could disrupt value chains and weigh on Indonesia’s economic performance. Moreover, challenges persist, necessitating structural reforms in human capital development, public spending efficiency, economic diversification, and environmental sustainability to ensure long-term prosperity and resilience.

This performance is attributed to key factors, notably a surge in household consumption, comprising over half of Indonesia’s GDP, driven by increased mobility and tourism following the easing of pandemic restrictions. Furthermore, export growth, fueled by elevated global commodity prices, contributed significantly, particularly in coal, palm oil, iron, and steel shipments. The nation’s economic resilience positions it as an exciting player on the world stage, with sustained growth anticipated in the years ahead.

Indonesia’s Economic Performance 2023

Indonesia’s economic resilience shines amid a global economic slowdown, driven by robust domestic demand and sustained positive export performance. Notably, the Transportation and Storage sector spearheaded industry growth, fueled by increased community mobility and a rise in foreign tourist arrivals. Despite inflation standing at 4.97% (YoY) in March 2023, slightly above the Bank Indonesia target range, the nation’s economic outlook remains promising, underpinned by strong domestic demand. Investment in 2023 reached IDR 328.9 trillion equivalent to 23.5% of the annual target, with contributions from regions outside Java, particularly Central Sulawesi, emerging as a top foreign direct investment (FDI) destination due to its rich mineral resources. However, concerns arise about potential impediments to Indonesia’s progress, given the global economic weakening.

In the third quarter of 2023, Indonesia’s GDP exhibited a growth of 4.94% (y-to-y), with household consumption as the primary driver, accounting for 52.62% of total GDP growth. The processing industry sector dominated contributions to GDP at 18.75%, followed by agriculture, forestry, and fisheries (13.57%). These five key industries collectively represented 65.32% of the Indonesian economy. Despite a slight dip in growth compared to the second quarter, Indonesia’s economic landscape reflects a diversified structure. Meanwhile, the annual inflation rate decreased to 2.61% in December 2023, staying within the central bank’s target range for the eighth consecutive month. The unemployment rate also demonstrated improvement, dropping to 5.32% in August 2023, marking a 0.54% decrease from the previous year, with 7.86 million people unemployed.

As Southeast Asia’s largest economy, Indonesia has achieved remarkable economic growth and poverty reduction, becoming the world’s fourth most populous nation and the 10th largest economy in terms of purchasing power parity. The nation’s proactive role in assuming the G20 Presidency reflects its commitment to fostering global cooperation for a robust and sustainable recovery from the impacts of the COVID-19 pandemic. With ambitious economic goals, Indonesia seeks to maintain its growth momentum and contribute to a stronger, more resilient global economic landscape.

Opportunities for Indonesia in 2024

Positive GDP Projections

Real GDP growth will pick up slightly in 2024 as moderating inflation and interest rates spur household spending. Bank Indonesia (the central bank) will loosen monetary policy in the second half of 2024, supporting economic growth from the latter part of that year. Before he steps down in mid-2024, the president, Joko Widodo (known as Jokowi), will double down on efforts to attract foreign direct investment into downstream heavy industries and into infrastructure development in the country’s new capital city, Nusantara. His administration will make only token gestures on other pressing political matters, including addressing the political strife in Indonesia’s eastern provinces and reducing corruption.

Forecasts and factors contributing to positive growth

Indonesia’s robust performance indicates that economic policy responses to the COVID-19 pandemic were successful. One factor which played a role in Indonesia’s success is a rising middle class with purchasing power. Middle class consumption has supported Indonesia’s economy for a long time, including during the pandemic. According to the World Bank, people with daily expenditures between US$7.75–US$38 are classified as middle-class. This group of 52 million Indonesians is sometimes called the concrete middle class.

Advancements in the Technology Sector

Indonesia has produced its own multi-billion-dollar tech platforms, a home-grown “super-app”, and numerous tech startups. It has one of the fastest-growing e-commerce markets in the world, on track to reach $360 billion in value by 2030. By one estimate, Indonesia ranks sixth in the world in terms of the number of startups with about 2,500 in 2023. Indonesia has also used digitalization to accelerate inclusive development, reaching the poor with better-targeted social assistance, national identification programs, and financial services.

Leveraging digital transformation for economic gains

Indonesia’s digital economy is expected to bounce back to its pre-pandemic levels with e-commerce steadily leading the path in both growth and profitability. The digital economy in Southeast Asia is on course to grow, in terms of Gross Merchandise Value (GMV), to US$300 billion by 2025 – and a further $600 billion by 2030 – from $218 billion at the end of 2023. Indonesia’s growth will largely be fueled by e-commerce due to the country’s success in controlling inflation and the “sticky” behavior of Indonesian online consumers.

Infrastructure Development

The year 2024 will be the last year of the administration of Joko Widodo. So, the government is urged to complete the strategic programs and projects that have been carried out in the last few years. It is important to ensure that the government transition will go smoothly and continuously. To work on infrastructure projects in 2024, the government has allocated a budget of 422.7 trillion Rupiah from the 2024 state budget (APBN), which is the highest infrastructure budget in the last five years. The amount is 5.8% higher than the 2023 infrastructure budget realization forecast that reaches 399.6 trillion Rupiah. Infrastructure budget in 2022 reached 373.1 trillion Rupiah. In 2021, the budget increased by 31.2% to 403.3 trillion Rupiah after decreasing by 22% to 207.3 trillion Rupiah in 2020 from 394.1 trillion Rupiah in 2019.

Government initiatives and projects

The Indonesian government has entrusted its state-owned company, Pelindo II, with the development and operation of an extension to the Tanjung Priok harbor in North Jakarta, the busiest trading port in the country. This new port, known as New Priok Port or Kalibaru Port, is envisioned to be a world-class facility, aimed at enhancing both the quality and quantity of Indonesia’s infrastructure.

Another significant infrastructure endeavor in Jakarta is the Mass Rapid Transit (MRT) project, a USD $1.7 billion initiative designed to alleviate the severe traffic congestion in the capital city. Upon its completion, the MRT system is expected to accommodate approximately 450,000 passengers daily, operating along two corridors: the North-South corridor and the East-West corridor. Currently, construction efforts are concentrated on the North-South corridor, which is being executed in two phases.

Additionally, Jakarta’s infrastructure development includes the Flyover Roads project, which entails the construction of two elevated non-toll roads approximately ten meters above existing thoroughfares. These roads will link Blok M to Antasari in South Jakarta and Tanah Abang to Kampung Melayu in East Jakarta. With a budget of USD $140.8 million, this public project aims to mitigate the persistent traffic congestion in Jakarta.

Sustainable Energy Opportunities and Investments in renewable energy sources

Indonesia has formally initiated its plan to raise a $20 billion investment fund dedicated to de-carbonization, marking a decisive step in its journey toward embracing clean energy. Spearheaded by the US and Japan, along with other global leaders, financing for the fund is channeled through Indonesia’s JETP initiative. The country aims to slash CO₂ emissions from its on-grid power sector by 250 million tonnes by 2030, while ambitiously targeting to increase the share of renewable energy in its power mix to 44%, a significant leap from the 12% recorded last year.

