FULL recovery of Indonesia's consumer and retail sectors is expected to take place in 2022, with household spending projected to grow by 4.1 per cent over the year, according to Fitch Solutions Country Risk & Industry Research.

However, the research house warned of downside risks that may lead to the country's growth underperforming its forecasts, including elevated inflation and a reimposition of Covid-19 related restrictions from new virus variants.

According to Fitch Solutions, consumer confidence levels in Indonesia were on an upward trajectory for the first half of 2021, before recovery momentum was curtailed from July 2021 onwards due to the country's growing number of Covid-19 cases. Consumer confidence plunged to 80.2 and 77.3 in July and August 2021 respectively, it said.

Indonesia's consumer confidence index later recovered to 118.5 in November - the highest figure since the pandemic began - from 113.4 in the previous month, as a result of easing Covid-19 restrictions.

"In spite of this recovery, we continue to note further downside risks to our forecast given the threat posed by new Covid-19 variants which could further affect both retail sales and consumer confidence," said Fitch Solutions.

According to the research house, its forecast of the "modest growth" in Indonesia's real consumer spending in 2022 is in line with its forecast that the domestic economy will grow by a real rate of 4.7 per cent. Main drivers of economic growth for Indonesia in 2022 will be consumers' spending and capital investments, which will contribute close to 90 per cent of the nation's gross domestic product, it said.

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However, Fitch Solutions observed that "momentum in the external sector is likely to wane", given the capping of demand for exports by other major economies in the region as they deal with rising Covid-19 challenges.

"As a result, retail sales may therefore stay under more pressure and for longer than they have currently been factored into our forecasts," Fitch Solutions said, citing the "increased transmissibility" of the Covid-19 Omicron variant and "persistent consumer worries around contagion risks" as other contributing factors to the slower growth.

Inflation has remained relatively muted for Indonesia, Fitch Solutions noted. It forecast inflation to average 1.6 per cent over 2021, which is below the 2 to 4 per cent target range of Bank Indonesia.

While the research house anticipates that "pent-up demand" will push up inflation to a "much faster rate" of 3.5 per cent in 2022, it does not believe that these levels of inflationary pressures will derail its consumer outlook, it said.

Fitch Solutions also noted that notable recovery on consumer spending rests on Indonesia's vaccination drive, with the Indonesia government having stated that restrictions cannot be lifted in the country until mass vaccinations have taken place.

The authorities in Indonesia are targeting to inoculate 77 per cent of its population - or 208.3 million people - by January 2022 to achieve a wider reopening, it said. Latest data available from Dec 26, 2021 reveals that only 40 per cent of people in Indonesia have received at least 2 vaccine doses - a rate that is significantly lower than the Asia region, which stands at 55 per cent.

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