Overview

Hope turns to confidence as recovery gathers pace

What a difference a year makes. This time in 2016, the people of Indonesia were facing a squeeze on spending on a scale not seen for many years. Unfavorable exchange rates, high inflation and the knock-on effects of a slowdown in China were conspiring to dampen consumer demand. People shopped less often and spent less money; business growth stalled.

Now, things are looking up. A continued program of structural reform is delivering stability in the near term, and promises steady growth in the longer term. This is gradually boosting local consumption, fueling business growth and expansion, and creating a magnet for international investment.

The ratings agencies S&P, Moody's and Fitch, have all upgraded Indonesia's credit rating to investment grade, opening the doors to greater flows of capital; their decisions have also sent the Jakarta Stock Exchange northwards, and given strength to the currency, the Rupiah.

The International Monetary Fund describes the government's efforts to improve the investment climate and fuel growth by reducing red tape, investing in infrastructure, broadening the tax base and opening new areas of the economy to private investment, all as positive. A tax amnesty on undeclared wealth held off shore announced last year has led to nearly US$350 billion being brought into the economy, raising tax revenue for government projects and adding to consumer spending, even if at lower levels than the government had hoped.

The central bank's measure of consumer confidence was at 125.9 in May this year, higher than at any other time in the past 17 years, as businesses took on more workers and as wages started to rise. The currency has steadied, as have the prices of commodities on which the Indonesian economy relies.

The restructuring of Indonesia is a long-term task. As Luis E. Breuer, IMF Mission Chief for Indonesia, said earlier this year, "Private consumption remains the main driver of growth, but higher inclusive growth will require deeper structural reforms."

What's clear now, though, is that the people of Indonesia see a future they can believe in. Consumer confidence earlier this year reached its highest level since at least the year 2000, and while people are not exactly splashing out, they are loosening their grip on household budgets.

The festivities that accompany the Ramadan fasting period and holy period of Eid are in many ways a bellwether of consumer confidence and the broader economy. Spending always goes up, as families come together for celebratory meals, but the extent to which people feel able to spend from year to year is revealing.

In 2016, festive spending tracked by Kantar Worldpanel leapt into double digits – it was up 16 percent on the previous six months, compared to a jump of only 6 percent during the 2015 festive period. Crucially, this lift was seen across socio-economic groups, with those at the lower end of the income scale actually spending proportionally more than their wealthier neighbors. Indications are that 2017 Ramadan spending was similarly strong.

Two-track growth

A walk through one of Indonesia's cities reveals the contrasts highlighted by the Indonesian growth story. There are gleaming, air-conditioned malls and well-heeled shoppers who would be equally at home in Hong Kong, London or Dubai. The number of dollar billionaires has risen from just one in 2002 to 20 now. Yet there are significant numbers of people who work long hours in menial jobs and still struggle to make ends meet. Others live off the land and the sea, and live a life far removed from that of their city-dwelling cousins.

While over a decade of sustained growth has led to one of the fastest middle-class expansions in the world, the wealth that has arrived for some has bypassed many others, and those "others" number in their tens of millions.

This disparity in wealth and opportunity has been a key area of government attention; access to education is seen as a key way of distributing the benefits of a growing economy. In 2016, it was announced that Indonesia's Gini coefficient – an internationally used measure of equality in a country – had improved, indicating that the gap was narrowing, if only slightly. It's reported that the four richest individuals in the country still have as much wealth as the poorest 100 million.

As Indonesia modernizes, digitizes and to some extent globalizes, it is not becoming more like the rest of the world. In fact, a stronger and more international Indonesia is becoming more distinct as a nation and as a proud collection of cultures, traditions and priorities. Indonesian consumers are finding their own balance between modernity and conservatism; they are simultaneously looking ahead, and celebrating where they have come from.

For brands, both at home and outside Indonesia, this brings into sharp focus the need for locally relevant values and communications. That means taking into account not just differences in income throughout the country, but also differences in preferences and beliefs.

Indonesia's pride in its tolerance of difference has been tested in recent months, with the controversial imprisonment of former Jakarta governor Basuki "Ahok" Tjahaja Purnama for blasphemy. His punishment has been decried by many as harsh, and by others as too lenient.

What unites the ranks of the consuming classes is their love of mobile technology and social media. Connectivity is improving people's lives, and at the same time, providing fertile ground in which local and international businesses can expand.

Marc Woo, industry head for e-commerce, travel and financial services at Google, said in May that Southeast Asia was ripe for growth in e-commerce as more people come online, saying it had "the largest headroom in Asia-Pacific", with scope to triple e-commerce sales by 2025.

In this climate, local e-commerce players have been exploring new horizons. Tokopedia is moving into financial services and in late 2016 launched a credit card application through its platform, and Bukalapak has launched a shariah-compliant mutual fund product aimed at first-time investors.

The local web-based motorbike-on-demand service Go-Jek, is also diversifying and has moved into India, where it has acquired several software businesses and is setting up an R&D center. The company is itself said to be in the sights of international investors, including China's Tencent, though no deals have been announced. China's Alibaba has already invested to the tune of US$1 billion in e-commerce site Lazada, which is big in Indonesia and five other Southeast Asian markets.

There remain uncertainties ahead for Indonesia; how the new US administration's policies will affect the region and Indonesia's biggest trading partners is still unclear, and China's economic re-balancing will continue to have a knock-on effect here.

But there is confidence among international observers that Indonesia can continue to adapt, manage short-term risks and leverage the power of its large, young workforce to drive the economy forward. Training and education will be key contributors both to productivity and to narrowing the wealth gap.

As with all fast-growing markets, it is inevitable that much of the excitement for brands on the move is around higher-income earners; those with money to spend today. But in Indonesia, there is long-term promise in the country's largest community of spenders–those at the lower end who might only become aware of your brand today, and might be some years away from actually being able to buy. For those brands that have these consumers' interests and aspirations in their sights, their time is still to come.

BrandZ Indonesia Top 50 2017

BrandZ Indonesian 2017 Report Top 50 Report

Top 50 Chart

Top 50 Infographic

Report Flipbook


Methodology and valuation by Millward Brown


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