Despite strides towards renewable energy, coal still dominates Indonesia’s electricity mix, constituting 60% of its generation capacity, according to data from the International Energy Agency. Profits from the coal industry remain substantial, with the country earning $46.7 billion from coal exports in 2022 alone. Nevertheless, projections from the CIPP suggest that emissions from on-grid coal generation will peak well before 2030. By the end of the decade, Indonesia is anticipated to witness a reduction in coal capacity to levels observed in 2020, as renewables and gas, a comparatively cleaner fossil fuel, are embraced on a larger scale.

Enhanced Global Trade Partnerships

As Indonesia seeks to join and move up Global Value Chains (GVCs), a critical focus is on improving the efficiency of its services sector which currently represents only 11% of gross exports. Indonesia’s sourcing from GVCs is lower than would be expected given the country’s economic characteristics, which deprives the country of potential productivity gains. Putting in place quality infrastructure that facilities international trade is crucial. This requires boosting investment in transport and logistics. In addition, more investment in knowledge-based capital (KBC) is needed. Were Indonesia to fully implement measures in the WTO Trade Facilitation Agreement, it could reduce trading costs by as much as 15%, and facilitate wider participation in GVCs.

Expanding trade relations and agreements

Indonesia is a party to the region-wide Association of Southeast Asian Nations (ASEAN) Free Trade Area. ASEAN, and by extension Indonesia, also has preferential trade agreements with Australia, China, Hong Kong India, Japan, Korea, and New Zealand and concluded text-based negotiations of the Regional Comprehensive Economic Partnership in November 2019. Indonesia has signed bilateral free trade agreements (FTAs) with Australia, Chile, Mozambique, as well as with Iceland, Liechtenstein, Norway, and Switzerland under the European Free Trade Association, but as of the end of 2019, none of these FTAs are yet in force except with Chile. Indonesia recently concluded negotiations with Korea on a Comprehensive Economic Partnership Agreement. Indonesia is negotiating other FTAs with the European Union (EU), India, Tunisia, and Turkey as well as reviewing its trade agreements with Japan and Pakistan.

Navigating Challenges for Indonesia in 2024

Global Economic Uncertainty

Despite global economic instability and an anticipated slowdown in global growth to 2.1%, Indonesia’s economy maintains relative stability. Economic growth is projected to ease slightly to an average of 4.9% over 2024-2026 from 5% in 2023 as the commodity boom loses steam. Inflation is expected, influenced by easing commodity prices and tightened monetary policy. As the global economy experiences a slowdown, Indonesia faces potential declines in export demand and investment. Such circumstances could exert pressure on the rupiah exchange rate, rendering imports more costly. Inflation averaged 3.7% in 2023, according to World Bank, potentially eroding consumer purchasing power and Inflation is expected to ease to 3.2% in 2024, within the target band of Bank Indonesia. The government must strike a balance between curbing inflation and sustaining economic growth. Indonesia’s economic growth has been significantly driven by commodity prices in recent years. However, expectations suggest a moderation in commodity prices in 2023, which could adversely affect the incomes of Indonesians reliant on commodity production and exports.

This strength, however, is driven by robust domestic consumption, with key manufacturing sub-sectors including basic metal, machinery, leather and footwear, textiles, transportation tools, electronics, pulp and paper, and food & beverage. These sub-sectors also support various downstream industries such as energy, information technology, communication, transportation, and logistics.

Governance and Corruption Challenges

Since the fall of General Suharto’s regime, Indonesia has embarked on a comprehensive and unprecedented process of decentralization, devolving almost overnight enormous responsibilities to regional, provincial and local governments. In spite of considerable achievements, the Indonesian decentralization process continues to face major challenges of state capture by the local elites, a deeply entrenched patronage system and widespread petty and bureaucratic corruption. The emergence of stronger civil society and a free media constitute promising trends that, combined with further reforms aimed at promoting transparency, community participation as well as reinforcing upwards and downward accountability mechanisms, could ensure that decentralization fully yields the intended benefits.

Infrastructure Development Challenges

Indonesia witnessed a notable surge in its economic performance ranking, soaring by 13 points from 42nd to 29th, as highlighted by the President. Additionally, the country’s business efficiency experienced a commendable advancement of 11 ranks, elevating from 31st to 20th. Meanwhile, government efficiency also improved, moving up 4 ranks from 35th to 31st. In terms of infrastructure, Indonesia secured the 51st position in the rankings. Since late 1990s, expansion of Indonesia’s infrastructure has not been able to keep up with robust economic growth that occurred after the recovery from the Asian Financial Crisis amid the lucrative commodities boom. As a consequence, Indonesia’s economic growth fails to reach its full potential.

Demographic Dividends and Challenges

As a country with the world’s fourth-largest population, the archipelago of Indonesia brims with youth and energy. With over 70% of its population aged between 15 and 64, Indonesia is benefitting from a demographic advantage often referred to as the ‘demographic dividend’. This statistical event is a potent catalyst of economic growth and an attractive pull-factor for global investors. Demographic dividends have historically correlated with an influx of foreign direct investment and Indonesia is no exception.

Managing the youth population for economic growth

‘The youth of today are generally healthier, better educated, more urbanized, enjoy greater access to knowledge, and are more connected with the rest of the world than the preceding generations. A growing body of research attributes this marked improvement in the life situations of young people to socio-economic development and the ensuing prolonged transition to adulthood.

With 52% of Indonesia’s population of 270 million consisting of young people between the ages 18 and 39 years old, Indonesia’s youth will shape the nation’s future. Combined with Indonesia taking a more visible position on the world stage.

Overall based on the research findings, young people are optimistic about their personal futures but are experiencing a lack of momentum, with half of the youth expressing that life in Indonesia has not improved since their parents were the same age. A number of recommendations designed to amplify the voices of young Indonesians and support better youth policymaking is a need of the hour in Indonesia.

Industry-Specific Challenges

The major challenge, in a word, is productivity. Most of ASEAN manufacturers including Indonesia have labor costs lower than China’s, but they have lower productivity rates as well. If Indonesia wants to become attractive to manufacturing multinationals and turn the cost advantage it still enjoys into the basis for a robust manufacturing economy, the country cannot compete on low wages alone. It will have to dramatically improve its industrial productivity.

What Indonesia Must Do?

Economic Diversification

Economic diversification is seen as making a positive contribution to economic representation, developing a multi-sector economy, balancing the structure of the national economy, stabilizing socioeconomic conditions including enhancing people’s living standards, and making the country’s economy more open. Global economic trends lead to economic diversification, which is shown by the decline in the contribution of the agricultural sector to the economy. The solution to increasing the non-government sector in promoting economic growth is through increasing the regional economy through diversification. Why is regional diversification so urgent? Because besides being believed to be able to increase the driving force of the economy, it is also hoped that it will become a special strategy in supporting quality and sustainable economic growth in Indonesia.

