Financial market liquidity helps finance growth through credit lines while providing interest income for capital owners. Derivation of this liquidity is commonly viewed at two key figures: money supply scales and banks’ third-party funds.
In theory, a low level of liquidity could constrain growth potential. Accordingly, too high of a liquidity level could induce inflationary risks.
In 2018, Indonesian liquidity indicators were under pressure, going lower as compared to 2017. The culprits in this situation could include a low level of capital inflow, slowing foreign direct investment flow, crowding-out effects and the development of new transaction instruments in the digital era.
The last issue is surely an interesting and unconventional factor to examine. Not only has it shaped the global economic landscape in the last decade, but also it is almost impossible to pinpoint how far it will play a part in the future.
We are well accustomed to what is called the opportunity cost of holding money. We put our income in saving and/or investment instruments, predominantly in the banking sector, to help us in our transactions (transaction motive), to make it safe for future needs (precautionary motive) and to gain interest (income motive).
Banks, stand-ins for intermediary agents, reroute this money to the economy as lines of credit. This liquidity-creation system has been in the financial market from the early days of banks.
With the rise of the digital era, these motives become less relevant, including in Indonesia. With a digital payment system, for example, the need for conventional money for the transaction motive is rapidly decreasing. Digital wallets are the millennial representation of banknotes and cards.
Moreover, the changing nature of individuals leads to new types of precautionary and income motives. As more educated Indonesians join the income-generating class, the idea of investing for precautionary and income motives has not only risen but moved farther from conventional banking instruments.
The registered number of stock market investors in Indonesia is at its historically highest level.
A rather streamlined business model supported by technology and relatively moderate regulations gave many start-ups and new investment instruments an advantage in terms of cost efficiencies compared to conventional banks.
In a more consumption-driven society, functionality and efficiencies provide the best incentives. Cash back and discounts are the new gems.
The loss of cash back and discounts for not using new payment instruments, for example, is slowly becoming the new definition of “cost of holding traditional money”.
We are now, voluntarily, putting a larger portion of our income into our e-money, OVO, GoPay, etc., reducing the amount that was traditionally stored in conventional saving or checking accounts in banks. Moreover, stock market transactions can now easily be done through our smartphones.
If monetary and business theory holds, shocks from new instruments should be relevant in the short term. As these instruments mature the level of interest should diminish. Nevertheless, in the new digital era, the level of business maturity and the learning curve is drastically skewed.
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