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Already among the most bullish consumers in the world, Indonesians heading into 2014 look set to amplify consumer confidence in anticipation of the upcoming legislative and presidential election. This reaction is neither unheralded nor unexpected; previous elections in 2004 and 2009 were also characterised by rising consumer confidence. In the case of 2009, this confidence coupled with the inflow of campaign spending into the economy to result in markedly higher private consumption. As the 2014 election season kicks into a higher gear, companies and investors must take stock of what election fuelled optimism means for the business environment in Indonesia as well as identify the sectors most likely to be directly affected by a campaign process set to run well into September. Certainly, the extent to which this election differs from those that came before it – in that Indonesia does not have the option of re-electing an incumbent and fewer parties will be participating – builds for some uncertainty in projecting general trends in the economy.
With that said, it is clear that the effect of the 2014 election will vary between industries. While the election is expected to temper business activity in property as well as other interest rate sensitive purchases, it is widely believed that it will also act as considerable boon to advertising, hospitality and selected retail oriented industries, in addition to being a catalyst in the deepening of Indonesia’s capital market.
A recent report by Nielsen found that Indonesian consumer confidence at the close of 2013 reached its highest point in four years. Indonesia’s consumer confidence index rose four points to 124 between Q3 and Q4; the highest score amongst the 60 countries surveyed and indicative of an acceleration of the country’s natural consumer trend towards a 'spend-first' mindset. Bank Indonesia’s measure tells a similar story, with consumer confidence edging closer towards an all-time high of 120.4 set in November 2004 at 116.5, having suffered a substantial dip earlier in the year attributed to a growing current account deficit, rising inflation and a weakened currency.
Consumer Confidence Index Q3 2013 - Q4 2013
Source: Bank Indonesia
With consumer confidence soaring and over $3 billion USD in campaign spending expected to flood into the economy, it is anticipated that several industries in the retail sector will benefit from the 2014 election. Businesses in the FMCG industry that offer products which have become essential purchase items for Indonesia’s lower and lower-middle classes should in particular experience an uptick in sales attributed to a widespread increase in willingness to spend (See Indonesia’s Fast Moving Consumer Goods Sector).
Research undertaken by Credit Suisse to isolate the effects of previous elections on the economy found that rising consumer spending in 2009 was largely concentrated in non-food purchases such as clothing. A similar trend in 2014 will further boost a clothing retail industry already thought to offer lucrative opportunities in catering to a market of middle class consumers projected to triple in size to 135 million people by 2030 (McKinsey).
To best understand the projected magnitude of this amplified spending behaviour during an election year in Indonesia, one needs only to look at the sales forecast for Indonesia’s automotive industry (See Indonesia’s Automotive Industry). Bucking the trend of rising consumer wariness when it comes to purchasing consumer finance linked goods in the midst of an election year, car sales are expected to grow by up to 10% in 2014 (Gaikindo) fuelled in part by spending on electoral campaigns trickling down to consumers.
It is important to note, however, that the positive influence of the 2014 election on other industries that provide high cost goods will not be as pronounced. As is typical for a year in which significant political change is guaranteed, 2014 for a number of sectors dependent upon the sale of products that require long term investment will instead be marked with slowing business activity. The property sector in particular will bear the burden of consumer reticence in undertaking heavy investments while uncertainty continues to cloud the political and regulatory landscape.
Similarly, the progress of PPP projects may slow with investment less forthcoming due to speculation that a new government may shift priorities in infrastructural development. Foreign investors looking to enter this field should thus only do so in projects that offer urgently needed utilities and are unlikely to be cancelled after the election. PPP projects with government guarantees approved by the state owned Indonesia Infrastructure Guarantee Fund (IIGF), for example, are potential areas of investment less affected by political uncertainty.
Without taking consumer confidence into consideration, a number of industries stand to benefit directly from election related spending. The advertising industry is set to profit from the many political campaign ads commissioned by candidates vying for nearly 20,000 seats at the district, provincial and national level. Though traditional avenues of advertising remain popular, social media campaigns in particular will play a crucial role in influencing voter behaviour as the primary means for public discourse on the topic of politics. Responding to the country’s growing reputation as a social media capital of the world and in an attempt to appeal to the population’s subset of 67 million first time voters, candidates have sought to establish a greater online presence. There is thus considerable scope for the entry of firms well versed in digital branding and tech driven marketing into a field of the Indonesian advertising industry poised for rapid growth in 2014.
Other business areas to be boosted by the 2014 election include the hospitality industry, which will benefit from an influx of short stay hotel guests on the campaign trail as well as rising demand for MICE services. Reports from Indonesia’s Hotel and Restaurant Association (PHRI) suggest that hotels in parts of Indonesia could see increases of up to 25% in average income from MICE operations.
In many ways 2014 looks set to be a year of dichotomies. Though the election is largely expected to boost private household spending and encourage growth in several key industries, it is also expected that uncertainty brought about by the election of a new president (Indonesia’s first in ten years) will stem the flow of foreign investment into the country and temporarily quell the development of long term investment intensive projects. Furthermore, on a broader scale the momentum of growing consumer optimism linked to the election faces a considerable opposing force in the form of unfavourable macroeconomic conditions such as rising fuel prices, a weaker Rupiah and steeper interest rates.
However, in assessing what these offsetting trends will mean for Indonesia going forward it is important to take notice of the sentiment of those on the ground. Subject to the realities of a more challenging business environment in 2014, Indonesian consumers remain buoyant. Such resilience points firmly to a belief amongst Indonesia’s population that the country is headed in the right direction and hints at the unparalleled potential of this market as an active consumer base poised to flourish should a more advantageous business environment return.
Furthermore, 2014 will also see Indonesia substantially deepen its capital market as companies seek to ride the wave of positive consumer sentiment by listing after the election. Through IPOs set to be undertaken by major private companies such as Blue Bird as well as state owned subsidiaries such as Perkebunan Nusantara V, Indonesia is on the precipice of strengthening a pillar crucial to its goal of developing into an advanced economy.
Global Business Guide Indonesia - 17th February 2014
Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)
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