Travel Journals: Manila and Jakarta

As many of our readers know, we’ve spent the last week in Manila and Jakarta, the capital cities of two of (in our opinion) the most fascinating countries in Southeast Asia. As always, they didn’t disappoint – in fact, both cities offered a glimpse of the promises of growth coming to fruition, albeit in different ways.

For us, it’s been 2 years since we were last in Jakarta, and 5 years since we were last in Manila. For sure, there are some very visible changes: almost everyone has a mask on, even while walking on the streets in the open; gone are the days when one could self-serve at breakfast – now one has to be served; and of course, the cost of transportation has risen markedly, not just in terms of the cost of air tickets, but also local transportation – even after the efforts of governments to lessen the impact from rising prices.

But some things don’t change: the unmistakeable smile that greets us when we enter shops and cafes, the jovial conversation shared not just by us but by the people around, whether for business or pleasure and the warmness (both literal and figurative) and optimism that is prevalent in both these cities amongst the people are a reminder that despite the narratives that are spun and fed to us, there are places in the world where things are actually going well. Not perfectly, of course, but people here are happy going about their business with a sense of purpose.

That’s where the commonalities end. For those who are unable to make the trip around the planet to come here (you should, and yes, this is a strong recommendation) and see the state of play for themselves, perhaps these notes can give a flavour of what’s really happening on the ground.

Sure, the caveat is that we were in the capitals of these countries, and what happens in the capital won’t be reflective of the entire country. Nothing beats being on the ground, but that’s not always an available option.

The Philippines – Crypto ground zero

We spent the first half of the week in Manila meeting up with old friends from our previous lives as emerging market fund managers. Manila was bustling – restaurants are doing well, so is retail, the streets are busy and traffic is terrible again (that’s probably a good thing?!). But a new generation has started to take centre stage: the impact of COVID on the country has been profound, accelerating adoption of digital technology in an unprecedented way.

In some aspects, the Philippines has seen changes common to many other countries: working remotely has now become the norm, with the lifestyles of many an office-goer profoundly overturned in the past 2 years, and not necessarily in a bad way. Swapping the office desk for the beach and a surfboard, for example, has led to the emergence of surfer communities at beaches just a few hours’ drive from downtown manila. Tales of a daily routine comprising a morning call, surfing, a couple of clients calls, lunch, more surfing and drinks into the night leave many wondering why they never tried that in the past – especially when there was no compromise in productivity.

But perhaps most unique to the Philippines was the phenomenon that was Axie Infinity and Play-to-earn. Sure, the skeptics would point to the collapse of the crypto markets as a reason to write it all off. And to some extent, as we pointed out when we first slapped the label of “bubble” on the metaverse theme all those months ago, that reflexivity and dependency on “numba go up” for the tokens that are earned is an issue that needs to be solved before Play-to-earn can get its mojo back.

Yet, perhaps unintentionally, many Axie Infinity players did the one thing that other crypto degens didn’t do – they sold the tokens they earned for cash. That cash went towards paying for food, new vehicles and even building new houses. Put differently, they took their profits on the way up, and many are now living with the realised benefits of their play-to-earn forays.

The result was that for a short period of time, a huge number of people were not only given a way to make a living in a locked-down world, but they were also given the opportunity to make life-changing amounts of wealth. Not the kind that buys you a villa in the Bahamas, but certainly enough to enjoy unprecedented financial security – even if only for a while.

It made believers of enough filipinos for crypto to become more than just a fringe project: there are 3.57m metamask users in the Philippines at the end of 2021, contributing 17% of the 21m new wallets created by metamask in 2021. Sure, we don’t know if that maps 1:1 to unique human users, but it’s a good guide for the trajectory of adoption. Even if we take some haircuts on that number to get to the number of underlying individuals, compare that number to the approximate number of equity trading accounts (institutional and personal in total) in the Philippines of c. 1m, and the number of fixed-income trading accounts (likewise institutional and personal in total) of c. 300k, or the c. 5.3m bank accounts opened with national ID numbers, and crypto is arguably MORE mainstream in the Philippines than stocks and bonds.

And it has likewise caught the attention of the big corporations who realise the potential for crypto applications to overcome business model hurdles in a completely different way, bringing an openness to experimenting with using crypto-native capabilities that stem from a public, decentralised ledger to grow their businesses.

It is this prospect that excites us the most: the possibility of using crypto in a way that delivers real-world impact and, most importantly, real-world operating cashflows that come as a result of creating value for users, as opposed to creating reflexive circular loops that accelerate as numba go up and implode as numba go down.

A handful of projects that we met – albeit in their early stages, some literally only months old – seem to have a path towards this promised land. Of course, promises are easy to make, and much harder to execute on and realise: the amount of funding required to hire the right talent to execute on these visions is material.

