Indonesia to surpass US’ GDP per capita of USD47,300

Big spenders
It is no exaggeration to say that Indonesia’s 240m consumers have been the saving grace of ASEAN’s largest economy, helping it to weather the global downturn of 2008.

Given the overall strong growth momentum and robust employment prospects, we expect the ‘shock absorber’ of private consumption to continue to buffer the country from global uncertainties that are still with us now. In fact, going by our long-term growth forecasts, the country’s 750m consumers may indeed be spending quite a bit more.

One supporting factor is the level of GDP per capita. Having crossed the USD3,000 level in 2010, under our optimistic scenario there is a good chance that Indonesia’s per capita GDP may double every decade going into 2050.

In this scenario, in today’s US dollar terms, Indonesia may reach GDP per capita of nearly USD20,000 in about 20 years and close to USD50,000 by 2050. To put these numbers in context, let’s compare them with the GDP per capita levels of other countries.

Specifically, what we are saying is this: Indonesia has a chance of closing in on the GDP per capita of today’s Korea (USD20,600 in 2010) in about two decades, and surpassing that of today’s US (USD47,300 in 2010) by 2050.

Note, of course, that this is not about Indonesia overtaking these countries, since presumably both Korea and the US will continue growing and enjoy even better living standards over the period. It is all about visualizing where Indonesia is headed in the coming years – and it is a rather enticing picture.

Even in our base-line scenario, consumer spending in Indonesia would still be strong. For instance, cumulatively over this decade, consumers will still be spending over USD4trn in 2010 US dollar terms even in this more subdued scenario.

Spreading it out
One key factor that has supported Indonesia’s overall growth and private consumption specifically is commodities. The increase in commodity exports has helped to improve the purchasing power of Indonesian consumers. In turn, private consumption, at around 60% of the economy, acted as a shock absorber during the post-Lehman days of the global downturn.

In particular, pockets of outlying regions where most of these commodities are found have developed rapidly, helping to spread out economic development that has traditionally centred around Java.

A World Bank study found that the increase in the price of mineral commodities has resulted in a substantial rise in the provincial GDPs of West Sumatra and West Kalimantan, two regions which are active in coal mining.

There is also some evidence suggesting that the purchasing power of rural inhabitants has improved in recent years, in part due to the uptick in commodity prices. While the average rural inhabitant spent 40% less than his urban compatriot in 2010, his spending has grown more harply in the past five years or so.

Importantly, as the World Bank argues, while in general the run-up in commodity prices in recent years has hurt the rural poor in developing countries, Indonesia is an exception. The negative impact from paying more for basic necessities has been more than outweighed by the benefits they receive on the income side, courtesy of the increase in agricultural real wages, among other things.

The trend in rural income growth has not gone unnoticed by consumer goods companies when it comes to formulating their marketing strategies. Indonesia’s television advertisements are peppered with rural scenes with down-to-earth looking characters peddling consumer items in small-pack sizes – projecting an image of both approachability and affordability.