Indonesia’s household consumption, a major contributor to GDP, has been growing at a lacklustre rate in recent years because of weak commodity prices and currency devaluations.
The latest economic indicators and FT Confidential Research data show signs of recovery, although the overall outlook remains precarious.
This situation is likely to drive pro-growth President Joko “Jokowi” Widodo to support households with subsidies, a populist policy that is incompatible with his fiscal reform agenda as he seeks re-election in April next year.
Indonesia’s Central Statistics Agency (BPS) revealed this week that the economy grew by 5.06 per cent year on year in the first quarter; the government’s 2018 target is 5.4 per cent. But first-quarter growth was faster than in the previous three years.
The BPS data show that there is room for optimism. Household consumption, which contributed 56.1 per cent to GDP in 2017, grew by 4.95 per cent year on year in the first quarter. This is only marginally higher than 4.94 per cent last year, but growth is no longer slowing, breaking a trajectory that had persisted since 2014.
A promising path
FTCR’s consumer survey points to faster household consumption growth in 2018. Despite slight fluctuations, we found in the past three quarters that Indonesians have been consistently willing to open their wallets for big-ticket items such as property, motorbikes and cars.
While sales data on passenger cars still show stagnation, we see a significant recovery in the demand for motorbikes, the vehicle of choice for more than 70 per cent of our survey respondents.
Motorbike sales reached 1.46m units in the first quarter, up 4 per cent year on year, the first positive first-quarter growth in the past four years and the fastest in the past seven. Sales data from the past decade show that first-quarter performance tends to predict sales growth for the full year.
There is also a recovery in demand in the property sector. The value of outstanding loans for houses and apartments has been growing by more than 10 per cent year on year every month since August last year.
This suggests that buyers are responding to Bank Indonesia’s repeated lowering of minimum down payments, and to lower interest rates and lower inflation and improvements in household incomes.
However, there are two scenarios that may hinder household consumption.
First is a continued depreciation of the rupiah, which breached the psychological level of 14,000 to the dollar as financial markets responded to slower-than-forecast GDP growth.
Although Indonesia’s economic fundamentals are much stronger than they were during the 2013 “taper tantrum”, history shows that household consumption in Indonesia is linked to rupiah fluctuations. The currency has lost 3.8 per cent of its dollar value in 2018, one of the worst performers in Asia.
Dragging on the currency are factors such as the narrowing of benchmark interest rates between the central bank and the US Federal Reserve; Indonesia’s persistent current account deficit; and the outlook for populist policies as Indonesia holds parliamentary and presidential elections next year.
Overall, however, we think that the rupiah’s fall largely reflects the strengthening of the dollar rather than weakness in the Indonesian economy.
Second, rising oil prices might put a dent in household consumption. The Indonesian crude price index has hovered above $60 a barrel since December, whereas the state budget for 2018 was calculated on the basis of $48 a barrel.
Spend, spend, spend
Instead of cutting back on energy subsidies, which was part of his reform agenda, Mr Widodo now plans to help consumers by adding Rp10tn ($710m) in the revision to the budget for the second half of the year.
The president also plans to issue a regulation that requires fuel retailers such as Pertamina and local units of Royal Dutch Shell and Total to seek its approval when raising the prices of non-subsidised fuels, except for those intended for industrial use and jet fuel.
The president has instructed his energy minister to postpone electricity price increases until the end of 2019, while the government already regulates the price of low-octane petroleum, locally known as Premium, and subsidises diesel for public transport, as well as kerosene and liquefied petroleum gas for poor households.
The president’s populist measures are likely to stretch the budget deficit beyond the 2.19 per cent targeted for this year, but the extra spending will be offset as the government benefits from higher prices for oil exports.
By law, the government is prohibited from running a budget deficit beyond 3 per cent of GDP, and Sri Mulyani Indrawati, finance minister, has maintained fiscal prudence since she was reappointed to the post in 2016.
While we think that Mr Widodo’s populist policies were made with one eye on next year’s presidential election, such measures also protect the purchasing power of 26.6m Indonesians still living in poverty.
|FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.|