Customer shops at traditional market. Wet markets and traditional grocery shops are holding on to customers in rural areas and small towns, but they are losing ground in larger towns and cities. (Photo: The Insider Stories)

JAKARTA (TheInsiderStories) – Indonesia posted impressive performance in investment last year after a number of efforts to repeal regulations and streamline business procedures, as suggested by the World Bank.

Last year, Indonesia booked Rp692 trillion (approx US$46 billion) in investment, with 6.15 per cent growth increase from 4.47 per cent in 2016.

Unfortunately, the rise in investment was not matched by any increase in consumption patterns. A slowdown in household consumption is most apparent in current retail sector trends, which saw a number of outlets shut down.

Clarks and Gap are among the fashion retailers counting their last days in Southeast Asia’s largest economy.

The lack of steam is further exacerbated by the recent shift in consumption to online-based services from brick-and-mortar outlets.

Indonesia household consumption, which accounts for about a half of the country’s economy, only expanded by 4.95 percent, slowing from 5.01 percent in 2016.

That percentage represents the slowest consumption expansion in the last decade for Southeast Asia’s largest economy.

Household consumption is an important gauge to observe because it accounts for some 56 percent of Indonesia’s economic growth.

Moreover, Indonesia’s retail sales grew just 2.6 percent (y/y) in December.

Analysts claim that Indonesian consumers now prefer to save their funds in the bank rather than spending. (Photo: The Insider Stories)

Bleak household consumption is often cited as the reason for Indonesia’s sluggish economic growth in recent years. Despite falling interest rates, consumers remain hesitant to spend on various items, such as cars, homes, and others.

Analysts claim that Indonesian consumers now prefer to save their funds in the bank rather than spending. There is a number of reasons consumption has proven hard to accelerate in the past year, namely, decreased interest in spending, a shift in consumption patterns, and employment affecting income.

Somehow, the government expects improvement in investment climate will boost both consumer and investor confidence in this political year.

Bambang Brodjonegoro, Indonesia’s Minister of National Development Planning, said a 20 percent increase in non-government consumption was visible ahead of Indonesia’s presidential election in 2014.

Before elections, during campaigning, those who are engaged in these elections – specifically the candidates themselves – spend a lot of money on products and services related to the campaigns, including t-shirts, banners, advertisements, gifts to attract votes, and more. Due to this infusion of additional money in society, overall economic growth in the regions gets stimulated.

In fiscal side, despite rising commodity and oil prices early in the year, the government has decided to maintain electricity and fuel prices, which are major contributors to inflation, stable, at least for the first quarter of this year, a move aiming at boosting people’s purchasing power in a country where consumption accounts for over half of GDP growth.

The government set a 2.5- to 4.5-per cent inflation target this year, compared with a 3- to 5-percent target last year.

Finance Minister Sri Mulyani Indrawati has allocated more for social welfare and subsidies, amounting to Rp283.7 trillion (approx. US$21.2 billion) this year, increased 3.65 per cent over last year’s budget.

Moreover, it will focus more on fiscal stimulus for the people, in order to boost public purchasing power, especially for the lower middle-class segment.

Meanwhile, international financial institution Morgan Stanley expects the economy to remain on a gradual recovery path, with GDP growth of 2018/2019 at 5.4 / 5.5 per cent, respectively.

According to Morgan Stanley, by 2017 Indonesia’s export growth was one of the strongest in Asean, and they expect strong export momentum to continue. The continuation of export recovery will have an impact on increasing capacity utilization, and generating employment opportunities. It will then provide a gradual increase in capital expenditures and consumer spending.

“Indonesia is heading for local elections on June 18 and a National Election on 19 April. Historically, in the run-up to elections, fiscal policy tends to be easier when old players are running again, and this also coincides with serial increases in personal consumption.”

Enhanced macro stability also lays the foundation for further growth recovery in the future. According to Morgan Stanley, Indonesia is currently better able to withstand the normalization of the Fed compared to 2013, due to improved fundamentals.

Overall, Morgan Stanley rates positive for growth prospects in the region. According to them, ASEAN will be better than North Asia in 2018 and among ASEAN countries, Morgan Stanley assesses Indonesia’s growth prospects as the most positive.

 

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