Pockets of growth built on foundation of stability
To look at Indonesia today – underpinned by stable economic growth, low inflation, high rates of employment and a balance between domestic and international investment – it is startling to recall just how different the country was just 20 years ago.
This is a market that has gone, not from bust to boom, but from economic and political catastrophe, to orchestrated stability. It is the depth of this change that is now helping Indonesia weather substantial global volatility. As the World Bank notes, the country now has sound macroeconomic fundamentals and strong policy coordination.
GDP growth has been steady for several years and is expected to remain at 5.2 percent in 2019; while demand for Indonesian exports has eased, largely as a result of the slowdown in China, domestic demand has been increasing due to increased social spending and a strong labor market. This is expected to more than make up for the effects of external factors. Oil prices have been rising, but inflation has been hovering around the 3 percent mark.
Unemployment edged up slightly towards the end of 2018, but at 5.3 percent is still low by global standards – and compares well to the Indonesian average of 6.05 percent seen between 1982 and 2017.
Massive government investment in public infrastructure works has bolstered employment; projects include the just-launched MRT mass transit rail system in Jakarta, which has been two decades in development, the Light Rail Transit system in the capital, and an LRT network in Palembang.
Progress on the long list of infrastructure projects set out by President Joko Widodo’s government has not been as swift as had been hoped in some cases, and in 2018, there was talk of removing IDR 264 trillion worth of projects from the governments’ strategic plan if sufficient progress had not been made by the end of Jokowi’s current term. The Trans Papua transport plan announced in 2015 – a key element of his ambition to improve infrastructure across the country – was not thought to be one of those projects under threat of being shelved.
In addition to these mega-projects, the digitization of the economy has proved a catalyst for entrepreneurship, employment and public access to information like never before. This is a market in which over 100 million people have an internet connection; while the majority of users are in cities, penetration in rural areas is 20 percent and rising.
A flourishing tourism industry is also helping the national economy; World Travel and Tourism Council figures show growth in 2017 (the most recent available at the time of writing) were up 22 percent on the year before. This compares to a global average of 6.4 percent growth and 7 percent among ASEAN nations, putting Indonesia ninth in the world for the pace of sector growth.
While there remain pockets of significant poverty in Indonesia, most people’s living conditions are gradually improving, and consumer confidence is buoyant; while confidence dipped slightly at the end of 2018 when the Rupiah weakened against the US dollar, it rebounded in early 2019. In global rankings of consumer confidence, Indonesia is third in the world, behind India and the Philippines.
This accounts, in part, for strong growth in retail sales; December 2018 sales were 7.7 percent higher than in the same month a year earlier, strengthening from an annual growth rate of 3.4 percent in November.
While the overall growth is systemic, the sudden surge in spending is primarily going on food, drinks, tobacco, cultural and recreational spending, and household equipment, according to Bank Indonesia, and is largely coming from lower-income earners.
This is a common phenomenon ahead of elections – candidates and their parties often encourage voters to support them by making donations and launching targeted social assistance programs. Higher earners tend to be more hesitant about spending in times of uncertainty, and are more likely to hold off on major purchases until after polling day, which was in April.
Foreign investment in Indonesia also tends to dip in the period ahead of national elections, and this proved to be the case this year. Investment Coordinating Board (BKPM) data shows that foreign direct investment (FDI) dropped 20.2 percent year-on-year to IDR 89.1 trillion (US$5.9 billion) in the third quarter of 2018, the third consecutive quarterly decline. Domestic direct investment (DDI) has surged, however, to levels that put it almost on level pegging with FDI, at US$5.6 trillion in Q3 2018.
The effect of all this change has not been uniform for brands in Indonesia; some have benefited from the recent surge in spending, but in a way that is unlikely to be sustained. Others are seeing growth due to higher prices, but not higher volume sales. And many categories are experiencing more fundamental change, as consumer incomes grow, and as habits and preferences evolve, which we explore in the pages ahead.