Promoting diverse industries for resilience

Indonesia is preparing future taxes on nickel products and will continue pursuing its local industry capabilities, despite the looming trade retaliation from its trading partners. President Widodo’s announcement of plans to ban bauxite exports, starting in June 2023, indicates a doubling down on the forced down streaming strategy despite trading partners’ and the WTO’s concern. The government offers various fiscal incentives to encourage further investment in the EVs industry, including ten years of tax holidays. Still, building its EV industry will take a long time as the market remains relatively small. One critical market opportunity is in the motorcycle industry, as the country had more than 120 million motorists in 2021. With the rising cost of petrol, it is timely to encourage the shift towards EVs. For this, Indonesia needs to continue investing in EV infrastructure, such as charging stations, to unlock this $48 billion potential market. Most importantly, its effort to develop EVs needs to be synergized with the national energy transition agenda. The government will need to gradually reduce fuel subsidies, to provide incentives for the EV industry and other green and renewable energy alternatives.

Measures to improve transparency and reduce corruption

Every year, corruption diverts millions of dollars away from public spending and into the pockets of private individuals and accelerates socioeconomic disparities. The United States and Indonesia are working together to reduce and prevent corruption by enhancing public oversight, expanding civic engagement, and strengthening integrity in the public and private sectors.

Despite a number of successes over the last decade, Indonesia still faces challenges in addressing corruption. Licensing and procurement irregularities lie at the heart of 23 percent of cases handled by the Corruption Eradication Commission (KPK) in the last ten years. In addition to harming the economy, corruption in procurement and licensing can also cause significant and long-term damage to the environment, public health, and peoples’ livelihoods.

The USAID Indonesia Integrity Initiative (USAID Integritas) is a five-year, $10 million program managed by KEMITRAAN in partnership with Indonesia Corruption Watch (ICW), Transparency International-Indonesia (TI-I), and the Basel Institute on Governance. The project works closely with relevant Government of Indonesia (GOI) agencies and the private sector at the national level and in the priority provinces of North Sumatra, South Sulawesi, East Java, and East Nusa Tenggara, as well as in DKI Jakarta.

Accelerating projects to overcome bottlenecks

The Southeast Asian nation announced in 2019 that it would build a new capital, Nusantara, on Borneo Island, replacing an overcrowded and sinking Jakarta. The new city is expected to cost a total of $32 billion by the time it is fully completed in 2045. Accelerating these projects would pave the way for the economic development of Indonesia.

Human Capital Development

The Government of Indonesia’s Vision for 2045 sets an ambitious path that will require significant investments in human capital and social protection Indonesia continues to set ambitious goals for its growth and development. The Government of Indonesia’s vision for 2045, when the country celebrates 100 years of independence is to achieve high-income status and reduce poverty to nearly zero. In addition to sustained growth and income opportunities for all, an inclusive and efficient social protection (SP) system will be essential to meet these ambitious goals. In most countries today, effective risk-sharing and SP policies play important roles in building equity, resilience, and opportunity, and in strengthening human capital. Indonesia is no different. Risk-sharing interventions can reduce and prevent poverty, and make growth more equitable by safeguarding households’ human and physical capital.

Balancing economic growth with environmental preservation

The Indonesian government has established a bold target of achieving net-zero emissions by 2060, with an interim goal of attaining net-zero emissions in Forestry and Other Land Use by 2030. Encouragingly, the country’s land use policies have started to yield results, evidenced by a significant reduction in deforestation. However, the journey ahead demands a balance, requiring coordinated efforts to mitigate greenhouse gas emissions, safeguard and restore nature, and sustain economic growth.

Central to this is the crucial role of the private sector. Leveraging their financial resources, industry expertise, and ability to drive grassroots initiatives swiftly, private enterprises are instrumental in advancing Indonesia’s sustainability agenda.

Conclusion

In summary, Indonesia faces a complex landscape of challenges and opportunities as it charts its course towards sustainable development. With promising economic growth projections, advancements in technology, and a youthful population, the nation is primed for progress. Yet, it must confront issues such as governance and corruption, infrastructure deficits, and the imperative to balance economic growth with environmental preservation. By prioritizing transparency, accelerating infrastructure projects, and investing in human capital, Indonesia can realize its full potential and emerge as a global leader in sustainable development, fostering innovation, equity, and resilience for generations to come.

Analysis

Why Southeast Asia Is Crypto Friendly?

Why Southeast Asia Is Crypto Friendly?

Blockchain technology, first conceptualized by an anonymous entity known as Satoshi Nakamoto in 2008, has revolutionized the way we think about digital transactions and data security. Initially associated primarily with Bitcoin, blockchain has since evolved into a versatile technology underpinning a wide array of cryptocurrencies and decentralized applications. Over the past decade, its usage has surged dramatically, capturing the curiosity and interest of millions worldwide. One region where this growth is particularly pronounced is Southeast Asia.

The origins of blockchain technology can be traced back to 1991 when researchers Stuart Haber and W. Scott Stornetta introduced a system for timestamping digital documents using cryptography to ensure they couldn’t be tampered with or misdated. However, it wasn’t until nearly two decades later that blockchain found its first real-world application with the launch of Bitcoin.

Today, the adoption of cryptocurrencies is skyrocketing globally, with Southeast Asia emerging as a global hotspot for cryptocurrency adoption. This region’s progressive stance towards cryptocurrency markets, burgeoning digital infrastructure, and the relative scarcity of established banking institutions have created a fertile ground for high-growth startups in the cryptocurrency space. Characterized by its diversity and rising incomes, Southeast Asia is attracting investors and entrepreneurs keen on tapping into the dynamic market opportunities.

According to a recent report by venture capital firm White Star Capital, Southeast Asia is home to over 600 cryptocurrency and blockchain companies. The report highlights that a significant portion of the recent surge in venture capital funding in the region has been directed towards web3, blockchain, and cryptocurrency startups. In 2022 alone, these companies collectively raised more than $1 billion in funding. This trend pinpoints the region’s pivotal role in the global cryptocurrency landscape and its potential as a hub for innovation and growth in the blockchain sector.

As global nomads build new businesses straight from their phones, the impact of blockchain technology continues to evolve, transforming not only finance but also sectors like insurance, supply chains, healthcare, and transportation.

Country-Specific Insights

Singapore stands out as a pioneer in establishing clear and forward-thinking blockchain regulations, including those for tokenized securities. This clarity enables businesses to operate without regulatory ambiguity. The country serves as a key hub for the Asian blockchain industry, hosting the headquarters or holding companies of numerous Asian blockchain startups. Alongside other blockchain-forward regions like Dubai, Abu Dhabi, and Luxembourg, Singapore is solidifying its position as a central player in the global blockchain landscape.

