Economic Update

Steady economic growth, rising disposable income levels and cheaper credit are set to spur activity in Indonesia’s retail sector through to the end of the year and into 2017.

In its latest assessment of the Indonesian economy, the World Bank said it expected private consumption to gain momentum in the latter part of the year, shaking off the impact of a weaker global economy.

Moderate inflation, reduced energy prices, a relatively stable currency and fiscal support – including a higher non-taxable income threshold and additional monthly salaries for civil servants – should combine to boost consumption.

This rise in demand could also help contribute to GDP growth, which is expected to expand by 5.1% this year, by 5.3% in 2017 and by 5.5% in 2018, the bank said in a statement issued in early October.

Though Indonesia’s GDP growth slowed from 5.19% in the second quarter to 5.02% in the third quarter of the year, household consumption remained solid, with Bank Indonesia (BI), the country’s central bank, estimating that household consumption contributes 55.9% to the country’s GDP, far outstripping any other sector.

In late September Yoga Affandi, director of economic and monetary policy at BI, told local media that household consumption was predicted to be the main driving force in the third quarter, citing relatively stable retail sales performances, with segments such as household equipment and clothing both seeing growth.

Investment opportunities

The rising potential for expansion in the retail sector has prompted Scotland-based Aberdeen Asset Management to recommend consumer goods as an investment destination.

Increased disposable incomes and higher demand will sustain growth in the retail and consumer goods sectors, according to Bharat Joshi, investment director at Aberdeen.

“Indonesia’s median disposable income will reach $11,300 per household by 2030, up from $6300 in 2014,” he told a press briefing in early October. “The country’s middle class will expand from 17.3m households in 2014 to around 20m households by 2030, which will create an important source of spending.”

Consumers still confident

Despite having eased slightly at the end of the third quarter, consumer sentiment remains strong, according to the latest data issued by BI.

The bank’s consumer confidence index for September showed a 3.3-point decline to 110, still well above the 100-point cut-off for negative sentiment, before rising to 116.8 in October.

Before October consumer confidence had been edging downwards since it hit a 15-month high in July, when the BI index rose to 114.2 points. The subsequent decline was due to consumer expectations of increased prices for a range of goods, including processed food, beverages, cigarettes, tobacco and groceries, the BI report said.

The recent increase, however, shows that “consumers expect price pressures to subside in January 2017”, a statement from the BI said.

Inflation also remains largely in check, with the consumer price index up 3.31% y-o-y in October, compared to 3.07% y-o-y at the end of September, according to data issued by state agency Statistics Indonesia. Though the October figure was higher than expected, it falls within the BI inflation target of between 3% and 5% at year-end.

Rate cuts to lift spending

Moderate inflation saw BI lower interest rates six times over the course of the year, cutting its benchmark from 7.5% at the beginning of the year to 4.75%, with its latest reduction coming in October. Cheaper credit is another factor that should boost retail activity towards the end of this year and into 2017.

At the end of September BI announced another policy move that is expected to further stimulate sales, unveiling plans to reduce the cap on interest payments on credit cards from 2.95% per month to 2.24% per month, or 26.9% per year. The bank is currently drafting the legislation to implement the cap, with the aim to issue it later this year, Ronald Waas, deputy governor at BI, told local media.

Once the cap is enforced, it will be the first time the bank has adjusted credit card rates since 2012, when it set the maximum annualised interest level at 35.4%.

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