: Super User; Indonesia; 31 December 2012; Hits: 1101

Indonesia's Consumers in Buoyant Mood

THE political system may be flawed, the environment regularly polluted and graft endemic, but Indonesia today stands as one of the most rewarding countries in the world to do business in. The reason for this, of course, is the buoyant mood of the Indonesian consumer.

A variety of statistics tell the tale. Indeed, it would be difficult to find another country where consumers are in a better mood.

The positive macroeconomic situation is one reason. Inflation is well under control. Benchmark interest rates are at record lows. And with exports responsible for a much smaller portion of the economy than is the case with its neighbours, Indonesia has been fairly well insulated from the global economic downturn.

The economy expanded by 6.5 per cent last year, the highest in 15 years, thanks largely to strong growth in household consumption and private investment. More recent statistics underline the point. In the third quarter, private consumption rose by 5.7 per cent, triggering a pick-up in manufacturing to meet the demand.

Economic growth in the quarter slowed slightly to 6.2 per cent, but this had more to do with a decline in exports and lower government spending than any let-up in consumer demand. The economy is still officially expected to grow by 6.3 per cent this year.

The results of regular Bank Indonesia surveys of some 4,600 households in 18 cities across the country have shown a steady rise this year, with the index for October reaching 119.5. A reading above 100 shows that consumers in general are optimistic.

Regular consumer polls by international survey company Roy Morgan Research reveal that the willingness of Indonesians to spend is buoyed by a tightening labour market, rising incomes and confidence in the general direction the country is heading.

Each month, this company polls Indonesian consumers aged 16 and above in 17 provinces, covering an estimated 87 per cent of the population. Sample sizes are smaller than those employed by the central bank. But they are well above the industry standard of just 1,200 and cover a much wider cross section of the country.

Indonesians may not have much faith in the ability of their elected representatives to tackle corruption or put a stop to a worrying rise in religious or ethnic tensions. But they do think things in general are going pretty well.

Asked if they thought the country was heading in the right direction, over 60 per cent of respondents have been saying “yes”.

The reasons are not hard to find. Roy Morgan research shows that unemployment has declined markedly in the last five years. Asked “Have you actively looked for a job in the last four weeks?”, only about 3 per cent now reply in the affirmative. Five years ago, that figure was closer to 6 per cent.

Using a different definition of unemployment, government officials say around 9 per cent of the workforce is jobless. But this figure has also been on a downward trend.

Meanwhile, the increasingly wide availability of consumer credit over the past three years has enabled more and more Indonesians to afford the trappings of a middle-class lifestyle.

Avoiding the difficulties associated with assessing income levels, Roy Morgan defines a middle- class household as one which has a television set, a refrigerator and a car or motorcycle. By this definition, the number of middle-class households in Indonesia has risen from 28 per cent in March 2008 to 48 per cent by September.

Indeed, the overwhelming majority – 88 per cent in October – expect Indonesia will have “good times” economically over the next five years. Not surprisingly, most also say that now is a good time to buy household items.

According to a report released by the McKinsey Global Institute in September, Indonesia will have the world’s seventh-largest economy by 2030, surpassing that of both Britain and Germany.

Some observers may view the McKinsey study with caution. After all, futurologists have a bad habit of projecting current trends into the future as if there were no significant countervailing factors.

One of the most important of these – apart from corruption and bureaucratic red tape – is the country’s generally low level of infrastructure investment.

According to National Development Planning Minister Armida Alisjahbana, Indonesia’s total infrastructure spending is equal to 4.5 per cent of gross domestic product. That figure compares badly with India’s (more than 7 per cent of GDP since 2009) and China’s (9 per cent to 11 per cent of GDP since 2005).

Even so, the persistently bullish sentiment of Indonesia’s consumers and the sheer size of its population suggest that there are enormous opportunities waiting for those businessmen who have yet to take the plunge.

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Key Political Risks

Asia is the fastest growing region in the world, and is likely to remain so in 2013. However, a number of risks cloud the picture.

The good news is that domestic demand in the region remains strong and should continue to cushion the impact of weaker external demand on overall economic growth. The completion of national elections in Japan and South Korea in December 2012 should also help reduce political uncertainties.

But Asian governments will need to guard against the adverse impact of prolonged easy financial conditions on inflation.

Rising inequality also continues to threaten social stability. Ethnic and religious rivalries remain just below the surface in many countries. When combined with government corruption and (in some countries) high youth unemployment, this could become a deadly mix. This seems particularly true of China.

Territorial disputes also require close monitoring. Much diplomatic activity in the new year is likely to be centered on finding ways to reduce tensions over resource-rich islands in the South China Sea, where Beijing's claims overlap with those of Japan, Vietnam and other Southeast Asian states. South Korea and Japan also have rival territorial claims.

North Korea remains the wild card. Inclined to believe its own propaganda, Pyongyang's new leadership could miscalculate, making belligerent moves that plunge the region into a military conflict that nobody wants.