Yet the Government faces many challenges. Bank Indonesia (the central bank) recently warned that significant foreign direct investment (FDI) is still needed to boost economic growth, especially to finance massive infrastructure projects. Moreover, the economy remains overly reliant on foreign debt. This reached US$347.3b at the end of November 2017, up 9.1% year on year. This could pose a threat if the rupiah weakens.
Meanwhile, corporate governance is not as strong as it could be. Indonesia ranks last out of 11 Asian markets in the Asian Corporate Governance Association’s most recent Corporate Governance Watch survey, issued in 2016; while reforms have been introduced, some commentators have suggested that they are not being implemented speedily enough.
Key sectors have been under pressure in an economy that is highly correlated with commodity price trends. Retail is one such sector and is strategically important, given that consumption accounts for more than half of the country’s economic growth. Official data shows household consumption growing at a slower pace compared to previous years (at just under 5% in 2017). As a result, some international retailers have been forced to shut down operations in Indonesia.
This ties back to broader drivers shaping the Indonesian retail landscape. “We are witnessing shifts in consumer spending patterns toward leisure, entertainment and education. Because of that, the fast-moving consumer goods (FMCG) segment is under pressure,” says Tevilyan Yudhistira Rusli, CFO at Unilever Indonesia. The global consumer giant has long roots in Indonesia, with a market presence dating back 84 years.
There is an expectation that, once this year’s provincial elections and the 2019 general election are out of the way, consumer spending will strengthen as the prevailing caution dispels. In any case, says Yudhistira, “the consumption per capital ratio is still one of the lowest relative to neighboring countries. Market penetration of products such as deodorant, at 35-40%, is still low. That makes the market very promising over the long term.”
The competitive landscape is also transforming. Large companies are facing competition from smaller, nimble market entrants that are able to outsource R&D. These companies are also tapping into more national-focused brand loyalties. “Consumer thinking is, why choose a global brand when I could choose an Indonesian one?” says Yudhistira. He adds that, for large companies, trying to be nimble is the best way forward, but it is like an elephant trying to dance – “easier said than done.”