Thailand leads Southeast Asia in cryptocurrency trading and investing. The country has a well-established middle class that is making substantial investments in digital assets. This robust investment climate positions Thailand as a significant player in the regional cryptocurrency market.

The Philippines has a vibrant Web3 community, with 20–30% of players of Sky Mavis’s Axie Infinity, a pioneering Web3 game, hailing from the country. This high level of engagement makes the Philippines home to one of the largest proportions of Web3 users globally.

Vietnam is emerging as a developer powerhouse and a notable leader in the Web3 space. The country has produced significant blockchain gaming startups like Sky Mavis, and its youthful, talented developers are expected to play a crucial role in the global blockchain ecosystem.

Indonesia, considered Southeast Asia’s elder brother and giant, has the fourth-largest population in the world and a rapidly expanding economy. The country’s potential is enormous, and it is garnering increasing attention over time. Additionally, Bali is praised as a crypto oasis in Southeast Asia, further highlighting Indonesia’s growing significance in the blockchain industry.

Malaysia is a true treasure in the blockchain world, home to prominent blockchain infrastructure and analytics companies such as CoinGecko and EtherScan, which are recognized worldwide. Malaysia’s contributions make it an important player in the global blockchain ecosystem.

Investors and demographics

As of 2022, NBC News estimates that 21% of American adults owned cryptocurrency, highlighting a significant interest in digital assets. Globally, India topped Chainalysis’s worldwide crypto adoption index as of September 2023, with Nigeria and Vietnam rounding out the top three, demonstrating the widespread embrace of cryptocurrency in diverse regions. Developing markets such as the Philippines and Indonesia also show a high number of adopters. In the United States, high earners are disproportionately represented among cryptocurrency investors; 25% of all crypto owners make $100,000 or more a year, compared to 15% of the overall population. Furthermore, a Morning Consult survey reveals a gender disparity in cryptocurrency ownership, with men making up over 70% of bitcoin owners despite representing only 48% of the overall population, while women constitute 30% of cryptocurrency owners.

Crypto Adoption Rates in Southeast Asia

The cryptocurrency market in Southeast Asia is anticipated to reach 1.79 billion dollars in 2024, with an annual growth rate (CAGR 2024-2028) estimated at 8.75%. This growth trajectory is expected to result in a total market value of 2.499 billion dollars by 2028. Southeast Asia continues to lead the world in cryptocurrency adoption, with countries such as Vietnam, the Philippines, and Thailand ranking among the top 20 in the 2023 Global Crypto Adoption Index. Singapore remains a standout leader in the Southeast Asian crypto landscape. In 2024, it maintains its position as a hub for crypto enthusiasts, with nearly 10% of its population actively holding cryptocurrencies, highlighting its influential role in the regional market. Vietnam and Thailand have shown significant progress in embracing decentralized finance (DeFi) technology, closely following the United States in adoption rates. This rapid uptake indicates a growing interest in innovative financial solutions within these countries.

Several factors are driving the expansion of the cryptocurrency market in Southeast Asia. Many countries in the region have a significant percentage of unbanked individuals and low levels of financial inclusion, making cryptocurrencies an attractive alternative. Nations like Singapore and Hong Kong have implemented advantageous policies that encourage the growth of the cryptocurrency sector. Additionally, numerous emerging technology funds across the continent are actively supporting and funding various cryptocurrency startups. The region boasts high internet access and smartphone penetration rates, facilitating the use of digital currencies. There is also a general skepticism towards traditional financial systems and fiat money, leading to a greater openness to adopting cryptocurrencies.

In support of this burgeoning ecosystem, the Central Bank of Singapore pledged $112 million last year to assist regional fintech initiatives utilizing cutting-edge Web3 technology. Additionally, through Singapore’s Project Guardian effort, regulators from both countries collaborated to create additional crypto testing activities.

Web3 Startups, Consumer-Facing Services, Decentralized finance (DeFi) platforms and Blockchain games (GameFi)

While a large portion of the deep, basic research and infrastructure development in the blockchain space still occurs in the United States, Southeast Asia is excellent for web3 firms offering consumer-facing services. The demographics of Southeast Asia are very favorable for web3. The populace is young, has an innate understanding of technology, and is more open to trying new things. People are highly motivated to join by the financial side of cryptocurrency because it is primarily a market for developing economies.

Decentralized finance (DeFi) platforms encompass a collection of financial services and products developed on decentralized blockchain networks without the use of intermediaries like banks or other financial organizations. With DeFi, anyone with an internet connection can access a more transparent and open financial system. Examples of DeFi services and products include decentralized exchanges, asset management, insurance, lending and borrowing platforms, and other financial services that can be accessed and managed via decentralized applications on a blockchain network. In 2024, the DeFi market is expected to generate a billion dollars in revenue, with revenue predicted to increase at a 10.60% annual rate (CAGR 2024–2028).

The DeFi market is experiencing rapid innovation and growth. One trend gaining traction is decentralized exchanges (DEXs), which allow users to trade cryptocurrencies without a central authority. Additionally, the integration of non-fungible tokens (NFTs) in DeFi is becoming more common, opening up new avenues for asset collateralization. The need for more inclusive, transparent, and accessible financial services than traditional finance is a major factor propelling the DeFi industry’s expansion. The DeFi market is expected to continue expanding, driven by the creation of new use cases and applications, growing acceptance of cryptocurrencies by mainstream investors, and the introduction of new DeFi platforms and protocols.

A new area of bitcoin and blockchain technology that combines gaming is called “GameFi,” or blockchain gaming. Through the use of NFTs, GameFi seeks to disrupt established gaming business models by granting players genuine ownership of in-game assets. The swift uptake of GameFi in ASEAN can be attributed to the socio-economic obstacles faced by the region’s populace, in addition to their keen interest in gaming. Numerous ASEAN nations face challenges such as a substantial portion of the populace without access to banking services, about 71% in the Philippines alone. Under these conditions, play-to-earn blockchain games offered an alluring way for consumers to augment their income, fueling GameFi’s rapid uptake.

Axie Infinity, a play-to-earn (P2E) game created by the Vietnamese startup Sky Mavis, is one of the most well-known use cases for GameFi. This game significantly impacted ASEAN society, particularly in the Philippines during its 2020–2021 peak. Even those with no prior gaming or cryptocurrency skills could earn cash through Axie Infinity. Players from across Southeast Asia could earn rewards and points in the game and exchange them for fiat money to meet basic necessities. As Axie Infinity’s popularity grew, the cost of in-game avatars, or Axies, skyrocketed, making it difficult for some to afford playing. However, P2E revenue was sufficient to sustain many people in ASEAN, acting as a helpful addition to their total income. Gaming guilds such as Yield Guild Games (YGG) stepped in to ensure that those with limited funds could still play the game by allowing them to rent gaming equipment at a discounted rate and return a portion of their profits to the guild.

