Indonesia's shrinking middle class rattles businesses betting on a boom

People are falling behind as commodities sector fails to deliver well-paid jobs.

- A. Anantha Lakshmi and Diana Mariska

Pizza Hut's Indonesian franchisee pinned its hopes on the expansion of the middle class in the world's fourth-most populous country. But its decision to shut 20 stores and reduce its workforce offers a warning for those betting on a consumer boom in South-east Asia's largest economy.

"We have observed shifts in consumer spending patterns in Indonesia, with a general trend of cautious spending among the middle class," said Mr Boy Lukito, chief executive of Sarimelati Kencana, the franchise operator in Indonesia.

Businesses selling everything from pizzas to cars have been hit by Indonesia's shrinking middle class. The number of people considered to be middle class by the government has declined 20 per cent over the past six years, a risk to the commodity giant's growth plans and a warning for potential investors such as Apple.

Economists said the decline had been triggered by a lack of formal employment, a shortage of investment in higher-income industries and overreliance on a commodities sector that has produced poorly paid work - pressures that have been exacerbated by the Covid-19 pandemic.

A weaker middle class, which has traditionally been the backbone of Indonesia's economy, could scupper President Prabowo Subianto's ambitious plans to boost annual gross domestic product growth to 8 per cent in the next five years, from the current 5 per cent, and become a developed economy by 2045. It could also put off much-needed foreign investment.

"Without structural reforms addressing the middle class issues, Indonesia will not achieve 8 per cent growth by 2045, let alone in the next five years," said Mr Teuku Riefky, a researcher at the Institute for Economic and Social Research.