Economic Update Indonesia: Layoffs & Weak Purchasing Power
Normally the Ramadan month and Idul Fitri holiday (the celebration that marks the end of the Islamic fasting month) trigger an acceleration of economic activity as people consume more products (such as food and clothes), while the exodus of people from the cities to the rural areas during the week-long Idul Fitri (where they will spend a short holiday) causes a massive flow of money from the urban areas into the regional economies.
However, during this year's Ramadan and Idul Fitri (that ended several weeks ago) we did not detect a surge in demand for products and services. In fact, some retailers in Southeast Asia's biggest economy claim sales have declined in this period. This implies people's purchasing power has weakened compared to one year ago.
Data from the Indonesian Retailers Association (Aprindo) show that domestic retail sales in Indonesia grew 16.3 percent during the Ramadan/Idul Fitri period in 2016 (compared to average sales in other months). In 2017's Ramadan/Idul Fitri period, on the other hand, these sales have only risen between 5 and 6 percent (from "ordinary" months).
Aprindo also said retail sales during the Ramadan/Idul Fitri period normally contribute 40 percent to full-year retail sales in Indonesia, hence constituting a crucial period for the nation's retailers. For the 2017 edition this figure is assumed to have dropped to 25 percent and therefore limits overall macroeconomic growth.
Weak consumer purchasing power in Indonesia means various businesses need to introduce efficiency measures in order to keep their balance sheets in check. One drastic measure is the termination of employment. Recently we saw several big Indonesian companies reduce the number of employees. For example media conglomerate Media Nusantara Citra (MNC), owned by business tycoon Hary Tanoesoedibjo, dismissed at least 300 employees just a few days before Idul Fitri in June 2017.
Another example is the shutting down of all the 7-Eleven stores across Indonesia per 1 July 2017. As a result more than 2,000 people were dismissed. Considering many of these employees have family members that are dependent on the employee's income from 7-Eleven, it affects many more than just the 2,000 dismissed workers. The weak earnings of 7-Eleven (that led to the decision to shut down all stores) cannot be fully attributed to weak purchasing power. Government regulation (the ban on sales of alcoholic beverages in minimarkets) and a weak business model contributed to the matter.
There are also rumors that Hypermart, owned by Matahari Putra Prima, wants to dismiss workers as the company saw its net loss worsen in the first quarter of 2017. The management of the company, however, denies these rumors and stated that they are actually planning to expand the number of Hypermart stores.
Also Adhi Lukman, Chairman of the Indonesian Food and Beverage Association (GAPMMI), is concerned about weakening purchasing power and its impact on retailers across Indonesia. Lukman said food and drink sales growth during this year's Ramadan and Idul Fitri were significantly weaker than in other years in Indonesia.
Lastly, mining giant Freeport Indonesia dismissed thousands of people earlier this year due to plunging production caused by the government's controversial ban on exports of mineral ore and amid uncertainty about the possibility to extend the miner's contract to operate the Grasberg mine in Papua beyond 2021. Also hundreds of workers at its smelter in Gresik were dismissed in early 2017 as there was a decline in activities at the smelter.
Years before, many local mining companies had already sacked workers as low commodity prices and weak demand for mining output after 2011 necessitated efficiency measures. Based on data from the Indonesian Coal Mining Association (APBI) a total of 3,040 small and medium sized coal mining companies collapsed on Sumatra and Kalimantan, leading to many additional unemployed people (most likely tens of thousands). Furthermore, Indonesia's Association of Bauxite and Iron ore Entrepreneurs (APB3I) claims that up to 55,000 workers were dismissed as 51 companies shut down operations.
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