Household spending is undeniably the engine of the Indonesian economy. It contributes more than 56 percent to total economic growth.
ENNY SRI HARTATI
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Household spending is undeniably the engine of the Indonesian economy. It contributes more than 56 percent to total economic growth. It should not be difficult to maintain Indonesia’s economic stability by keeping spending growth stable. On the other hand, our economic stimulus policy will be-come ineffective, if it fails to stimulate domestic consumption.
Nevertheless, boosting domestic consumption is not instantaneous. Loving domestic products and hating foreign goods will not cut it. It is because the main driver of spending is purchasing power, which in turn, comes from the size of one’s disposable income.
The problem is that the economic cycle doesn’t work as normal during a pandemic. Almost all of our economic activities have suffered from the disruption. Mass layoffs have occurred, while others have experienced a drop in income, including the upper-middle class.
The pandemic has been going for a year. People are witnessing their saving decrease day by day; even some have nothing left. Meanwhile, the economic recovery is still full of uncertainty because productive economic activity and investment growth are still under intense pressure. Moreover, the economy in the first quarter of this year is still heading toward a contraction.
This condition affects the behavior, preference, decision and ability of consumers to spend. Consumers will become cautious and selective in spending their money, making a scale of priority. Staple foods will become their main priority, followed by spending for health care. On the other hand, spending on durable goods, which many consider an investment, will wait until our economic prospect becomes more certain.
Hence, the government’s policy to stimulate household spending through relaxations in mortgage and vehicle loan requirements could turn into a polemic. Bank Indonesia has relaxed the loan to value (LTV) ratio for mortgage as well as down payment requirement for vehicle loans.
The government hopes this could boost spending on durable goods, particularly property and vehicles. The government has even offered a discount or waiver on luxury tax (PPnBM) for new vehicles under 1500 cc capacity for purchases made from March to December this year.
The potential to be ineffective
In normal conditions, the relaxations would surely improve spending, especially in the property sec-tor where the gap between supply and demand of new housing is wide. The problem is limited access to affordable housing, particularly for lower-middle-income families.
Ideally, the largest demand for mortgages should be for middle-segment houses priced within the range of Rp 500 million (US$ 34,817) to Rp 2 billion. Demand for middle-segment houses is big and growing but faces limitation due to poor purchasing power. So, even without a down payment, consumers will have difficulty obtaining a mortgage. Consequently, the monthly installments will be-come too big to handle for most consumers. Moreover, the prime lending rate (SBDK) is still at 9.8 percent, so consumers will face double digit lending rates for their mortgage.
A weakening economy affects penetration in the property sector. Previously, demand for property was driven more by investment motives than spending, within the ratio of 60 percent to 40 percent. After the pandemic, however, the property sector could experience a bubble. Rising property prices are driven by speculative motives, not improvements in purchasing power. As a result, when economic stagnation or even contraction hits, speculative demand for property bursts.
In 2019, the government’s relaxation policy failed to jolt boost for property. The government cut its tax for luxurious housing from 5 percent to 1 percent. The minimum value of housing applicable for the tax was also increased from between Rp 5 billion and Rp 10 billion to Rp 30 billion. The incentives failed to maintain speculative investments in the property sector.
Meanwhile, amid weak purchasing power, the banking sector faced the prospect of increasing non-performing loans (NPL). Another risk they faced was moral hazards caused by a zero percent down payment policy, in which borrowers would become more likely to default on their debt because they have no sunk cost. If the government is not careful, the growing risks of debt defaults can trigger systemic risks in the financial sector.
The same risk may occur in vehicle loans due to the relaxation introduced by the government. Rather than improving vehicle sales, the government is facing the risk of inadequate state revenue. High maintenance costs would prevent vehicle from serving as an instrument for investment, especially during the pandemic, when the need to commute and travel has fallen drastically. Moreover, the government should not stray from its post-pandemic goal of encouraging the use of public transportation.
The same risk may occur in vehicle loans due to the relaxation introduced by the government.
In principle, creative policies are needed to boost household spending and accelerate economic recovery. But economic incentives are like a double-edged sword, so the government must carefully calculate the negative impacts. One of the costless and less risky ways to jolt increase spending is through encouraging the purchase of domestic products. There is a strong correlation between in-vestment and spending. If no one buys domestic products, then no investments will be made.
However, the main determinants for buying domestic products are quality and price. If domestic producers can manufacture cheap and good quality products, consumer loyalty toward domestic products will grow.
ENNY SRI HARTATI, Senior researcher at the Institute for Development of Economics and Finance (INDEF).