That said, one thing is different this time: unlike in the past when the Philippines was held hostage to the whims of global capital flows directed by asset allocators in a high tower somewhere, the exponential growth of crypto-native wealth by local Filipino investors – themselves no longer hamstrung by regulatory barriers and able to invest in headline hundred-baggers like YGG and Axie Infinity – has birthed a local venture community that can support and mentor these young startups.

Locally owned capital, provided by Filipinos to Filipino projects that have the potential to go global – that is what excites us the most. Execution is going to be the big question mark, but as far as set ups go, all of the above converge upon our opinion that the Philippines is in prime position to be ground zero for the true interfacing of the tech in crypto with the real economy. How? Who knows. But the ingredients are in place.

Indonesia – REALLY delivering on the promises of reform

After a four-hour flight south of Manila, we found ourselves in Jakarta, one of the cities we used to visit frequently before COVID hit. Arriving at midnight at the airport, some things were familiar enough – everything was intact. But there were crowds – travel was back, crowds waiting for their baggage around the reclaim belts, drivers holding signs with printed names of the travellers they were there to pick up (yes, non-indonesian travellers!) including ourselves… but this was past midnight on a Wednesday morning, when one would’ve expected the airport to be quiet. The cab ride into central Jakarta was smooth – we had heard of urban legends of the roads of Jakarta being empty during the lockdowns, although making the assessment about whether things were “back to normal” was something probably most fairly done the next day.

The following morning, as we headed out for meetings, it was clear that the only thing that had changed about Jakarta’s traffic was the widespread use of face masks. Nothing else was different – travel times were as long as they had always been, the roads were packed with cars and motorbikes. Jakarta is back in business.

Of course, when our conversations inadvertently came upon the subject of business and inflation, the common theme was finely balanced between the well-known (global) worries around inflation and costs, and worries about whether consumer affordability would be able to hold up, and the optimism around Indonesia’s future.

“Optimism?”, one may ask. For sure, the orthodox belief around emerging markets, Indonesia included, is that a strong USD and high oil prices are a recipe for a crash – as it has been before. The fact that Indonesia is probably THE best performing emerging market in the world, with the IDR being one of the most stable EM currencies at this time, has been looked upon with great skepticism. For the orthodox EM investor, alarm bells scream “risk”.

Hanging out with the local crowd tells a different story: one of long-dated reforms finally paying off, leading to a material improvement in per capita income, productivity and a general satisfaction with life. Hope for the future was strong, and even the man on the street feels it.

At the heart of these payoff drivers were reforms and investment into infrastructure put in place by the Jokowi administration over its two terms. Articulating the scale of these reforms is going to take an entire note in itself, but some snippets provided to us largely sum up the story.

Snippet no. 1 – the Jokowi administration has in the past 5 years built more kilometres of toll roads connecting major cities in Indonesia than in Indonesia’s entire 70 year history as a republic. Improving connectivity allows labour, materials, talent and wealth to spread throughout the country. That’s supply side economics, straight out of the textbook.

Snippet no. 2 – the administration’s adamant stand on banning raw metal ore exports and forcing the value added refining work to be done locally has allowed the total value of exports from Indonesia to exceed the peak of the last commodity boom (yes, THAT commodity supercycle). More value is being captured locally, jobs are being created and gone are the days of foreigners walking in, exporting cheap ore, and refining it elsewhere. That value is now being captured locally, and that’s made all the difference.

Next step: move further up the value chain and capture even more value through exports. The government has managed to be simultaneously nationalist AND pro-business at the same time, and in a world of resource scarcity, the vast undeveloped mineral resources of Indonesia are a gift that needs to be used and deployed prudently – for the ultimate benefit of the country. That is the plan, and most importantly, the plan is being put into action.

But perhaps the greatest credit goes to the Indonesian people: Indonesia should be the guiding light for how a democracy should function. The people voted this government in for a second time, and the government has delivered. Listening to Indonesia’s story over the past 8 years told by the people who experience it first-hand literally gives chills, and they’re multiplying.

We’ll be back

After two years of being stuck, it is fantastic to be back here. One of our friends remarked that we had a rather strange itinerary of meetings, a mishmash of businesspeople, new entrepreneurs, other investors, brokers and everyone else in between, both in Jakarta and in Manila. That’s not “orthodox”, but to some extent, neither are we: sure, we travel because we want to learn, that is the purpose. But more importantly, we want to meet with people that we like to meet and consider our friends.

As always, these trips are too short to do everything we want to do, and see everyone we want to see. But perhaps that’s the magic of it all – with a few constraints here and there, there’s always a reason to come back again.

And so, we shall.

Eugene LimJune 10, 2022