The P2E industry has grown by an astounding 188% since 2021, attracting over 61,000 monthly searches. More developments and expansion are anticipated in the GameFi space in the coming times. A notable change in Southeast Asia’s GameFi scene is the growing interest of popular Web2 gaming businesses in Web3 and blockchain-based game creation. For example, Ampverse, a gaming and esports firm based in Thailand, recently created Ampverse Web3, a business division dedicated to the metaverse. With a significant presence in the local esports scene, Ampverse aims to develop a strong Web3 community by educating players about NFTs, P2E, and other GameFi-related topics.

Challenges and Opportunities

Asia is home to several of the world’s most important financial hubs, including China and India, as well as major economies like Singapore, Hong Kong, United Arab Emirates, and Japan. These distinct legal jurisdictions each have their own cryptocurrency laws. For example, trading and ownership of digital assets are permitted in Singapore, but retail cryptocurrency ads are not. Hong Kong has welcomed bitcoin businesses to maintain its status as a significant global financial center, while Dubai has been aggressively pursuing the adoption of digital assets. Japan has gradually relaxed token listing regulations and is becoming more accepting of cryptocurrencies. Conversely, China outlawed the mining and trading of cryptocurrencies in 2021, and while the government is striving to develop comprehensive crypto legislation, India has implemented strict crypto regulations.

Approximately 500 million individuals in Southeast Asia are anticipated to reach working age by 2030. The ten nations that make up the Association of Southeast Asian Nations (ASEAN)—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam—already have economies that rank fifth in the world when taken as a whole. These economies are expected to grow at a rate of more than five percent annually over the next decade, which is significantly faster than the global average. A Google study predicts that 3.8 million new users will join the internet each month in Southeast Asia due to these favorable demographics. Based on approximately 50 billion dollars in investment, the internet economy in the region is expected to surpass 200 billion dollars in value by 2025.

While cryptocurrencies have made remarkable strides and holds a lot of promise in Southeast Asia, there are still certain obstacles to consider. Among them are cybersecurity and fraud. As cryptocurrency gains popularity, it attracts the interest of hackers, con artists, and other criminals. The region has seen multiple instances of ransomware attacks, phishing scams, hacking, and cryptocurrency theft. Users need to be more vigilant and cautious about their online security and privacy. Additionally, uncertainty surrounding regulations and compliance poses challenges. While some Southeast Asian nations have adopted a pro-crypto stance, others remain circumspect or antagonistic. The regulations and regulatory frameworks in the region are not uniformly clear or consistent, making it difficult for businesses and consumers of cryptocurrency to understand various requirements across different jurisdictions. Further, there is still a lot of misinformation, misconceptions, and mistrust surrounding cryptocurrency. Many people do not know how to use cryptocurrency properly or safely, or they do not understand its advantages and risks.

Despite these challenges, there are several benefits to cryptocurrency adoption. Protection against inflation is one of them. Many currencies lose value due to inflation, but many people believe that cryptocurrencies provide a buffer against this. For instance, the total quantity of Bitcoin is capped at 21 million coins. As the money supply expands faster than the amount of Bitcoin available, its price is expected to rise. This supply limitation mechanism also serves as a buffer against inflation. Another benefit is the speed of transactions. In the United States, for example, moving assets or funds between accounts or sending money to loved ones can take time but, cryptocurrency transactions can be completed in seconds. Moreover, cryptocurrency transactions can be economical, with negligible or even zero transaction costs for international money transfers, eliminating the need for third parties like VISA to validate transactions.

Cryptocurrencies represent a new decentralized money paradigm, helping to release money from governmental control and combat currency monopolies. This decentralization means no government agency can determine the value of a coin or its flow, making cryptocurrencies safe and secure. Additionally, cryptocurrency investments offer variety and can help diversify portfolios. Cryptocurrencies have shown significant growth over the last decade, and their market pricing activity appears unattached to conventional markets such as equities or bonds. This can result in more consistent returns when combined with assets that have lower price correlation. Cryptocurrencies are also accessible, requiring only an internet-connected computer or smartphone to open a bitcoin wallet, without the need for identity verification, credit checks, or background checks. This ease of use facilitates online transactions and money transfers.

End Note

Southeast Asian nations are making significant strides in adopting blockchain, AI, and cryptocurrency technology, quickly positioning the region as a hub for these advancements. According to Chainalysis’s 2023 global crypto adoption index, countries like Vietnam, the Philippines, and Thailand are poised for a transformative shift in the cryptocurrency industry. Thailand leads the region in applying blockchain technology across various sectors, while Singapore, known for its Web3 leadership, proactively supports financial solutions. In 2023, Singapore’s central bank allocated $112 million to support regional fintech projects leveraging advanced Web3 technologies. Prominent cryptocurrency platforms such as Coinbase, Blockchain.com, Circle, and Crypto.com have applied for licenses to operate in Singapore. As we embrace the Fourth Industrial Revolution, the ASEAN economies are brimming with potential. To fully capitalize on these opportunities, businesses must adopt digital technologies and become more agile, making digital transformation essential to harness the region’s economic power. Preparing for Industry 5.0, ASEAN is poised for a bright future where embracing digital changes will be key to success.

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Analysis

Is Vietnam the Next China?

Is Vietnam the Next China?

As the sun rises over Ho Chi Minh City, the streets are already alive with activity. In a vast, bustling factory, hundreds of workers skillfully piece together electronics, garments, and machinery that will soon be shipped around the world. This scene is strikingly similar to what one might have witnessed in Shenzhen during the early 1990s, when China’s economic engine was just revving up. Today, with a population surpassing 100 million, Vietnam, the world’s fifteenth most populous country, is drawing comparisons to China. However, a more precise analogy might be the “next Guangdong,” a regional powerhouse with immense potential. As 2024 unfolds, the distinctions and similarities between China and Vietnam become ever more pronounced, revealing the unique trajectories of these two nations.

Vietnam has steadily grown its economy, becoming a manufacturing hub that attracts foreign investments due to its strategic Southeast Asian location and a vast coastline. According to Fred Burke, managing partner at Baker McKenzie in Vietnam, “Vietnam’s strategic approach to economic reform and integration into global supply chains is creating a new economic dynamo in Southeast Asia. The country’s young workforce and pro-business policies are key factors driving its growth.” In contrast, China’s economic might, characterized by its vast GDP, industrial output, and technological advancements, continues to dominate globally. Demographically, Vietnam benefits from a younger population, while China grapples with an aging population affecting its labor force and economic dynamics.

Both countries are integral to global supply chains, with Vietnam emerging as a key manufacturing base for textiles, electronics, and footwear, whereas China remains the world’s factory with extensive infrastructure and a diverse industrial base. Politically, China’s centralized governance and state-led economic model contrast with Vietnam’s socialist-oriented market economy, driven by political stability and openness to reforms. Geopolitically, China’s assertiveness in the South China Sea and its Belt and Road Initiative significantly influences regional dynamics, while Vietnam carefully balances economic ties with China and fosters strategic partnerships with other nations. We’ll deeply analyze the contrast between the two nations. Let’s get into the details of it.

