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The growth of Indonesia’s real GDP over the past decade or so has significantly impacted the number of domestic visitor staying in star-rated hotels across the archipelago, especially in provinces such as Riau, Lampung, Kalimantan Tengah and Gorontalo. As a major economic determinant of star-rated hotel demand, the growth in real GDP had an uneven impact on the performance of star-rated hotels across the country as illustrated by the table of demand elasticities below.

Since 2007, a 1% increase in real GDP resulted in a 2.9% increase in the number of domestic visitors staying in star-rated hotel accommodation. The annual demand elasticities for the country ranged from a high of 9.7 in 2013 to a low of 0.26 in 2019 as illustrated in the table at the end of this post.

Indonesia’s real GDP grew at a compound annual growth rate (CAGR) of 5.6% from IDR 5,391,656.9 billion in 2006 to IDR 10,947,982.1 billion in 2019. Over the past five years, 2014-2019 it grew slightly slower at a 5% CAGR. Total domestic guests staying in star-rated hotels grew by a CAGR of 15.3% since 2006. This compares with the number of domestic guests staying in star-rated hotels in Bali which grew at a 13.9% CAGR, Jakarta 10.6% CAGR, Jawa Barat 17.3% CAGR and Jawa Timur 15.1% CAGR

Growth in Number of Domestic Guests Staying in Star-Rated Hotels Indonesia & its Largest Provinces and Indonesia’s Real GDP, 2006-2019

Source: Hotel Investment Strategies, LLC based on BPS Indonesia Statistics

Our hotel market forecasts for Indonesia’s major cities and tourist destinations come from estimating, then predicting with, a series of equations based on well-established economic and statistical principles. Arguably, the most important of these equations captures the relationships between hotel demand – the number of rooms sold – and economic determinants of hotel demand. To be included in a demand equation, economic variables must ‘make sense’ from an economic theory perspective (i.e., be economically significant) and have a demonstrated statistically significant relationship with hotels.

Since 2006, the total number of domestic guests staying in star-rated hotels has been highly correlated with Real GDP with a correlation of 0.973. It ranged from a high of 0.983 for the Province of Jawa Barat to a low of 0.485 for Maluku. It is also highly correlated with Industrial Production (0.985), Average Real Wage Index (0.983), Real Manufacturing (0.981), Real Private Consumption (0.980) and Real Personal Income (0.979).

So just how responsive has the number of domestic guests staying in star-rated hotels been to changes in Indonesia’s real GDP? We can provide the answer by examining the demand elasticity, defined as the percent change in the total number of domestic guests staying in star-rated hotels divided by the percentage change in real GDP.

Between 2007 and 2019, the demand elasticity has averaged 2.9 and over the past five years it averaged 2.6. So the long term demand elasticity of 2.9 means that on average, the number of domestic guests staying in star-rated hotels has grown 2.9% for every 1% growth in real GDP.

Domestic Guest Elasticity for Star-Rated Hotels for Indonesia and its Provinces 2007-2019

Province2007-20192015-2019
Aceh1.91.5
Sumatera Utara2.20.0
Sumatera Barat3.22.2
Riau5.88.1
Jambi2.93.4
Sumatera Selatan3.82.9
Bengkulu5.75.1
Lampung5.09.5
Kep. Bangka Belitung4.95.1
Kep. Riau3.00.8
DKI Jakarta2.12.2
Jawa Barat3.33.0
Jawa Tengah3.92.7
DI Yogyakarta3.85.5
Jawa Timur3.54.3
Banten4.05.3
Bali3.73.9
Nusa Tenggara Barat3.82.2
Nusa Tenggara Timur5.15.1
Kalimantan Barat3.32.3
Kalimantan Tengah25.29.6
Kalimantan Selatan3.13.2
Kalimantan Timur3.32.3
Kalimantan UtaraN/A3.3
Sulawesi Utara4.64.6
Sulawesi Tengah7.63.4
Sulawesi Selatan5.65.6
Sulawesi Tenggara14.33.4
Gorontalo7.37.6
Sulawesi Barat2.74.7
Maluku5.4-0.5
Maluku Barat4.74.3
Papua Barat5.86.1
Papua5.22.2
Indonesia2.92.6
Source: Hotel Investment Strategies, LLC based on BPS Indonesia Statistics data

Since 2007 domestic guest demand elasticity has averaged 2.9 as illustrated in the graph below.

Annual Domestic Guest Demand Elasticity for Star-Rated Hotels in Indonesia 2007 – 2019

Source: Hotel Investment Strategies, LLC based on BPS Indonesia Statistics data

The Economist Intelligence Unit (EIU) has recently forecasted that real GDP will grow by 0.2% in 2020 and 5.2% in 2021 while Oxford Economics forecasts no growth in real GDP in 2020 and a bounce back of 8.5% in 2021. The current sixty-four-dollar question is: Does hotel demand generated by the domestic market “snap back” to previous levels or does it reset at a new lower level after the COVID-19 pandemic?

Many argue that the long history of close correlation between the number of domestic guests in star-rated hotels and real GDP suggests that eventually the “normal” correlation of close to 1 to 2.9 for the country’s star-rated hotels will be re-established. Others suggest that there will be a significant reset at less than 1 to 2.9. What do you think?


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