Opinion Piece: Is Indonesia's Purchasing Power Actually Weak?
Over the past couple of months there have been many reports about Indonesia's weak consumer purchasing power. For example, the Indonesian Retailers Association (Aprindo) said it detected rather weak retail sales during this year's Idul Fitri period (the week-long holiday that marks the end of the Islamic fasting month). Whereas these sales rose 16.3 percent during last year's edition of Idul Fitri, they rose only by an estimated 5-6 percent this year.
Another example is that sales growth of electronics has not risen significantly in Q2-2017 in Indonesia and is actually far from the target that was set by the Indonesian Electronics Industries Association (Gabel). Based on data from Gabel, sales of those electronics manufacturers that are member of Gabel fell 10 percent year-on-year (y/y) in Q1-2017. This weak performance was attributed to bleak consumer purchasing power.
Bleak purchasing power is a problem for the whole economy as household consumption traditionally accounts for about 55-60 percent of the nation's gross domestic product (GDP). Therefore, bleak retail sales growth in H1-2017 trigger some concern about Indonesia's economic growth in the remainder of 2017.
However, considering Indonesia's economic slowdown ended in 2016, and domestic economic growth has actually been accelerating since that year, it is remarkable to see slowing retail sales growth in 2017.
Thus we pose the question: is Indonesia's often cited weak consumer purchasing power so far this year actually what it seems?
Many analysts - and even Indonesian politicians - attribute the nation's bleak purchasing power to (1) weak commodity prices, (2) a delay in disbursement of the 13th month wage to civil servants, and (3) a delay in disbursement of funds related to the Prosperous Family Card (KKS) program for the poorer households. Such matters would then indeed curtail purchasing power.
However, if such reasoning is true, then we should see a boost in purchasing power later this year once the 13th month wage and KKS funds have been disbursed. Meanwhile, low commodity prices are not a new phenomenon and therefore society should have already adjusted to the structurally low commodity prices (since several years ago).
A second scenario is that Indonesia's purchasing power has actually not weakened this year. Instead, we merely witness a change in consumer behavior. No doubt, the domestic and global economies are still experiencing serious challenges (in fact, also in the political domain there are plenty of reasons to be careful, both within Indonesia and internationally). For many Indonesians the cost of living has increased recently as the government cut electricity subsidies, raised taxes on cigarettes, while non-subsidized fuel also became more expensive. Therefore, a large part of the Indonesian households may have decided to limit spending and instead focus a bit more on saving.
This scenario is supported by data from Indonesia's central bank (Bank Indonesia). While in 2015 there was a slowing growth trend in terms of third-party funds in the Indonesian banking sector, these funds rose 4.1 percent (year-on-year) in the first quarter of 2017, followed by a 9.1 percent (y/y) growth pace in the second quarter. Hence, the Indonesian population may have prioritized saving over consuming. And while weak household consumption undermines economic growth, rising funds in the banking sector tends to have positive effects on the economy as interest rates can fall, encouraging investors to invest in new tools, research and the establishment of more efficient production facilities. This would ultimately also boost consumer purchasing power as prices of products can decline due to the more efficient production process.
A third scenario (for which there is only anecdotal evidence but it is still an interesting one to mention here) is that Indonesia's retail data are rather distorted this year. It is said (but we have no official data) that courier delivery services have actually risen steeply during the past Ramadan and Idul Fitri period in Indonesia, which would imply there remained a strong flow of goods (or perhaps even improved) due to robust demand. Some claim that the Internet is responsible for this distortion. Through the Internet the Indonesian consumer now has much more room to contact the manufacturer directly (thus order directly from the manufacture; products are delivered by the courier services to the consumer) or drastically cut the number of middle men between the manufacturer and end-user.