Indonesia Household Spending is Struggling But Good for the Long Term

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JAKARTA (TheInsiderStories) – The weakening of people’s purchasing power is now a concern. The economic recovery process expected to start this year have not been reflected by strong household spending.

In the first quarter (Q1) of 2017, household spending only grew 4.93 percent year-on-year (y-0-y) or below psychological level at 5 percent. There was an optimism that household spending will increase significantly in June along with the holy month of Ramadhan and Idul Fitri celebration. As home of biggest Muslim population, Indonesia usually see consumption peak in Ramadhan and Idul Fitri.

But, businessman have complained about the sales decline. The Indonesian Retailers Association (APRINDO) estimated retail sales in first half (H1) this year only grew around 4 percent, far lower than 11 percent growth in the corresponding period last year.

Indonesia’s largest retailer for apparel, beauty, and home products, PT Matahari Department Store Tbk (IDX: LPPF) posted a 0.55 percent decline in revenue in H1 this year while fashion retailer PT Ramayana Lestari Sentosa (IDX: RALS) which focuses on middle-to-low income segment, reported a 0.22 percent decline in sales in Q1.

Since the global economy slowed down, household spending has been struggling due to the falling of commodity prices, especially crude palm oil and coal price. Hence, the people living in commodity-based area such as Sumatera and Borneo experienced a decrease in income.

The Indonesia’s household consumption growth is actually fragile. Beside depending on commodity-based export performance, it is also depending on the government through subsidy, especially energy and electricity subsidy.

“This condition is contrast to what happened in China,” Catur Sugiyanto, Professor of Economics and Business in Gadjah Mada University said.

China’s household spending is driven mainly by strong investment growth, particularly the manufacturing industry. The Jokowi administration is trying to adopt this economic model by revoking subsidy for more than Rp300 trillion, to fund infrastructure projects. This strategy is crucial to put out Indonesia from consumption-based economy so that household spending growth becomes robust in the long term.

However, the transformation of this economic model has a big risk due to strong dependence of GDP to household spending. The household spending plays important role in Indonesia economy for long since many years before. In the period of 1960-1968, the household spending contributed more than 60 percent to Gross Domestic Product (GDP). Although gradually decreasing, the proportion of household spending over GDP remained 56.6 percent until 2016.

Chatib Basri, an economist who also former finance minister, said the Jokowi economic policy model emphasizing on supply side has a long term impact. He suggested the government to keep restrain the weakening of people’s purchasing power.

Fiscal stimulus needs to be directed to lower class who have high marginal propensity to consume. Of course, the government is aware of this issue. Since 2015, non-taxable income limit is raised by 125 percent.

Since 2016, the government also gave additional two-month salary for 4.5 million civil servant. Chatib said, it is not enough because it only affects formal workers and civil servant.

“You need to allocate and expand cash transfer program, cash for work,” he said.

Not only middle-low people, in 2015, the government also removed luxury tax for expensive stuff ranging from Louis Vitton bag to Chanel perfumes to encourage middle-up income people to spending their money.

But, it seemed less successful because they tend to put their money on deposit.Indonesia Deposit Insurance Corporation (LPS) data shows that the amount of deposits in banks reached Rp4,168.96 trillion in in January 2015. But in May 2017, it rose to Rp5,104.82 trillion.

The pressure of purchasing power in the beginning of this year came from the inflation. Electricity subsidy for 19 million people was removed by the government. Until June, administered-prices inflation reached 7.8 percent, higher than general inflation of 2.38 percent year-to-date.

The increasing of inflation pressures forced the government to give additional energy and electricity subsidy as set in the Revised State Budget (APBN-P) of 2017. So, the government assures there is no fuel, electricity, and gas subsidy in the next six month to meet inflation target this year at 4.3 percent level.

Darmin Nasution, Coordinating Minister of Economy Affairs said low inflation is important to keep people’s purchasing power. With combination of oil prices declining and government effort to keep low food prices, Indonesia is able to keep inflation beneath 4 percent in the last two years, whereas in 2013 and 2014 was at level 8 percent.

Darmin also believes that peoples have money to spend in their own pocket. The raising of commodity prices since the late of last year will increase people’s income. So, he projected GDP growth to be remain strong at above 5 percent, driven by robust household spending.

However, Darmin noted about the declining in retail sales. But, he said there is change of household spending behavior with a development of e-commerce industry. Although the proportion of e-commerce is relatively small, online transactions rose significantly amid the declining of offline retail sales.

Online transaction during Ramadhan and Idul Fitri in Lazada grew 250 percent, while reported a 200 percent jump. Bukalapak and Shopee also reported a 50% increase each in online transaction. Even though, there is no data available to show the overall of online transaction amount and proportion so far.

The increasing of transactions was also supported by positive growth of credit card transaction, which reached 2 percent in H1 this year, against 2.8% contraction in H1 last year. Bank Indonesia (BI), central bank’s decision to cut credit card interest rate from maximum 2.95 percent to 2.25 percent per month was encouraging people to using credit card.

Another positive signs of household spending recovery also come from the growth of flight passenger or traffic which rising 12.99 percent during Ramadhan, higher than 12.25% growth in H1 last year, also beating the government expectation of 9.8 percent rise.

Automotive maker posted slight growth for car sales in H1, only 0.4 percent rise with total sales of 534,288 units, despite declining sales in June due to less working days for Ramadhan and Idul Fitri. Automotive maker however still upbeat for 1.1 million car sales target this year.

Data from tax authority also shows that value added tax and luxury tax in H1 reached Rp192 trillion or grew 13.24 percent year-on-year, against 3.39 percent contraction in H1 last year.

Although, the household spending is still struggling, its recovery process will continue because the economy Indonesia has passed its lowest point in Q2 of 2015. For H2, the household growth is expected to be better driven by the increasing of government spending in line with government effort to meet GDP target of 2017 by 5.1 percent. (Rahmat Fiansyah)