Jun 8, 2015

Indonesia - Thrifty consumers put brakes on Indonesia's economy

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The Muslim fasting month is traditionally a time of plenty in Indonesia: shoppers throng Jakarta's markets snapping up gifts to exchange at extravagant fast-breaking celebrations.

But this year, Ramadan - which runs from mid-June - will be a more abstemious affair because widespread job losses, a spike in inflation and lower earnings from commodities that Indonesia sells to the world have crimped consumers' purchasing power.

The unseasonable thriftiness of Indonesia's 250 million inhabitants - who between them spend $500 billion a year on goods and services, about the same as Thais, Malaysians and Singaporeans combined - is another obstacle in the way of President Joko Widodo's promise to lift economic growth to 7 percent.

Because private consumption accounts for more than half of gross domestic product, even a slight slowdown in spending has a big impact on overall growth.

Already growth has slipped to its most sluggish pace since 2009, and consumption languished at a four-year low of 5 percent in the first quarter as disposable incomes were squeezed.

To stimulate demand, the government is considering raising the income tax threshold and the central bank plans to relax rules on lending, including mortgages and auto loans. But, with inflation rising and the rupiah at a 17-year low versus the dollar, cutting interest rates isn't an obvious remedy.

Such measures would come too late anyway for traders at Jakarta's sprawling Tanah Abang market, who are waiting impatiently for their seasonal sales boom.

"Last year was way better," says Meta, a chatty middle-aged woman who peers over a jumble of prayer mats and religious robes in her basement stall, scanning the market for customers. Her best hope now is that business will pick up ahead of the Lebaran holiday, which follows Ramadan.


But there is an abundance of evidence that shoppers in Southeast Asia's largest economy remain cautious.

Consumer lending has recovered a little after sinking to an eight-year low last September, but is still only growing slowly.

Sales of cars and motorbikes dropped by 16.3 percent and 21.5 percent, respectively, in January-April from a year earlier, and in the first five months of 2015, sales-tax collection was down 6.1 percent.

Consumer prices rose by 7.15 percent in May, the highest this year, as the cost of food staples such as rice and chilli leapt. This means households have less to spend on other things.

"Overall this year, the trend for sales has been down," said Fetty Kwartati, corporate secretary of retail giant PT Mitra Adiperkasa Tbk, which oversees big brands such as Zara, Marks & Spencer and Starbucks.

Satria Hamid, secretary-general of the national retailers' association, said sales during the holiday period usually account for 60-70 percent of the group's annual target, but this year retailers will do well to hit 40 percent.

"As retailers, we have to be able to read the market and diversify our strategy," said Hamid. "We are doing a lot of credit card promotions to attract people to our stores."

Surrounded by bulging bags of shopping at the Tanah Abang market, however, Acehnese woman Erni is determined not to let a sluggish economy spoil her holidays. Her husband's business is struggling, but they still have some spending money.

"We can't buy new clothes for Lebaran," she said.

By Nicholas Owen And Gayatri Suroyo

Additional reporting by Cindy Silviana; Editing by John Chalmers and Ian Geoghegan

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