Indonesia’s G20: How Can Major Economies Solve Global Supply Chain Disruption?

Consequently, we might witness that the existing incumbent forms alliances that have a strong market power to set and determine the global freight rates, especially by implementing the blank sailing program by reducing the number of operating vessels during the pandemic.

The tit-for-tat strategy has led to an increase in freight rates on major routes globally. For this reason, a price cap might be seen as an appropriate strategy to prevent further pressure on the transportation cost that potentially drives cost-push inflation.

By implementing this proposal, many countries would benefit from solid guidance and certainties for both exporters and importers in estimating their freight costs. Furthermore, we expect more price stability by avoiding unnecessarily price fluctuation due to logistic costs.

The G20 member economies could facilitate the dialogue between the relevant government authorities or agencies and the Main Line Operators (MLOs) in designing and setting these price caps.

On the structural problems, the emerging economies usually have limited power on controlling the exportation of goods and services to the global market. Due to its limited capacity, shipping operators in the emerging economies might have the ability to transport goods from each country towards regional hubs before the cargo is offloaded on the mother vessels onto the destination across the globe.

The capacity of shipping operators in emerging countries is constrained due to the inability to procure vessels associated with vessel price fluctuation.

The global vessel index increased dramatically during the pandemic from about 5000 to nearly 25.000 which indicates the price of container vessels might increase five times compared to the pre-pandemic period. Even so, the exact change varies depending on the size and age of the vessels.

The absence of dedicated financial intermediaries in the shipping industries adds to the complexities. This is a loophole where a stronger tie and cooperation between the G20 countries might facilitate the establishment of the global financial institutions that understand the typical risks in the shipping industry hence emerging economies can strengthen their shipping industry reducing the dependency on the global Main Line Operators (MLOs).

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Some countries decide to assist the industry by providing private and government bank loans, banks devoted to the shipping industry, or institutions such as Maritime Finance Incentives (MFI), Bank Pembangunan Malaysia Bhd (BPMB), and Merchant Marine.

To spread the risk of vessel price volatility, the government could offer a guarantee to the shipowner for gaining a loan from a commercial bank or subsidy the interest rate by the lenders offered by the government.

Another solution is that syndication between banks to provide lending for the shipowner. These solutions could be a way out to help the small and open economy in the world including Indonesia facing the capacity constrain that entails cascading impacts on transportation costs and inflation.

(This article is written jointly by Senior Research Associate Ibrahim Kholilul Rohman and Research Associate Afif Narawangsa Luviyanto from IFG Progress, a leading Think Tank established by the Indonesia Financial Group. The views expressed in this article belong to the writers).