Increase in Living Cost to Affect Startup Verticals

The government presents a "reward" of increasing rate on some products and services after the turn of the year. The public, particularly those with middle to low income is certainly the most affected.

The increase rate and services become highlighted issues by Indonesia's digital service providers. The question is how much the increase in living costs will affect the business and consumers.

The increasing rate and costs

The contribution rate of the Social Security Organizing Agency (BPJS) for Health is the most highlighted issue. Based on Presidential Regulation (Perpres) Number 75 of 2019, BPJS Health contribution rate increased by around 65% - 115% for three different classes.

The cigarette excise tax is another issue for some Indonesian people. With the number of smokers reaching 65.19 million people, the increase in cigarette excise at 21.55% is pressuring for smokers who are mostly come from the middle class.

In the transportation sector, rates on some toll roads are also increasing this year. The Jakarta-Cikampek Toll Road, Surabaya-Gempol, Belawan-Medan-Tanjung Morawa, are some of the toll roads with increasing rates. The rising price is to be followed by the government's plan to revoke the 3 kg LPG subsidy. It's still under discussion, however, if it's true, the price per bottle estimated to reach Rp 35,000 according to market prices.

Above all, the current global economic situation expected to remain depressed along 2020. The neverending trade war between US and China and the global recession create another external issue in the local economy.

Impact on digital service providers

Bima Yudhistira, an INDEF economist, agrees that this year will be a difficult year for owners of digital services. The first thing he highlighted was the flow of funding for tech companies would rather difficult given the most funding came from the US, Europe, China, and Japan, where the global recession effect is projected to hit severely than in Indonesia.

In terms of demand, the increase rate of products and services will make people think twice to spend money. "In 2020 they will probably save some money because the increase in living costs is not followed by a significant increase in income, therefore, I thought the demand will not be as high as in the previous years," said Bima.

This kind of situation will encourage investors in the digital ecosystem to be more aware of their investment. Bima believes the "money-burning contests" often performed by the on demand platforms, such as Gojek and Grab, e-commerce, online travel applications (OTA), and peer-to-peer lending will be much reduced this year.

MDI Ventures' Head of Strategist, Aldi Adrian has a rather different opinion. He said the global economic slowdown had no effect on the domestic digital business ecosystem. Aldi actually sees what happened to WeWork and Uber as factors that will influence the startup business, especially in terms of acquiring new customers using unrealistic discounts.

"The outside sentiment, from the US in particular, such as WeWork and Uber, is much greater. That is a sign that they must change methods and cannot depend much on discounts, yet to have a more sustainable strategy, must be more positive, a business which capable of cashcow," he added.

Moreover, Aldi also predicts that there will be types of startups that can grow better in this difficult year. He mentioned startups in the category of software as a service (SaaS), B2B2C e-commerce, and social commerce.

From the consumer's perspective, in this case, those people who have been spoiled with discounts, the situation forced them to spend money wisely. Bank Indonesia (BI) has projected this year's inflation to grow at 3.1%, and the food supply chain rate will be a shock. The combination of the economic situation with the demand for a new method has created a conclusion that the digital service providers will act more rationally.

"In 2019, the inflation rate is low because there's no increase in living cost, while this year everything is significantly increasing, people should think twice to spend in order to save money," Bima said.

– Original article is in Indonesian, translated by Kristin Siagian