In this Nusantara (previous one on e-bike here), we provide our findings from our on-the-ground survey and in-depth interviews with mass market and small-medium enterprise (SMEs) owners in the Java region to gain insights into Indonesia’s purchasing power. Our survey (2.5% margin of error with 95% confidence level) involved 1,493 respondents, and we conducted more than 200 interviews with business owners/employees.

Our survey reveals that weak purchasing power is felt across the board from consumers and business owners, and we deem the need of stimulus to stimulate purchasing power (see Fig. 7). However, we also believe long-term solutions (specifically in education) are needed to resolve the structurally weak purchsing power issue.

Conclusion — weak across the board and signs of downtrading

In short, the weakness in purchasing power is felt across the board (especially those that earn minimum wage or below), and that cost-of-living increases across the board (predominantly basic needs, kids’ education, and healthcare; notably also transport). Also, respondents have been cutting discretionary spending (such as entertainment, etc) and focusing on basic needs (such as food and beverages).

Further anecdotal observations

Interesting observations from our interviews include: 1) downtrading in multiple products, such as cigarettes, reduce the frequency of dining out/buying food outside of home; 2) the garment sector has been hit the most; 3) minimum wage hike at +6.5% is generally not enough to offset rising costs and fulfill basic needs; and 3) export-oriented companies tend to be in a better shape than those that only serve the domestic market.

Reasons for weakness in purchasing power

From our channel check, one of the main concerns about Indonesia is the exceedingly weak purchasing power. Indeed, cost of living growth (at +5.9% CAGR in 2020-2024) far outpaced the minimum wage growth (CAGR 5% 2020-2024). Taking inflation into account, real wages only recorded a +2.1% CAGR in the same period, far below the cost-of-living growth. Further, 80% of the job creations in the past 5 years were in the low wage segment [ e.g. loss of jobs in the garment sector to wage cuts in F&B (2020-2024, refer to Fig. 3)]. The abrupt halt in micro loans, which were grossly over-extended during the Covid perod as social aid, also negatively impacted the grassroots economy. President Prabowo announced a minimum wage growth of 6.5% to take effect in 2025 (vs 3.4% in 2024); thus we’re assessing the potential impact on mass consumers and business owners.

Recommendation and stock implication

Our recommendations consider our findings that basic needs and demand remain resilient. As such, we like consumer names that wcater to basic needs and are shielded from the downtrading phenomena: AMRT, MYOR, ICBP, CLEO, and MIDI (all rated Buy). We also like banks with strong deposit franchises that remain insulated from mid-low segment weaknesses. Our preferred banking sector pick is BBCA (Buy).

Declining middle income population

Fig. 1: Indonesia losing 9-10mn middle income population in the last 5 years

Over the past five years, Indonesia's middle-income population (monthly spending of Rp2-10mn) has declined by 9-10 million, likely shifting to the aspiring middle-income bracket (Rp900k-2mn/month). Key factors driving this decline include rising living costs outpacing wage growth, job creation concentrated in low-paying sectors, and a sharp reduction in micro loan availability.

Fig. 2: One of the main reasons is wage growth (+4.9% pa. avg 2020-2024) cannot keep up with cost-of-living growth (5.9%). No single sector posted wage growth above the cost-of-living growth — hence squeezing purchasing power

Beside cost of living outpacing minimum wage growth, 82% of job creations over the past 5 years also happened in sectors with below minimum wage (i.e., agriculture, accommodation and F&B, etc.)

Fig. 3: In the last 5 years, Indonesia created 16mn jobs. 12.9mn (82%) of those jobs were low paying jobs

Noteworthy, during Covid-19, micro loans were grossly overextended as “social aid” for the grassroots economy. However, the abrupt halt in micro loans distribution in 2024, after a high base, has left the grassroots largely unsupported, and thus, weakened their purchasing power.

Fig. 4: Micro loans were overextended during COVID-19 period (2020 – 2023)

Fig. 5: Micro loans extension outpaced government subsidies and social aid during COVID-19

In addition, post-COVID, labour-intensive sectors experienced a scarring effect, which could have caused a shift in the employment landscape from manufacturing to low-paying services jobs.