Economic Growth & Manufacturing

China

China’s economic ascent is unparalleled, transforming it into the “factory of the world.” Despite the decreasing share of exports in its GDP, China remains the largest trading nation globally. While its export share of GDP has decreased to around 20%, China’s manufacturing has shifted towards high-tech industries such as electric vehicles, renewable energy, and telecommunications. Services have also grown in importance, contributing a larger share to the GDP. China is not only the world’s biggest exporter but also its second-largest importer, with a booming consumer market. It holds the largest foreign exchange reserves, amounting to $3.1 trillion. With the largest labor force globally, China is a key player in global trade, leading in several high-tech and industrial sectors.

China’s innovative capacity is also noteworthy; it was ranked the 11th most innovative nation globally in 2022 and leads in various metrics related to patent filings and research output. It is also the second-largest holder of financial assets worldwide. China has a labor force of 791 million people and has lifted hundreds of millions out of poverty, creating a significant middle class. This demographic shift has fueled domestic consumption and innovation, making China a leader in sectors like fintech and AI. However, rising labor costs, which have increased to an average of $6.50 per hour, push manufacturers to seek more cost-effective locations like Vietnam.

Vietnam

Vietnam’s economic growth has positioned it as one of Southeast Asia’s leading manufacturing hubs. Its strategic location, cost-effectiveness, and favorable business environment have attracted significant foreign investment. Labor costs in Vietnam are notably lower than in China, at approximately $2.99 per hour, making it an appealing destination for manufacturing. Key industries include textiles, electronics, machinery, and footwear.

The World Bank projects that Vietnam’s economy will continue to grow, reaching 5.5% in 2024 and 6.0% by 2025, driven by its robust manufacturing sector and improved infrastructure. Vietnam’s labor force of over 57 million people, combined with a young and tech-savvy population, enhances its attractiveness to global investors.

Vietnam’s rise in manufacturing is further bolstered by its participation in various free trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA). These agreements have reduced tariffs and increased market access, making Vietnam a vital part of global supply chains.

In the realm of electronics, Vietnam has become a significant player. Major global companies like Samsung, Intel, and LG have established large manufacturing facilities in the country. Samsung alone accounts for nearly one-quarter of Vietnam’s total exports, highlighting the country’s critical role in the global electronics market. This growth is supported by a young and increasingly skilled workforce, with a median age of 32 and a literacy rate of over 95%.

The textile and garment industry is another cornerstone of Vietnam’s manufacturing sector. Vietnam is the world’s third-largest exporter of textiles and garments, with the United States being its largest market. The industry employs around 2.5 million people, contributing significantly to the country’s GDP. Competitive labor costs, coupled with improvements in production quality and compliance with international standards, have made Vietnam a preferred destination for apparel manufacturing.

Vietnam’s government has also prioritized the development of industrial zones and clusters to attract foreign direct investment (FDI). These zones offer various incentives, including tax breaks and streamlined administrative procedures, to create a conducive environment for manufacturing. The government’s focus on infrastructure development, such as expanding ports, highways, and industrial parks, further enhances Vietnam’s appeal to global manufacturers.

Political Systems

China

China’s political system is dominated by the Chinese Communist Party (CCP), one of the largest political parties globally with over 85 million members. The CCP exercises centralized control over all aspects of governance, including the military, media, and civil society. The Politburo and its Standing Committee, China’s top decision-making bodies, dictate policies and oversee their implementation across the country. Despite market-oriented reforms since the late 1970s, the state retains control over key industries and exercises significant influence over private enterprises.

China operates under a socialist market economy, characterized by strong state intervention. This system has enabled rapid economic growth and modernization but has also led to concerns about human rights abuses and the concentration of power. David Shambaugh, a professor of political science and international affairs at George Washington University, reflects on this dual-edged sword: “China’s centralized political system has been both a blessing and a curse. It allows for swift implementation of policies but also stifles political freedom and can lead to significant social unrest if not managed carefully.”

The CCP’s centralized governance ensures political stability and policy continuity, critical factors in China’s economic success. Despite its effectiveness in policy implementation, concerns persist about political freedoms and social cohesion under such a tightly controlled regime.

Vietnam

The Communist Party of Vietnam (CPV) is the sole political party in the Socialist Republic of Vietnam. Founded by Hồ Chí Minh in 1930, the CPV has maintained unitary rule and central authority over the military, administration, and media. The CPV follows democratic centralism, with the National Congress electing the Central Committee, which in turn elects the Politburo and the Secretariat.

Vietnam has undergone significant economic reforms since the 1980s under the Đổi Mới policy, transitioning from a centrally planned economy to a socialist-oriented market economy. These reforms have encouraged foreign investment, trade, and private enterprise, propelling Vietnam into one of the fastest-growing economies globally.

Vietnam’s unique blend of socialist governance and market reforms has created a stable and conducive environment for economic growth, attracting significant foreign investment while maintaining political stability

Foreign Relations

China

China’s expansive claims in the South China Sea have caused tensions with neighboring countries, including Vietnam. The region is believed to hold vast reserves of oil and natural gas, leading to competing claims over islands and maritime areas. China’s assertive actions, including building military outposts and expanding islands, have drawn international criticism and increased regional instability. The United States supports freedom of navigation and has called for a legally binding code of conduct to resolve disputes peacefully.

China’s Belt and Road Initiative (BRI) is a massive infrastructure project aimed at enhancing global connectivity. The BRI has expanded China’s political and economic influence, though it has also faced criticism and concerns about debt sustainability among participating countries. The initiative aims to build a vast network of infrastructure, including roads, railways, and ports, linking Asia, Africa, and Europe. Despite its ambitious goals, the BRI has been viewed with suspicion by some nations, fearing it as a tool for Chinese geopolitical expansion.

Vietnam

Vietnam has skillfully navigated its foreign relations, balancing ties with major powers like China and the United States. Despite deep economic links with China, Vietnam has sought to diversify its partnerships to avoid over-reliance on any single nation. The recent upgrade of US-Vietnam relations to a “comprehensive strategic partnership” reflects Vietnam’s strategic balancing act. Vietnam’s approach involves hedging, assurance, and deterrence to manage relations with great powers.

Vietnam’s military upgrades and strong national defense posture underscore its commitment to safeguarding its sovereignty, particularly in the contested South China Sea. The country also maintains active diplomatic ties with middle powers like Japan, South Korea, and India, enhancing its strategic options. ASEAN remains central to Vietnam’s foreign policy, providing a platform for regional stability and cooperation.

