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The growth in Indonesia’s GDP is having a sustained and positive impact on the number of domestic visitor nights in classified and non classified hotels across the country. The number of domestic visitor nights in classified hotels has outnumbered the number of domestic visitor nights in non classified hotels since 2013 as illustrated in the graph below.

For the period 2012 to 2017 and 2007 to 2017, the number of visitor nights generated by Indonesians has grown at CAGR 23% and 17.5% respectively. This compares with a CAGR of 7% and 8.2% for domestic visitor nights in non classified hotels over the same periods.

Growth in Domestic Visitor Nights in Classified & Non Classified Hotels in Indonesia 2004-2017

Source: Badan Pusat Statistik

Since 2004, total domestic visitor nights in classified and non classified hotels has been highly correlated with real GDP with a correlation of 0.974. It is also highly correlated with the growth in the labor force (0.940) and real personal disposable income (0.977). The following graph depicts the growth of Indonesian visitor night demand and real GDP between 2004 and 2017.

Between 2004 and 2017, domestic visitor night demand increased at a CAGR of 11.5%, while Indonesia real GDP increased at a CAGR of 5.6%

A Comparison in the Growth in Total Domestic Visitor Nights in Classified and Non Classified Hotels & Real GDP in Indonesia 2004-2017

Source: Badan Pusat Statistik & Hotel Investment Strategies, LLC

Demand elasticity is defined as the % change in total domestic visitor nights divided by the % change in real GDP. Between 2005 and 2017, the demand elasticity has averaged 2.2, with a high of 5.6 in 2013 and a low of -0.7 in 2005 as illustrated in the graph below.

Domestic Visitor Night Demand Elasticity for the Indonesian Hotel Sector 2005-2017

Source: Hotel Investment Strategies, LLC based on Badan Pusat Statistik data.

The demand elasticity refers to how sensitive the demand for hotel accommodation is to changes in real GDP. A demand elasticity of 2.2 means that for each 1% increase in real GDP, domestic demand for hotel accommodation will increase by 2.2%. So if real GDP is forecast to grow by 5%, domestic visitor nights for hotel accommodation is expected to grow by 11%.

Over the period 2013-2017, the demand elasticity was 2.9 and over the ten year period, 2008-2017, it was 2.4. This compares with the U.S. room demand elasticities of 1.3 and 1.6 over the same periods.

With real GDP projected to increase by over 5% per year over the next five years, domestic visitor nights in the hotel sector are forecast to grow by at least 11% per year.