When economic growth boosts people's purchasing power as well as consumer confidence, people are more willing to purchase costly durable goods such as a car. However, when economic growth slows - undermining people's purchasing power and consumer confidence - the purchase of durable goods such as a car are often postponed or cancelled altogether. Due to the existence of this correlation between a country's car sales and economic growth, it is always worthwhile to take a look at the different forecasts for car sales in Indonesia in 2016.

Consulting firm Frost & Sullivan estimates that car sales in Indonesia will fall 4.3 percent year-on-year (y/y) to 969,100 vehicles in 2016. This figure is further divided into 704,100 passenger cars and 265,000 commercial vehicles. Vivek Vaidya, Frost & Sullivan's Vice President of Automotive and Transportation Practice in the Asia Pacific, said the main reasons for this pessimistic view is that the weak rupiah exchange rate and low commodity prices undermine Indonesians' purchasing power. As the car manufacturing industry of Indonesia still needs to import various car components and spare parts, a depreciating rupiah makes these imports more expensive. So far this year the rupiah has been stable against the US dollar, weakening only about 0.60 percent to IDR 13,872 per US dollar. However, given more US interest rate hikes are in the pipeline, pressures on the rupiah may rise in the year ahead. The chart below shows that the rupiah has depreciated drastically since mid-2013 when it started to become clear that the US Federal Reserve was serious about ending its accomodative monetary policy (which involved the quantitative easing program and low Fed Fund Rate).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Meanwhile, persistent low commodity prices - dragged down by sluggish global economic growth (particularly the slowdown in China and other emerging markets) and the low crude oil price - are also a major obstacle for Indonesia as this country is a major exporter of commodities such as coal and crude palm oil. A decline in car sales is particularly detected in the resource-rich regions of Indonesia, such as Kalimantan and Sumatra. Amid sluggish global economic growth and ample supply in the USA and OPEC member countries, oil is still flirting with the USD $30 per barrel level, a near 12-year low.

Crude Oil Price:

The latest data from Gaikindo show that in 2015 car sales in Indonesia fell 16.1 percent to 1.01 million vehicles, the lowest sales figure since 2011. Similar to the year 2014, conditions have been tough for Indonesia's automotive industry as the economy slowed for the fifth straight year, while high inflation (caused by subsidized fuel price reforms), the relatively high benchmark interest rate (BI rate) and low commodity prices curbed people's purchasing power.

Further Reading: Analysis and Overview of Indonesia's Automotive Industry

However, by many (including the Indonesian government, International Monetary Fund and World Bank), the year 2016 is seen as the year in which Indonesia's economic growth will accelerate (after five years of economic slowing). In 2016 Indonesia's GDP growth is estimated to reach 5.3 percent (y/y), whereas last year's GDP growth is estimated at 4.7 percent (y/y). This is reason for Gaikindo to set a more optimistic target regarding Indonesia's car sales in 2016. The institution believes car sales will rise by 5 percent (y/y) this year.

Earlier this week it was reported that American Ford Motor Company decided to halt operations in both Indonesia and Japan starting from late-2016. This decision is not expected to affect Indonesia's automotive industry as the American automaker only plays a minor role in this industry. Moreover, this decision is not based on weak fundamentals of Indonesia's car industry but on Ford's inability to compete with Japanese car brands on the Indonesian and Japanese markets.

Further Reading: Why Does Ford Motor Company Leave Indonesia and Japan?

Indonesian Car Sales (CBU):

 Month    Sold Cars 2012    Sold Cars 2013    Sold Cars 2014    Sold Cars 2015
 January           76,427           96,718          103,609           94,194
 February           86,486          103,278          111,824           88,740
 March           87,917           95,996          113,067           99,410
 April           87,144          102,257          106,124           81,600
 May           95,541           99,697           96,872           79,375
 June          101,746          104,268          110,614           82,172
 July          102,511          112,178           91,334           55,615
 August           76,445           77,964           96,652           90,537
 September          102,100          115,974          102,572           93,038
 October          106,754          112,039          105,222           88,408
 November          103,703          111,841           91,327           86,938
 December           89,456           97,706           78,802           73,264
 Total         1,116,230
        1,208,019         1,013,291


     2008    2009    2010    2011     2012     2013     2014     2015
Car Sales
(car units)
 607,805  486,061  764,710  894,164 1,116,230
1,229,916 1,208,019 1,013,291
Car Exports
 100,982   56,669   85,769  107,932  173,368  170,907  202,273  207,691

Source: Gaikindo