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Matthews Asia Snapshot


Postcard from Makassar

Week of November 29, 2017



Indonesia’s port city of Makassar has big development plans (current site at top; proposed below).

Slow consumer growth in Indonesia has posed something of a conundrum lately. With inflation relatively benign, unemployment low and monthly minimum wages about 8% higher in 2017 than in 2016, why are spending levels sluggish in one of the world’s most populous countries? And how is consumer demand outside of Java?

By some accounts, the problem lies with the nation’s middle- to high-income earners, or with shifting consumer patterns among Indonesian millennials. Some point to less disposable income among lower-income earners after the government trimmed subsidies for electricity and fuel. Whatever the culprits, slow consumer spending has been a concern for policymakers and economists. So the issue was top of mind during our recent trip to Makassar, a port city and the capital of Indonesia’s Sulawesi island. We were intrigued by the rapid rate of growth in this region, which was 6.5% in the second quarter of the year—beating the national average growth rate of 5%.

The bustle we saw confirmed this. Sulawesi's realized investment year to date from both domestic and foreign sources was roughly US$3.6 billion as of late October. Many large projects were underway in and around the area, including new ports and toll roads, a high-speed rail line and property developments. And the city of Makassar, with a population just over 2 million, wakes up early. Street traffic was heavy as early as 7 a.m. and some shopkeepers were already opening up. By comparison, most stores in the area in Hong Kong where we live don't open until 11 a.m.

However, the broader national consumption conundrum was evident. We noticed a divergence between low- and high-end consumer spending. During a trip to the street market, local vendors noted that sales were weak or flat compared with 2016, which itself was a relatively weak year. At one vendor’s stand, we noticed that dust had settled on his nonperishable items. This scene was in stark contrast to local shopping malls that cater to middle-class consumers. There we saw crowds of shoppers and packed restaurants.

When it came to property, developers of more affordable housing said demand was slow. On the upper end of the spectrum, one luxury residential project had sold out of its waterfront-facing land plots of around 600 square meters. Each was priced at around US$1 million1—for the land alone!

Consumer demand is likely to be more balanced in 2018. Indonesia’s Parliament recently approved its 2018 budget, which focused on supporting lower income groups: Fuel and electricity subsidies for this segment were increased and welfare spending received a 21%2 increase over 2017. Indonesia’s central bank left policy rates unchanged in October as it expects robust investment growth and private consumption to accelerate through the end of year. In addition, federal funding to regions across the Indonesian archipelago remained at US$4.4 billion, flat year over year, but three times higher than in 2015. And, regional and local governments that hoarded money in 2017 are likely to spend more enthusiastically ahead of elections scheduled for the second half of 2018. We expect these developments will contribute to a more buoyant growth environment in ASEAN’s largest economy.

Alfred Hong
Research Associate
Matthews Asia

Sriyan Pietersz
Investment Strategist, ASEAN
Matthews Asia  

Sources: All data from CEIC unless otherwise noted

1Ciputra Group (As of 10/31/2017, the Matthews Asia Funds held no positions in Ciputra Group.)
2Ministry of Finance; Republic of Indonesia


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