Trade & Investment

China

China’s transformation into a global trading titan is one of the most remarkable economic stories of recent times. From the 1970s, China’s reforms opened its economy to the world, culminating in its entry into the World Trade Organization (WTO) in 2001. This integration into the global economy propelled China to become the world’s largest exporter. However, China’s export dominance is facing challenges due to rising labor costs and shifting global trade dynamics.

China’s economic model is evolving, with a growing focus on domestic demand and high-tech industries. Economist Nicholas Lardy of the Peterson Institute for International Economics notes, “China’s export-led growth is transitioning towards a more balanced approach, emphasizing domestic consumption and high-tech industries. This shift is necessary for sustaining long-term economic growth amid rising global competition.” While China remains a major player in global trade, its export-driven growth model is maturing. Increasing labor costs and competition from other manufacturing hubs like Vietnam are eroding China’s competitive edge. Additionally, geopolitical tensions and a shift towards deglobalization may impact China’s future trade prospects.

Vietnam

Vietnam’s integration into the global economy has been facilitated by a vast network of free trade agreements (FTAs). The country is part of 16 bilateral and multilateral FTAs, which have deepened its economic ties with the world. Vietnam’s total trade value reached $683 billion in the previous year, reflecting its robust trade activities.

Vietnam’s trade and investment landscape has benefited from favorable conditions, including lower labor costs, strategic location, and a business-friendly environment. The country has attracted significant foreign investment, particularly in manufacturing and export-oriented industries. Vietnam’s economic outlook remains positive, with continued growth expected in the coming years.

Challenges & Opportunities

China

China, frequently hailed as an economic giant, is at a turning point in its development. The Chinese economy has grown significantly over the last few decades but now faces several difficult obstacles. These include declining growth, rising debt, changing demographics, environmental concerns, international trade conflicts, and technological rivalry.

Scott Kennedy, a senior advisor and trustee chair in Chinese business and economics at the Center for Strategic and International Studies (CSIS), comments on these challenges, stating, “China faces significant economic challenges, from rising debt to demographic shifts. However, its focus on innovation and strategic investments in technology and renewable energy could pave the way for sustained growth in the coming decades.”

China’s formerly spectacular GDP growth rates have slowed, with the IMF projecting a mere 4.5% growth in 2024, down from previous double-digit rates. One reason for this slowdown is the diminishing returns on extensive infrastructure investments. Rapid housing development, for example, has fulfilled demand ahead of income levels, limiting further growth potential. The growing debt load is another pressing issue. China’s total debt, including household, corporate, and government debt, has surged to over 280% of GDP. This raises concerns about financial stability and the potential for economic crises if not managed properly.

Changing demographics pose a unique challenge as China’s population ages and the workforce shrinks, putting pressure on government finances, healthcare systems, and pension plans. Environmental issues, such as air and water pollution, soil erosion, and sustainability, also demand significant investment and policy reform.

International trade tensions, especially with the US, complicate China’s economic landscape. The ongoing trade disputes have disrupted supply chains and created uncertainty in global markets. Additionally, China’s technological advancements, while impressive, face challenges in intellectual property rights, cybersecurity, and regulatory barriers, limiting its aspirations for global technological leadership. Despite these challenges, China’s commitment to innovation, renewable energy, and strategic planning offers opportunities for continued growth and development.

Vietnam

Vietnam presents numerous prospects but also faces significant challenges. Conducting business in Vietnam can be hindered by bureaucratic delays, corruption, legal and regulatory inconsistencies, and infrastructure issues. Ruchir Sharma, former head of emerging markets and chief global strategist at Morgan Stanley, observes, “Vietnam’s economic potential is immense, but to fully realize this potential, it must address infrastructure gaps, regulatory inconsistencies, and labor market challenges. By doing so, Vietnam can continue its impressive growth trajectory and solidify its position in the global economy.”

Although Vietnam has lowered duties on many goods per its WTO obligations, high tariffs remain on certain categories. Reducing these tariffs could enhance export growth, especially in sectors like agriculture, processed foods, and nutritional supplements. Vietnam’s role in developing secure, diversified supply chains is crucial. As global companies seek to reduce reliance on China, Vietnam’s favorable business environment, free trade agreements, young and tech-savvy workforce, and strategic location make it an attractive manufacturing hub. However, challenges such as underdeveloped infrastructure, high startup costs, unexpected tax assessments, complex land acquisition processes, and labor shortages can pose obstacles to foreign investment.

End Note

As China and Vietnam navigate their unique paths in the global economy, the future holds both promise and challenge. China’s strategic investments in technology and renewable energy, alongside its evolving economic model, suggest potential avenues for sustained growth amid global uncertainties. Meanwhile, Vietnam’s dynamic manufacturing sector, bolstered by its young workforce and strategic partnerships, positions it as a pivotal player in Southeast Asia’s economic landscape. The road ahead will likely see both countries continuing to adapt to shifting global dynamics, balancing economic expansion with environmental sustainability and geopolitical stability. How each nation navigates these complexities will not only shape their own futures but also influence broader regional and global economic trends.

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Analysis

Digitalization can Transform Philippines into a Trillion Dollar Economy

Philippines Vows Resilience Amid Escalating Tensions with China

Let us explore the Current State of Digital Competitiveness in the Philippines, Economic Potential of Digital Transformation, Government Initiatives and Funding and the challenges faced by the Philippines in digital transformation. We will delve into the urgency for the Philippines to fully embrace digitalization across government processes, businesses, and education systems and will highlight the potential benefits for economic growth and competitiveness.

The Philippines needs a digital transformation to propel its infrastructure, government policies, and financial inclusion forward. The First Digital Transformation Development Policy Loan (DPL) aims to achieve this by supporting competition in the digital infrastructure markets, aiding in the digitization of government operations and service delivery, and promoting the adoption of digital financial services and payments. This initiative will also facilitate reforms to enhance e-commerce, stimulate value-added and competitive activities in the digital services markets, and support industry skill development.

According to an IT expert, “More widespread use of digital technology can enhance the effectiveness and transparency of government services, empowering people who were previously remote from decision-making centers.”

A thriving digital economy in the Philippines, which benefits millions of people and small businesses, hinges on the widespread adoption of digital payments. Currently, cash is predominantly used for over-the-counter grocery purchases (95%), government services like birth certificates and driver’s licenses (97%), and government fines and penalties such as traffic tickets (88%).

Technology is transforming business operations across the Philippines. Organizations are adopting digital technologies and solutions to enhance customer experiences, increase efficiency, and streamline processes. By implementing digital technologies, businesses can optimize operations, foster innovation, and automate mundane tasks.

This technological integration is disrupting traditional business models, compelling conventional sectors to rethink their strategies and adapt to the digital age. Businesses that embrace digital transformation can gain a competitive edge by offering innovative products and services that meet evolving consumer demands.

Adopting digital transformation will enable businesses in the Philippines to explore new growth opportunities, expand their customer base, and achieve long-term success. The essential shift to digital will reshape the Philippines’ economy, positioning it as a vibrant hub for digital innovation and entrepreneurship.

