The year 2015 has been a tough year for Indonesia's tobacco industry due to an 8.7 percent increase in excise on tobacco products in early 2015 and people's weakening purchasing power amid the country's economic slowdown. During the first nine months of 2015 sales of cigarettes in Indonesia fell 1.3 percent (y/y) to 232 billion cigarettes. Next year, challenges will remain as the Indonesian government prepares another tobacco tax hike (23 percent). However, people's purchasing power is estimated to improve as economic growth may accelerate.

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The 'Top 100 Indonesia brands' ranking, issued by UK-based brand consulting firm Brand Finance, has a new leader. On top of this year's list is majority state-owned telecommunications firm Telekomunikasi Indonesia (Telkom) with a brand value of USD $2.8 billion, replacing Indonesia's largest tobacco company HM Sampoerna (which fell to fourth position in this year's ranking). Other Indonesian top brands are tobacco producer Gudang Garam and Bank Mandiri, Indonesia's largest bank (by assets).

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Gudang Garam is a leading Indonesian manufacturer of kretek cigarettes (clove cigarettes), which are the favorite choice of Indonesians. Indonesia has a large and diverse tobacco consumer market with a significant percentage of adult smokers. In 2012, it was estimated that 67 percent of Indonesian men and 5 percent of Indonesian women smoke (Indonesia has a total population of over 240 million people). In 2012, Gudang Garam had a market share of about 20 percent of the domestic cigarette market.

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After the Indonesian government abandoned the idea to increase excises on cigarettes, the production of cigarettes in Indonesia is expected to increase to between 355 and 360 billion cigarettes in 2014. However, in order to meet that target, it is also important that the country's macroeconomy - particularly the inflation rate - remains stable. This year, Indonesian cigarette production is expected to reach 340 billion cigarettes. Indonesia has one of the world's largest markets for cigarettes.

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Shares of Gudang Garam, Indonesia's leading kretek (clove cigarettes) producer, surged 1.92 percent to IDR 79,500 on Friday (24/11). So far this year the company's shares, listed on the Indonesia Stock Exchange, have risen 24.4 percent. This is remarkable considering there are plenty of negative issues going on in Indonesia's cigarette industry.

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Indonesia's Industry Ministry hopes that the recent acquisitions of Karyadibya Mahardika and Surya Mustika Nusantara by Japan Tobacco Inc will have a positive effect on the domestic tobacco industry in Indonesia. The Japan-based cigarette manufacturing company bought 100 percent of the stakes in both companies for a combined price of USD $677 million. The deal is expected to be completed in the fourth quarter of 2017.

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Indonesia's slowing economic growth, weaker purchasing power and an 8.7 percent increase in excise on tobacco products (in early 2015) had a relatively small impact on the financial performance of Indonesia's listed tobacco companies HM Sampoerna, Gudang Garam, Bentoel Internasional Investama and Wismilak Inti Makmur. Whereas companies active in various other sectors of the Indonesian economy were plagued by falling revenue and profit figures, these tobacco firms still posted solid gains in revenue and - to a lesser degree - net profit growth. This shows that Indonesian smokers are faithful to their "death stick".

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The benchmark stock index of Indonesia (Jakarta Composite Index, abbreviated IHSG) declined 0.92 percent to 5,136.86 points on the last trading day of the week. Seven of the ten sectorial indices fell, led by the finance sector (-1.66 percent), followed by consumer goods (-1.50 percent) and manufacturing (-1.34 percent). The main reason for this poor performance is that investors are again looking at the true fundamentals of the Indonesian economy instead of optimism about Joko Widodo becoming Indonesia’s seventh president.

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Widespread cigarette consumption among Indonesians (especially men) can have a negative impact on the country’s current demographic bonus. One of Indonesia’s strongpoints in terms of economic make-up is that it has a large and young, thus potentially productive, population. Indonesians in the productive age (15 to 64 years) outnumber those that are categorized as youth (below 15 years) and elderly (over 65 years). This large productive group should provide a boost to Indonesia’s economy in the next two decades.

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After its one-week holiday, Indonesia's main stock index (IHSG) started in negative territory. The index fell 0.93 percent to 4,597.78 on Monday (12/08) with the country's miscellaneous industry sector and the consumer goods sector leading the fall. It is interesting to note that most Indonesian mining companies showed significantly rising share prices as prices of mining commodities are expected to increase. According to Morgan Stanley, coal imports to India will grow while the global coal price has already reached its lowest point.

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