Wealth Illusion: The Fading Mirage Of Indonesia's Middle Class

Driven by the desire to maintain the appearance of a jet-set, many within the middle class have resorted to leveraging credit to finance their lifestyles. The Indonesia Financial Fitness Index 2024 by OCBC shows staggering figures: 80% spend money to follow their peers' lifestyles, 41% often borrow money from friends and family, 39% save money for materialistic goods like branded stuff and up-to-date gadgets, and 12% spend more than they earn. The middle class was among those surveyed.

The proliferation of peer-to-peer (P2P) lending platforms and other digital financial services has made it easier than ever to access credit. However, this access has not been accompanied by a corresponding increase in financial literacy.

According to the latest data from OJK, consumer credit growth has outpaced income growth. In 2023, consumer loans increased by 7.5% year-on-year, compared to a GDP growth rate of 5.1% during the same period. As of May 2024, online loans reached nearly IDR65 trillion, soaring 25% year-on-year.

A growing number of middle-class households are also trapped in a debt cycle due to mindless financial decisions. Loan repayments eat into disposable income, leaving them to live paycheck to paycheck without room for reserves.

As household debt rises relative to GDP, households leverage more of their future income to meet current consumption, including everyday expenses, durable goods, housing, and possibly discretionary spending-not to mention taking debt to support their rich-looking lifestyle-implying less capacity to save and invest, potentially reducing financial security.

Mandiri Spending Index 2024 shows a hike of almost double in the total spending on groceries, from 13.9% to 27.4%. This reflects not only the presumably price surge but also the decrease in income.

The World Bank defines Indonesia's middle class as those earning IDR4-20 million monthly. Despite its significant size, the middle class is increasingly vulnerable to economic shocks. Once seen as the backbone of Indonesia's economic stability, it is now at risk of experiencing downward mobility.

Bank Indonesia projects that if current trends continue, a significant portion of the middle class could fall into lower income brackets within the next decade. Meanwhile, the country relies heavily on the middle class-from their tax contributions, savings and productivity, particularly in labor-intensive industries.

The consequences of this debt-fuelled consumption are beginning to surface. The increase in household consumption invites further revisits to delve into whether it reflects strong purchasing power or conceals an unprotected financial behavior, which may cause the freefall of the middle class once economic shocks occur.

It also invites further reflection about fostering sustainable, resilient household consumption that is not overly reliant on debt.

The middle class may be grappling on their own, with minimal support from the existing policies. In Q2 2024, the middle class are hit with a series of shocks: a VAT increase by 12% in 2025, an increase in university tuition fees, and an increase in BI rate to 6.25%, potentially affecting mortgage payments.

Fundamentally, the middle class may lack comprehensive social protection mechanisms. This is particularly concerning given the limited social protection available to this demographic group. Unlike the low-income population, who benefit from the government conditional cash transfer program, Program Keluarga Harapan (PKH), the middle class has few safety nets.

The government has also implemented social safety nets for the low-income population, such as the non-cash food aid, Bantuan Pangan Non-Tunai (BPNT). Still, there is a glaring gap in support for the middle class. This exclusion exposes them to economic downturns, rising costs of living, and unforeseen financial crises.

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The IMF has noted that Indonesia's social protection framework remains insufficiently comprehensive, particularly for those who are neither poor nor wealthy.

Although the rise in debt may be mistakenly interpreted as an indicator of an asynchronous increase in financial inclusion and literacy, the reality is more complex. The growth of financial access is lacking solid financial education program and has led to a focus more on“looking successful” than on“being successful.”

The abovementioned gap between financial inclusion and literacy underscores the need for more robust financial education initiatives that empower individuals to manage their finances consciously, mindfully, and sustainably rather than simply increasing their access to credits.

Indonesia's middle class is at a crossroads. The pursuit of an artificial opulent lifestyle, driven by impulsive spending and easy access to credit, has created an unsustainable economic environment.

To safeguard the middle class and ensure it remains a pillar of economic growth, Indonesia must prioritize financial literacy, promote responsible lending practices (both from the financial institution and consumer sides), and expand social protection mechanisms to include this crucial segment of the population.

Without these reforms, the nation risks not only the demise of its middle class but also the broader economic stability that it supports.

Greget Kalla Buana is sustainable finance specialist at UNDP. Anisa Indah Pratiwi is SDG financing specialist at UNDP.

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