IMD World Digital Competitiveness Ranking 2022

According to the 2022 World Digital Competitiveness Ranking by IMD Business School, the Philippines moved up two spots to 56th out of 63 nations, with a score of 52.81. Despite this improvement, it remains the lowest-ranked Southeast Asian nation.

Among the 14 Asia-Pacific economies in the IMD index, the Philippines ranks 13th, only ahead of Mongolia. It trails behind its Southeast Asian neighbors: Indonesia (51st), Thailand (40th), Malaysia (31st), and Singapore (4th).

In the knowledge category, the Philippines made a slight improvement, climbing from 63rd to 62nd. It maintained its positions in training (61st) and talent (55th), but slipped one spot in scientific concentration (57th).

The technological standing of the Philippines saw a more notable improvement, moving from 54th to 49th, largely due to a 45th place ranking in the technological framework sub-factor. However, it held steady at 62nd and 40th for the capital and regulatory framework sub-factors, respectively.

Conversely, future readiness is a critical area needing attention, as the Philippines dropped from 57th to 58th. This metric assesses how well society, business, and government are adopting and embracing technology.

The data highlights the urgent need for a digital transformation in the Philippines. By advancing its digital infrastructure, enhancing government policies, and increasing financial inclusion via digital finance, the country can improve its competitiveness and form a dynamic digital economy.

Economic Potential of Digital Transformation

The Philippines needs a digital transformation to unlock its economic potential and drive innovation. The country’s digital infrastructure is crucial for this transformation, serving as a key building block for sustained economic growth.

According to Statista, the Philippines’ data center industry is projected to generate $488.50 million in sales by the end of the year, with a compound annual growth rate (CAGR) of 6.51% from 2023 to 2028. By 2028, the market volume is expected to reach $669.70 million. Maximizing the use of digital technologies could elevate the Philippines’ economic potential to an estimated $101.3 billion by 2030.

Research and Markets analysis highlights the rapid digital transformation of businesses and organizations in the Philippines, aided by cloud services from providers like Tencent Cloud, Alibaba Cloud, Google Cloud, and AWS.

Eight major technologies hold the potential to revolutionize labor and corporate practices in the Philippines: mobile internet, cloud computing, big data, artificial intelligence (AI), financial technology (FinTech), advanced robotics, additive manufacturing, the Internet of Things (IoT), and remote sensing. These technologies can significantly enhance the Philippines’ economy by fostering new business models and boosting productivity.

By 2030, fully leveraging digital technologies could unlock up to $101.3 billion in economic value annually in the Philippines. This value would come from increased productivity, higher incomes, cost savings, and overall GDP growth. The sectors expected to benefit the most include consumer goods, retail, hospitality, education and training, and agriculture and food.

Government Initiatives and Funding

In 2022, the digital economy of the Philippines grew to approximately $36.5 billion, accounting for 9.4% of the nation’s GDP, according to the Philippine Statistics Authority (PSA). This marks an 11% increase from over $33 billion in digital transactions recorded in 2021, which encompassed e-commerce, digital media and content, and the infrastructure enabling these digital transactions. Notably, infrastructure that supports digitalization emerged as the largest contributor, accounting for over $28 billion, or 77.2% of the total digital economy.

Professional and commercial services, along with telecommunications services, were major contributors to this growth, collectively accounting for 7.5% of the total digital economy, amounting to $26 billion in 2021. This significant contribution underscores the importance of robust digital infrastructure and services in driving economic growth.

Digital transformation is a central theme of the Philippine Development Plan (PDP) 2023–2028. In his second State of the Nation Address (SONA), President Marcos mandated the digitization of all vital public services by all government institutions. To enhance connectivity, more common tower infrastructures are being constructed, and local governments are digitalizing business registration processes. The integration of online government services into a single platform is being achieved through the eGov PH Super App, while the national broadband plan aims to improve internet and mobile services. Additionally, the Cloud First Policy is being implemented to encourage the use of cloud computing technology for public service delivery and government administration.

The Philippine government is also strongly encouraging micro, small, and medium-sized enterprises (MSMEs) to embrace innovation and digitalization. Legislative measures have been enacted to advance the ICT sector.

Challenges & Opportunities

The Philippines’ digital infrastructure has significantly improved over the past few years, paving the way for further digitalization of the financial sector and other economic activities. The government’s initiatives to encourage both the public and private sectors to adopt digital technologies are promising, although there are still some obstacles to overcome. To ensure these initiatives are effective, the country must address challenges such as enhancing cybersecurity to protect against online threats and vulnerabilities, as well as updating labor laws and skills training to meet the demands of a digital economy.

Despite these advancements, the Philippines’ digital infrastructure still lags behind that of its ASEAN counterparts. Many rural and remote areas lack reliable, high-speed internet connections, which can hinder economic growth and digital inclusion. Additionally, the country falls short in key areas of digital development, such as digital governance, digital transformation and trade, and digital security. Modernizing its soft infrastructure is crucial for the Philippines to fully realize the benefits of economic digitalization.

Addressing issues like the workforce’s lack of digital skills, public resistance to digital change, and regulatory gaps and loopholes will require effective solutions. The rapid advancements in technologies such as big data, blockchain, artificial intelligence, and the Internet of Things  present challenges for the legal framework, which struggles to keep pace. Developing and implementing timely and appropriate policies is essential to support these technological advancements.

To protect consumers from online risks and vulnerabilities, the Philippines needs to enact suitable regulations for the use of digital technologies. In 2022, the country was the second most attacked nation online, according to cybersecurity firm Kaspersky. The nation’s largest telecom provider reported 16 billion cyberattacks in 2023, nearly 90 times more than in 2022. The 2023 National Cybersecurity Index (NCSI) by the eGov Academy ranked the Philippines 45th out of 175 countries, highlighting the urgent need for improved cybersecurity measures.

The Philippine government is on the right track in developing policies to promote economic digitalization. However, to ensure a smooth digital transformation process, it must prioritize infrastructure development, enhance digital skills within the workforce, and strengthen the regulatory environment. By addressing these areas, the Philippines can better position itself to harness the full potential of its digital economy.

Conclusion

In conclusion, it’s imperative for the Philippines to wholeheartedly embrace digitalization across all sectors – government processes, businesses, and education systems. This urgency stems from the potential benefits it can bring for economic growth and competitiveness.

By fully integrating digital technologies, the Philippines can streamline government operations, making them more efficient and accessible to citizens. Businesses can leverage digital platforms to reach wider audiences, improve productivity, and innovate in their respective industries. Furthermore, digitalization in education can enhance learning experiences, equipping students with the skills needed for the digital age and fostering a more dynamic and adaptable workforce.

Overall, embracing digitalization isn’t just a choice, but a necessity for the Philippines to thrive in the global economy. The sooner the country embraces this transformation, the greater its chances of unlocking new opportunities and sustaining long-term growth and competitiveness.

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