Household consumption in Indonesia is expected to improve in 2018. This assumption is based on a number of indicators that show a positive trend. For example, consumer confidence in Indonesia rose to 126.4 points in December 2017. The country's macroeconomic picture is also strengthening with accelerating economic growth, low inflation and a stable (or actually appreciating) rupiah rate.
DBS Group Research notes in a recent report that improving household consumption is very important for the Indonesian economy because of the big link between both. Household consumption accounts for about 55 percent of the nation's total economic growth and therefore it has a major impact on the direction of the Indonesian economy.
DBS Group Research sees a relation between Indonesia's bleak GDP growth rate of 5.06 percent year-on-year (y/y) in the third quarter of 2017 (below Bank Indonesia's target of 5.18 percent) and declining household consumption growth (recorded at 4.93 percent in Q3-2017, down from 4.95 percent in the preceding quarter). In the first half of 2017 the Indonesian government raised electricity tariffs for certain groups (in an effort to wind down energy subsidies) and this is partly to blame for sliding household consumption growth in Southeast Asia's largest economy.
But Indonesia's household consumption will improve in 2018, according to DBS Group Research, in line with the overall accelerating pace of the Indonesian economy, which is estimated to reach 5.3 percent (y/y) in 2018 from an estimated 5.1 percent last year. Rising GDP growth is expected to come on the back of growing investment realization.
Indonesia needs to rely on investment as fiscal space of the government is limited with the budget deficit capped at 3.0 percent of GDP. DBS Group Research expect the budget deficit to reach 2.6 percent of GDP in 2018, from 2.42 percent in the preceding year. The deficit is expected to rise because tax revenue realization will probably be lower than targeted (as usual).
Meanwhile, the government allocated IDR 2,221 trillion (approx. USD $165 billion) for its spending budget in 2018, up around a modest 4 percent from the 2017 spending budget. Moreover, it will focus more on fiscal stimulus for the people in order to boost the purchasing power of especially the lower middle class segment. Therefore, the electricity subsidy budget has been raised 5 percent to IDR 94.5 trillion in the 2018 state budget.
The government also significantly raised the budget for the Family Hope Program (in Indonesian: Program Keluarga Harapan, or PKH), a cash transfer program for the country's poor families. The budget was raised from IDR 1.7 trillion in 2017 to IDR 20.8 trillion in 2018 and will now cover 10 million poor Indonesian families, hence their purchasing power will improve. The higher budget is also likely a strategic move ahead of regional elections in 2017 and legislative and presidential elections in 2019.