Photo by Finance Ministry

JAKARTA (TheInsiderStories) – Sustaining the momentum of economic growth is the theme of the 2018 state budget, according to Finance Minister Sri Mulyani Indrawati, even as household consumption, which accounted for more than half of Indonesia’s Gross Domestic Product (GDP), is losing its steam.

The parliament approved the 2018 state budget on Wednesday which aimed to achieve economic growth of 5.4 per cent. The pace of economic growth, however, is unlikely to be driven by household consumption, which is expected to expand at 5.1 per cent in the 2018 budget.

Mulyani said gross capital formation, or investment, will emerge as the key driver of the economy in 2018, thanks to the government’s infrastructure spending and investors’ appetite on Indonesia’s potential. Therefore, President Joko Widodo sees the issue stability and sustaining the momentum of reform as imperative for next year, the minister said.

Indonesia is facing slow growth of economy that only reach 5.01 per cent in the two quarters of 2017 where the real sector was slowing down and people’s buying power, especially among lower-class and poor people was so weak.

The condition was proven by the Central Statistic Agency data that showed contribution of household consumption to Gross Domestic Product (GDP) was only 2.65 percent in second quarter this year, slump from the first quarter of 2017 and second quarter 2016 reached 2.72 percent of total GDP.

The 2018 state budget is expected to serve as a fiscal instrument to boost economic growth as well as to support the efforts to alleviate poverty, reduce disparities, and create more jobs, Mulyani said.

For its part, the government will pursue three fiscal strategies in 2018; first, optimizing state revenues by maintaining the investment climate; second, using budget efficiently and increasing productive budget to support priority programs; and third, encouraging efficient, innovative, and sustainable financing.

The slowing of household consumption is most apparent in the current trend in the retail sector, which saw a number of outlets shut down. The lack of steam is further exacerbated by the recent shift in consumption to online-based services from brick-and-mortar outlets.

Mulyani said Indonesia’s conventional department store industry needs to come up with a new strategy or shopping concept to survive amid increasingly fierce competition from domestic and global e-commerce platforms.

“For the retail sector, the government with this state budget will generally try to create the momentum of economic growth,” she said adding the government will create same level playing field between conventional store and online store through taxation or duties as fiscal tools.

In September 2017 Indonesian listed retailer Matahari Department Store (IDX: LPPF) announced that it would close two department stores in Jakartad due to decreasing revenue.

However, at the same time the company said it would add department stores in other parts of Indonesia as the company remains optimistic about the prospects of the department store sector in Indonesia. Matahari Department Store, part of the Lippo Group, operated 155 stores across Indonesia per June 2017. It plans to add 6 to 8 new stores in 2017.

Meanwhile, its rival Mitra Adiperkasa (IDX: MAPI) announced it will close all of its remaining Lotus Department Store outlets as the store chain fails to contribute positively to the corporate earnings of the listed company.

Mitra Adiperkasa is currently restructuring its department store business segment in an effort to reduce the company’s operational costs. Fetty Kwartati, Head of Corporate Communication at Mitra Adiperkasa, emphasized that the closing of Lotus does not mean Mitra Adiperkasa will focus less on its department store business segment.

It is only part of the company’s restructuring strategy in order to boost the overall performance of its department store business segment. The minister said that the closing of retail stores in Indonesia is actually not a sign of weak consumer purchasing power. This is evident when looking at tax revenue stemming from the country’s retail sales.

Up to September 2017 there was an increase in tax revenue realization from this sector. Hence, it seems to indicate that there is indeed a shift from physical shopping to online shopping that is increasingly putting pressure on physical retail stores.

Writing by Elisa Valenta, Email: elisa.valenta@theinsiderstories.com