• Indonesian consumers are optimistic that economic growth will improve but remain cautious about making big-ticket purchases due to persistent concerns over incomes, the latest FTCR data show.
  • We expect the appetite for consumer borrowing to remain weak until at least the third quarter.
  • Inflation will continue to drag on consumption, with further electricity price rises likely in the second half.

Household consumption growth in Indonesia is unlikely to accelerate this year despite significant improvements in consumer expectations for the country’s economic and political performance.

FTCR’s Indonesia Economic Sentiment Index rose sharply to 76.3 in the first quarter, up from 70.5 in the fourth quarter of 2016 (see chart). This is the second highest reading since we launched the index four years ago. The improvement can be attributed to a commodity price recovery that helped boost first-quarter export growth to 23.6 per cent year-on-year. A year earlier exports fell 13.5 per cent.

Consumers were more optimistic about the political situation at the time of our survey (in March), largely in anticipation of the end of the highly divisive Jakarta governor’s election, which was marred by religious blasphemy allegations against the incumbent Basuki Tjahaja Purnama, also known as Ahok — and a Christian. Our Political Sentiment Index rose to 63.5 in the first quarter from 59 a quarter prior.

Yet we do not believe the rises in these two indices will lead to a significant improvement in household consumption growth. Consumer spending growth has slowed for the last five years due to the collapse in commodity prices and currency depreciation, the after-effects of which continue to weigh. We forecast a growth rate of 5 per cent this year, the same as in 2016, although the pace of growth may well be lower if the recent commodity price recovery is not sustained (see chart).

Weak income growth to drag on consumption

We think households will remain cautious about big-ticket purchases due to persistent concerns about income growth. The FTCR Indonesia Household Income Index — which gauges consumers’ perceptions of how their monthly income has changed compared with a year before — fell to its lowest ever level in the first quarter at 71.2, continuing a downward trend that started in the second quarter of 2016.

This corresponded with lower readings for discretionary spending. When asked how their spending on non-essential items had changed year-on-year 44 per cent of respondents said it had either stayed the same or fallen. Our Discretionary Spending Index for Indonesia slid to 70.8, the second lowest reading since we began our survey in the first quarter of 2013 (see chart).

Our quarterly survey further suggests that weaker income growth is directly affecting demand for loans. The reading for our Consumer Borrowing Index — which measures how consumers saw their monthly borrowing change compared with a year earlier — was just 66.8, well below last year’s average of 70.3 and the series’ historical average of 70.2 (see chart).

This weak appetite for credit is likely to persist at least until the end of the third quarter, according to our survey. Our forward-looking Future Consumer Borrowing Index dipped to 52.4 in the first quarter from an already weak level in the fourth quarter of 2016. This is in line with our findings on Indonesian property demand: our Property Purchase Index — which gauges purchasing intentions for the next six months — fell to its second lowest reading ever in the first quarter.

Inflation is likely to be the biggest factor weighing on consumption this year. The government raised electricity tariffs by more than 60 per cent in the first quarter, affecting about a third of all households. It plans further rate increases in the second half. This will maintain upward pressure on inflation following the end of the Muslim fasting month of Ramadan on June 25, when inflation usually peaks due to heightened consumption.

— Andi Haswidi, Indonesia Researcher

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast 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.