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NEWS UPDATES Asean Affairs    24 July 2012

Indonesian Middle class grows richer


Indonesia's booming economy has turned middle-class households richer, with increases in net worth, assets, income and ability to repay loans, central bank latest survey shows.

The 2011 survey also found that the middle class comprises 60.9 per cent of Indonesians, while the low income segment with a net income of below 20.4 million rupiah (US$2,162) per year was 22.1 per cent of the population and the remaining 17 per cent were those who have high income of more than 65.6 million rupiah ($6,953).

"Households' growth is driven by improving overall economic growth and manageable inflation. High GDP [gross domestic product] creates economic potential for the people," said Yunita Resmi Sari, deputy director of banking research and regulation department at the Bank Indonesia (BI).

"Improving household conditions also triggered consumption and therefore spurred economic activities," she added.

Southeast Asia's largest economy is more than 50 per cent driven by domestic consumption, and therefore stable prices are keys to maintaining the over 6 per cent economic growth seen since two years ago. Last year, inflation turned lower at 3.8 per cent, versus almost 7 per cent in 2010.

Weaker inflation has lowered operational costs for households by 2.5 per cent throughout last year, according to the BI survey. With lower costs and 14.7 per cent higher gross income, Indonesian households saw their net income soaring by 80.8 per cent last year to an average of 11.8 million rupiah ($1,250).
Household disposable income also rose 12.9 per cent to an average of 37.7 million rupiah ($ 3,996) throughout 2011.

"The increase in household income in 2011 was primarily driven by a 46 per cent increase in production activities. Meanwhile, investment activities gained in 2011 compared with losses in 2010," Sari said, adding that household investment returned 36.3 per cent last year to 527,971 rupiah ($55.9).

Other than production activities, which account for 15 per cent of overall household income, the increase in income was primarily supported by the service sector, contributing 58.5 per cent. Income from trading activities account for 20.8 per cent of overall Indonesian households income.

The improving conditions of Indonesian household finances has brought up overall assets and net worth by 14 per cent to an average of about 200 million rupiah each in 2011. Cash positions also soared 80.2 per cent to 16 million rupiah, boosting households' savings.

"Higher savings has also strengthened the financing source for development," Sari said.

But still, more than half of Indonesian households still do not have access to savings and loans at financial institutions, according to the central bank, which surveyed 4,095 households in big cities in Java, Sumatra, Kalimantan, Sulawesi and Bali.

"There's a large untapped market for banks in Indonesia in terms of savings and loans," Bank Mandiri chief economist Destry Damayanti said.

The ratio of household total debt to total assets was only at 3.3 per cent last year, down from 3.6 per cent in 2010, indicating that almost all of household assets were funded not by debt, but by people's own incomes, according to BI survey.

Meanwhile, the ability of Indonesian households to repay their loan was high given strong cash conditions, with an assets-to-short-term-debt ratio of almost 22 times.

"That's why Bank Mandiri and many banks are now strategising on tapping into the retail segment," Damayanti added.

"Now, we need to ensure that the strong economic growth is also felt by the low income segment," World Bank senior economist for Indonesia Vivi Alatas said.

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