Strong domestic spending has proved a key advantage for Indonesia, with its 240m consumers helping to insulate it from global economic tailwinds. Private consumption has risen sharply above pre-1997 levels, becoming a key driver of Indonesian economic growth – aggregate domestic consumption now accounts for around 70% of GDP, similar to the structure of a postindustrial economy. The Japanese bank Nomura Capital estimates that the Indonesian middle class (with disposable household income in excess of $3000 a year) has grown from just 1.6m in 2004 to 50m in 2011 and is on track to reach 150m by 2014 following these trends. Although this may prove too optimistic – other estimates put the current figure closer to 30m (see Industry & Retail chapter) – such projections do reflect the bullishness of investors seeking to cater to growing middle-class consumption.
CONFIDENCE: Spurred by a strengthening labour market and high agricultural commodity prices, private consumption grew by 4.6% year-on-year (y-o-y) in 2010, contributing 2.7 percentage points to GDP growth. Household spending accounts for over 55% of GDP, providing a domestic engine for economic growth and further insulating Indonesia’s prospects from those of the global economy. Consumer confidence is set to continue its rise in 2011, as the Bank Indonesia consumer confidence index proved resilient throughout 2011, reaching its highest level in two years. Analysts expect private consumption to expand 5.3% on average from 2011 to 2015, spurred by the growth in real wages, causing the retail confidence index to strengthen throughout August.
Domestic demand looks set to remain strong with confidence levels sustaining a two-year high in September 2011 according to central bank indicators. Successive surveys of business managers conducted by the Central Statistics Agency (BPS) indicate clear optimism on the part of both local consumers and businesses. Danareksa Research Institute expects Indonesia’s economy to sustain its current expansion until at least 2016.
In 2011 the automotive, telecoms and real estate sectors have all registered double-digit y-o-y growth in the first two quarters. Around 750,000 automobiles and 8m motorcycles were sold in 2010. Auto sales grew by an annualised 29% in the first quarter, while motorcycle sales expanded by 21%. According to Sudirman M Rusdi, chairman of the Association of Indonesia Automotive Industries, “Auto sales are likely to surpass 850,000 units in 2011.” Yet disruptions in the supply of automotive parts from Japan hit the sector and car sales dropped 7% month-on-month in April.
CREDIT GROWTH: The accommodative monetary stance of BI has supported domestic consumption and private investment, leading to strong growth in recent quarters. Although commercial banks passed on only some of BI’s 300-basis-point rate cuts to August 2009, credit growth accelerated from mid-2010, reaching roughly an annualised 22% by the turn of the year. Bank credit grew a further 24.7% y-o-y in the first quarter of 2011. With non-performing loans (NPL) well contained – dropping to 2.7% of all loans at the end of first half of 2011 from 3.3% in the first half of 2010 – the central bank had hoped for faster growth. The net interest margin remains still at about 5%, far higher than in neighbouring countries. Although consumer NPLs have been growing at a marginal rate, their small share of total loans means that the aggregate NPL ratio has remained on a downward trend. BI has also kept an eye on the growth in consumption loans, tabling the option of raising down payments on home and car loans if growth exceeds its target by too wide a margin.
Yet despite such growth, the economy remains broadly under-leveraged, with a bank-credit-to-GDP ratio of 28%, lower than pre-1997 levels and lagging far behind India’s 80% and China’s 120%. Credit to the services sectors grew apace in 2010, while consumption loans grew rapidly. Credit growth in the mining sector outpaced the rest at 53.5% y-o-y in 2010, followed by credit to agriculture (32%), construction (19.4%) and manufacturing (15.5%) – all sectors that will drive growth ahead.
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