Private consumption most significant growth driver for Indonesia: UOB

Millennials are poised to be an important force in Indonesia which may lift growth higher, as they comprise the largest workforce, command the largest portion of the income, and correspond to unique blend of higher value consumption, according to a report by UOB.

Being a mobile first and mobile only generation, the combination of millennials' rising consumption pattern, increase in disposable income, and stellar rise of digitalisation can provide further opportunity to raise Indonesia's overall private consumption growth.

Indonesia's consumer market is also set to witness a steady rate of expansion, driven by strong economic development, increase in disposable incomes, and most importantly the unique consumption pattern of millennials.

Economists noted that Indonesia must refocus its efforts to revive the power of its domestic consumption and to leverage on its domestic market. The role of private consumption, especially consumption of the millennial generation consumption, if managed and supported appropriate and strategically, will be able to lift headline growth higher.

This is also as growth in private consumption in Indonesia has been gradually declining to the 5 per cent mark, despite the government trying to beef up higher headline growth by increasing investment expenditure.

Putting the situation into context, millennials make up 33.4 per cent of Indonesia's overall population, which stands at 268 million and will make up approximately 44 per cent of Indonesia's productive age, those aged 15 to 64 years old in 2030.

Economists also found that the portion of millennial real income growth experienced an increase at 8.6 per cent compound annual growth rate during the 2010 to 2019 period, which bigger than the average real income growth of all population at 3.0 per cent to 4.0 per cent.

Additionally, millennials were found to spend up to 50 per cent of their disposable income towards the so-called 4S: Skin, Sugar, Sun, Screen, compared to 30 per cent for the preceding generation.

For the 4S', Skin refers to spending related to fashion, mass beauty and personal care, while Sugar relates to spending for food and beverage, especially premium and outside basic food and beverage needs. Meanwhile, Sun covers spending related to travel, attractions, as well as leisure activity. Finally, Screen groups spending related to cinema, internet, digital tv and video games.

The compound annual growth rate of spending in these sectors, according to economists, is estimated to at least hover around the 15 per cent mark between 2018 and 2023.

The economists also added that one can be more sanguine on Indonesia's online/digital economy potential, due to its massive population and the stellar rise of online platforms in facilitating millennials' consumption growth.

Additionally, internet penetration has also been identified as one of the key factors in the rapid monetization of the online economy. Indonesia reached 56 per cent internet user penetration rate in 2019 from around 28 per cent in 2015.

Indonesia has also managed to produce the largest consumer based in Southeast Asia despite recording the lowest internet and ecommerce penetration among country peers.

This provides digital players a large consumer base to market their services as well as drive marginal costs lower through economies of scale.

In a separate report, Google and Temasek calculated that the value of Indonesia's online economy will hit US$27 billion in 2018 and is expected to reach US$100 billion in 2025.

Making up this would be Indonesia's e-commerce market, online travel market and transport and food delivery industries, which are expected to reach US$53 billion, US$25 billion and US$14 billion in 2025.

All this taken into account, economists noted that there would be challenges, with one being the challenge to capture the full potential of the consumer based by ncreasing the internet penetration rate, especially since Indonesia is comprised of archipelago, making the network infrastructure the biggest hurdle to beat.

The other challenge would be the question of how to fully capture the online economy to measure the gross domestic product (GDP). As infocommunications technology and comprehensive data management are still lacking, especially in emerging countries such as Indonesia, it will be quite hard to properly measure the massive quality gains and benefits from the online economy.

Economists also found that foreign investors are also eyeing the Indonesia consumer market. Data showed that offshore foreign investors are currently halfway through in raising their collective targeted capital of US$6.6 billion, almost equal to quarterly Indonesian foreign direct investment (FDI) for all sectors, in order to invest in Indonesia's consumer market.

They pointed out that Indonesia must partner with the foreign investors in raising the much-needed financial capital to unleash the great consumption potential in Indonesia, adding that it is a good diversification of sectors from the usual ones such as mining,electronics, and transportation.

Furthermore, if Indonesia could induce and strategically entice more of these foreign investments to use more and more local factor of productions and local resources, then the acute problems of having persistent current account deficit could be mitigated. This is as the incoming FDI is expected to be able to cover the deficit in Indonesia's current account balance and ultimately stabilise the rupiah's exchange rate.

Given the government efforts in narrowing the current account deficit along with further FDI prospects from private equity and venture capital firms, Indonesia is expected to record a positive basic balance in 2022.

With economists assuming that the millennial generation has not fully reached their consumption potential as their earnings will grow significantly in the next 10 years, they predicted that Indonesia's GDP growth could be boosted to around 6.5 per cent by 2030.

However, they cautioned that the appropriate strategy must be put in place for Indonesia to reach a higher and more sustainable growth, capitalizing on millennials' rising consumption.That means that Indonesia must look more towards its domestic resources rather than importing most of its consumption goods.

With the expected improvement in the current account position and possibly more entry of longer-term foreign investment, the rupiah will tend to be more stable. This may also have a positive impact on the magnitude of the opportunity to reduce interest rates to a lower level and at the same time support a higher quality economic growth in Indonesia.