Bullish on Indonesia

The growing middle class here continues to spend at an unprecedented rate, undaunted by the slowdown in global growth or by infrastructure and policy gridlock at home, business leaders say.

James Riady, chief executive of Lippo Group 0226.HK +0.72% —one of Indonesia's largest conglomerates, with a range of interests including property and supermarkets—says there have been no signs of a slowdown in the spending by Indonesians that helped give Southeast Asia's largest economy one of the world's strongest growth rates last year.

Economists warn that Indonesia's growth could hit a wall soon, since President Susilo Bambang Yudhoyono's coalition government has been unable to build much-needed infrastructure or pass important economic and political changes. Standard & Poor's—the last major ratings service to rate Indonesian debt as junk—on Monday decided not to upgrade the country's credit rating, citing "policy slippages," such as the government's failure to raise fuel and electricity prices.

Still, spending doesn't seem to be slipping, Mr. Riady says. Whether it is shoppers at the company's malls, subscribers to its television and broadband services or home buyers at its apartment complexes, Lippo Group continues to see strong growth and expects it to continue for the next five years as wealth spreads to the Indonesian archipelago's far-flung islands.

"We are entering a golden era where consumers are just starting to enjoy more than just the basics," Mr. Riady said in an interview Monday. "It's propelling consumer sales to amazing new levels."

Indonesia's increasingly confident consumers are a primary reason why its gross domestic product rose 6.5% last year and could climb around the same pace this year. Unlike many of its Asian neighbors, Indonesia isn't dependent on exports for growth, so it has been able to shine while other Asian economies have struggled as their customers in the U.S. and Europe suffered.

Continued consumer confidence here will help decide whether the country can become the next great boom market in Asia, after China and India, economists say.

If measured by the number of people that make at least $3,000 a year, Indonesia's middle class made up 50 million of its nearly 250 million people in 2009, and that will triple to 150 million by 2014, according to investment firm PT Nomura Indonesia.

Motorcycle sales, for example, jumped to more than eight million last year, more than double the level five years earlier.

Middle-class spending will continue to climb, and power the Indonesian economy over the next five to 10 years, says Fauzi Ichsan, senior economist at Standard Chartered Bank in Jakarta. Indonesia's population is young, with a median age of 28.2 years, according to the CIA Factbook. That means a growing percentage of the population will be in the working and spending periods of their lives relative to those who are retired.

Meanwhile, the banking sector is just taking off and as the sector expands, it will become easier for average Indonesians to get loans to pay for their new lifestyles.

Mr. Riady says Lippo Group's home sales, largely to the middle class, will be around $450 million this year, up from $100 million two years ago. He says sales at the group's hypermarkets will rise 40% this year from last and sales at its department stores will increase 25%. Mr. Riady predicts similar growth rates for the next three years.

As the middle class demands better health care, Lippo Group is building hospitals across the country. The group plans to have 14 hospitals by year-end and add around 10 a year for the foreseeable future.

Given new private and government investment in hospitals, Philips Electronics NV PHG +0.20% says it expects its annual health-care equipment sales in Indonesia—which are already growing faster than in China and India—to more than quadruple in the next three years.

"It's really exciting growth," coming from all over the country, says Wayne Spittle, Asia-Pacific head for Philips Healthcare.

Some economists warn that the market could be overheating, putting too many cars on the road and pushing up property prices. Indeed, the central bank last month ratcheted up restrictions on loans for motorcycles, mortgages and cars.

Still, rising incomes are expected to continue to boost demand for a variety of items, from smartphones, to refrigerators, to cut-price airline tickets.

"We have passed $3,000 GDP per capita, which has been a benchmark beyond which people are starting to have real money to spend," and that is creating more growth and new businesses, Mr. Riady says. "There is so much more to be done."

SOURCE: http://online.wsj.com/article/SB10001424052702303990604577365462350890828.html?mod=SEA_LeadStory