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Is Indonesia Safe from Silicon Valley Bank’s Bankruptcy?

Sri Mulyani about silicon valley bank
Is Indonesia Safe from Silicon Valley Bank's Bankruptcy? Image Source: twitter.com

Finance Minister Sri Mulyani Indrawati has stated that, so far, Indonesia’s financial sector remains safe from the impact of the Silicon Valley Bank (SVB) bankruptcy in the United States.

According to her, the financial sector is still in a very good situation with the movement of foreign capital towards emerging markets.  

“Judging from exchange rate movements and capital flows to emerging markets, we can see that, in this case, capital flows have entered Indonesia,” said Indrawati in a press conference at her office in Central Jakarta on Tuesday 14th March. 

In February alone, there was an inflow of US$22.9 billion. The details for the purchase of shares in Indonesia amounted to US$4.9 billion and the purchase of bonds was at US$17.9 billion.

“This has resulted in better bond prices and decreased yields,” she added.

On the other hand, the Silicon Valley Bank case itself would likely not have as big an impact as the fall of Lehman Brothers in 2008, which caused a global economic crisis.

We hope that the United States can stabilise its financial sector because it will affect the rest of the world,” she said. 

Furthermore, the Financial Services Authority (OJK) Banking Supervision Chief Executive, Dian Ediana Rae, said that the closure is not expected to have a direct impact on Indonesian banks which do not have business relationships, credit lines, or investment in SVB securitization products.

Unlike SVB and banking in the US in general, banks in Indonesia do not provide credit and investment to technology startups or crypto companies.

He claimed that after the 1998 financial crisis, Indonesia had taken fundamental steps in the context of institutional strengthening, legal infrastructure and governance strengthening. There was also progress in customer protection, which has created a strong, resilient, and stable banking system.

This is reflected in the performance of the Indonesian banking industry which continues to grow positively amidst domestic and global economic pressures.

Based on data, currently, the condition of Indonesian banking shows good liquidity performance. The liquid assets for non-core deposits (AL/NCD) and liquid assets for third-party funds (AL/DPK) are above the threshold of 129.64 percent and 29.13 percent respectively. This figure is above the regulatory threshold of 50 percent and 10 percent, respectively.

However, regarding the impact on startups in Indonesia, the Director of the Economic and Law Studies Centre Bhima Yudhistira said this has the potential to cause startup companies to drag capital. Even worse, it could trigger another wave of layoffs.

“Massive efficiency in startups is directly and indirectly related to funding from SVB and its affiliated venture capital,” said Yudhistira.

Yudhistira cannot determine the potential for layoffs because the number of Indonesian startups that have received funding from SVB or its affiliated venture capital must be calculated in advance.

Digital Economy Observer from the Institute of Economic and Finance Nailul Huda also said that startups in Indonesia have the potential to find it increasingly difficult to get funding after SVB is liquidated.

“I think the impact will be that it will be increasingly difficult to get funding from abroad. It will also be even more difficult considering that the portion of funding from the US to our digital startups is quite large,” said Huda.

Therefore, domestic sources of funding for startups need to be increased again to anticipate the impact of the SVB closing. 

Silicon Valley Bank collapsed on Friday 10th March morning, United States time. The bankruptcy of the startup lender specialist bank occurred after 48 hours after a capital crisis.

California regulators finally decided to close SVB and place it under the control of the US Federal Deposit Insurance Corporation (FDIC).

One of the factors contributing to SVB’s bankruptcy was the aggressive increase in interest rates by the US central bank (the Fed) over the past year. To shore up its balance sheet, SVB sold US$2.25 billion of new shares.

As interest rates approached zero, banks had been buying up long-term bonds that appeared to be low risk. However, when the Fed began raising interest rates to control inflation, the value of these assets fell.

This made the banks, including SVB, bear unrealised losses of up to US$1.8 billion in bonds, whose value was destroyed by the increase in the benchmark interest rate.

The California-based bank’s collapse sparked panic among major venture capital firms who were reportedly advising companies to withdraw their money. SVB was the 16th largest bank in the US in 2022, with assets of around US$209 billion.

The collapse of SVB has also threatened to affect a series of global giant startups that have a certain amount of cash from their operations in the bank. Some of these companies include Vox Media, Roblox, Unity, Roku, and Circle to name a few.

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