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11 Mar 2014

Indonesia: driving growth

Alan Richards

by Alan Richards

CEO, HSBC Indonesia

Indonesia: driving growth (Getty Images/Bruno Morandi)

The middle class is driving growth in consumer spending

An escalator in the shape of a four-metre high-heeled shoe, located in central Jakarta’s seven-storey shopping mall, is a fitting symbol of the power of Indonesia’s consumers.

Indonesia’s economy has performed well in recent years, growing during the worst of the financial crisis and seeing a rise in GDP of 5.6 per cent in 2013. The middle class is driving growth in consumer spending. The proportion of households with an annual income of USD3,000 or more has increased from 33 per cent in 2003 to 55 per cent today and is expected to rise. Household consumption accounts for around 57 per cent of GDP – a greater proportion than neighbouring countries such as Malaysia and China.

However, Indonesia is a diverse country, with nearly 250 million inhabitants spread across 17,500 islands and a sharp contrast between the richest and poorest. Smaller islands generally have less developed infrastructure and lower incomes. Wealth is concentrated on the four main islands of Java, Sumatra, Kalimantan and Sulawesi. Here, in towns and cities which continue to grow at a rapid pace, the urban middle classes are leading changes in consumption.

Indonesia’s economy has performed well in recent years, growing during the worst of the financial crisis and seeing a rise in GDP of 5.6 per cent in 2013

Eating habits have changed significantly over the past ten years and basic foodstuff accounts for a lower proportion of disposable income. The amount of protein in the average diet doubled between 1999 and 2010, according to official statistics. Consumption of prepared food rose 50 per cent. Despite this richer diet, the percentage of household expenditure on food decreased from 66 per cent to 51 per cent, leaving more money for other items.

With a median national age of 28, the population has embraced new technology. Around 15 per cent of the messages on the social networking site Twitter come from Indonesia, according to research by Accenture. Facebook said last year that Indonesia had more than 60 million users and was one of its top five locations.

Indonesian consumers place a strong emphasis on brands and our economists expect this to continue. A number of foreign retail, fashion and convenience food firms have already identified opportunities and opened branches in the country. HSBC Global Research forecasts that over the next 40 years Indonesians’ average expenditure on items such as furnishings, clothing, recreation, restaurants and hotels will increase faster than in the US or eurozone.

Coordinating Minister for Economic Affairs M. Hatta Rajasa said in 2012 that domestic consumption had helped to “insulate” the country from the 2008-2009 financial crisis. However, he stressed the need to balance strong consumption by increasing the competitiveness of domestic industries and improving infrastructure, helping the country develop higher-value industries. Lifting relatively low levels of export relative to GDP could support sustainable growth, especially given Indonesia’s proximity to other dynamic Asian economies. Indeed, HSBC’s Global Connections forecast suggests that trade flows with Asia are set to grow as regional cooperation increases.

Indonesia’s three largest industries are currently manufacturing, agriculture and mining, and the government is keen to improve their competitiveness. A recent ban on the export of raw minerals, for example, means miners now need to process minerals before shipping them out of the country, increasing the value of exports. Commodities are likely to continue to constitute the largest export sector in the medium term. For the longer term, however, the government stresses the importance of diversification through continued investment in education and skills.

Despite the challenges posed by its geography, Indonesia is ambitious to grow. Consumers and producers will play an important role in its success.