Fig. 6: Scarring effect in labour-intensive sectors — industry values are lagging its baseline

Fig. 8: Most prominent scarring effect due to COVID-19 happens in business services

We believe the declining middle-income population due to weakness in purchasing power requires short-term, mid-term, and long-term solutions. Short-term solution, in our view, would include stimulus package to alleviate the purchasing power, mid-term includes focusing on the quality job creation that focuses on export and dollar creation (e.g. tourism, etc), and long-term would be improving education quality.

Results of the survey

Fig. 9: Minimum wage at 6.5% — 60% answered it's not enough (representing about 110mn population in Indonesia)

Fig. 10: On how much is basic necessities spending as a % of monthly income — roughly two-thirds answered it ranges between 30% and 70% of their monthly income

Fig. 11: Cost of living trend — for basic necessities such as food, still relatively sactisfactory but purchasing power for clothes declining

Fig. 12: Employees that earn minimum wage or below are more prone to layoffs

Fig. 13: Spending items that were increased — top three includes food and beverages, kids’ education, healthcare

Fig. 14: If respondents were to lack income — most of the respondent would borrow money from family/friends, take out savings, and/or reduce expenses

Fig. 15: Future spending basket — if income increases, most of the respondents would allocate to savings/investments and basic necessities, followed by education, paying debts and entertainment is the last

Fig. 16: Optimism for 2025 questions — big majority of the respondents are optimistic about the economy in 2025

Fig. 17: Demographic of respondents

Fig. 18: Respondents’ breakdown by monthly income – majority is at minimum wage or below, representing middle income and aspiring middle income or about 75% of population

Interview results — business owners

We interviewed 217 business owners in East, West and Central Java to assess sales and purchasing power trends. Our findings reveal that business owners feel that consumer purchasing power is soft, and that majority of them witness declining sales.  Signs of downtrading are also pertinent given that some business owners have shifted from selling clothes to selling food in food stalls. Layoffs are laregly minimal for most sectors, but specific structural challenged sectors such as garment is witnessing significan layoffs.

More than a quarter of business owners borrowed money in 2024 for personal purposes — due to cost-of-living increases, after depleting their savings. Thus, , many business owners prefer to replenish their savings if their sales increase in the future.

Fig. 19: Sales of many business owners have been declining, with the worst seen in Central Java (Jateng)

Fig. 20: Majority of the respondents attribute the declined sales to weak purchasing power and intensified competition

Fig. 21: Majority of the respondents feel that cost of basic needs are increasing vs the prior year

Fig. 22: About 28% of the business owners have borrowed money for personal expenses in 2024

Fig. 23: If income increases, replenishing saving is the top objective of respondents

Fig. 24: Generally, layoffs were considerably minimal in most sectors. Garment sector the hardest hit in West Java (Jabar)

Fig. 25: Demographic of the business owners – sectors and location

Interview results — employees

We also interviewed 194 employees across multi-sectors (such as services, manufacturing, F&B, garment, cigarettes, office workers, etc) in East, West and Central Java.

From our interviews, the majority of respondents feel that expenses have been increasing in the past 12 months — with the driver being higher prices. Respondents feel that the price spike happens mostly in primary needs, education and also transport.

Similar like business owners, about a third of the respondents have borrowed money in the past 12 months for personal expenses — reflecting tightness in purchasing power. Only 31% of the respondents feel that the minimum wage hike of +6.5% are sufficient (57% feel that +6.5% minimum wage growth is sufficient). Interestingly, those that answer it is enough are worried that their companies might file for bankruptcy or that they’ll be laid off.

Very feasible signs of downtrading — given some respondents have shifted their behavior from buying foods from outside of home to now bringing home-made food to work place because it is more economical. Most respondents have also cut discretionary expenses such as social hangouts, buying clothes, etc., and focusing on primary expenses.

Fig. 26: Majority of the respondents earn above minimum wage

Fig. 27: Most respondents believe expenses have increased in the past twelve months...

Fig. 28: … driven by higher prices

Fig. 29: Items with price increase include primary needs, education and transport

Fig. 30: Over a third of the respondents have borrowed money in the past one year for basic needs

Fig. 31: More than half of the respondents feel that +6.5% minimum wage growth is enough to catch up with cost of living