Fri, 03 Jul 2015

The latest survey of Bank Indonesia shows that consumer confidence in Indonesia has fallen in June 2015 on fears of shrinking job availability as well as declining income and business activity. Last month, the central bank’s Consumer Confidence Index fell 1.5 points to 111.3. This year so far, Indonesian consumer confidence only rose in May. In other months the index fell. Bank Indonesia’s Consumer Confidence Index is based on samples of 4,600 households in 18 major cities in Indonesia (100 separates optimism from pessimism).

Declining consumer confidence in Indonesia is no surprise as Indonesia’s economic growth has continued to slow in the first quarter of 2015 (4.71 percent GDP growth y/y). Moreover, Indonesian consumers can read plenty of news stories in local media that give rise to reduced optimism: a sharply weakening rupiah (ahead of looming further monetary tightening in the USA), a benchmark stock index that has plunged since April (on concerns about slowing economic growth), a wide current account deficit, weakening exports and imports (signalling that global and domestic demand are weakening), and high inflation (further curbing people’s purchasing power).

In this context, Indonesian consumers refrain from purchasing durable goods such as cars, motorcycles, electronics and household appliances. In the first five months of 2015, car and motorcycle sales in Indonesia have plunged drastically on a year-on-year basis and therefore Bank Indonesia recently introduced lower down payments for the purchase of a car and motorcycle in a bid to boost spending.

It is interesting to note that curbed consumption is unusual to occur in the Ramadan and Idul Fitri period (the holy fasting month of Ramadan started in mid-June). Typically, this period sees significantly increased spending on consumption goods such as food, clothes, shoes and bags (supported by the pay out of workers’ 13-month salary) as well as durable goods. However, on current concerns about job security and income over the six months ahead, Indonesian consumers have become cautious.

According to an estimate of the Indonesia Retailers Association (Aprindo), Indonesian retailers expect sales to plunge by 36 percent (y/y) to IDR 15 trillion (USD $1.1 billion) during this year’s Ramadan and Idul Fitri celebrations due to reduced purchasing power (caused by the depreciating rupiah, high inflation and slow government spending).

Meanwhile, Bank Indonesia expects Indonesia’s economic growth to pick up slightly from the six-year low of 4.71 percent (y/y) in Q1-2015 as consumption and government investment are to increase in line with the kick-off of infrastructure projects and higher credit expansion of Indonesian banks. Regarding full-year 2015, Bank Indonesia sees GDP growth in the range of 5.0-5.4 percent (y/y). The lender of last resort added that enhancing the country’s investment climate plays a crucial role in boosting economic growth in 2015.

Indonesian inflation, which accelerated to 7.26 percent (y/y) in June, is expected to ease to the range of 4.5-5.5 percent (y/y) by the end of the year according to Bank Indonesia. Currently, Indonesia is being plagued by inflationary pressures due to rising food prices and higher transportation tariffs (caused by recovering petroleum prices). This means that Bank Indonesia has little room to cut its key benchmark interest rate (BI rate) which currently stands at the relatively high level of 7.50 percent.

To finish on a positive note, Indonesian consumers expect current price pressures to ease in the next six months.