A small request?: House of Representativesâ Commission X1 chairman Emir Moeis (right) asks something of Finance Minister Chatib Basri (second left) and Bank Indonesia (BI) Governor Agus Martowardojo (third left) during a meeting at the House in Jakarta on Monday, while National Development Planning Minister Armida Alisjahbana (left) and Central Statistics Agency chief Suryamin (fourth left) take their seats
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Newly appointed Finance Minister Chatib Basri has hammered home to lawmakers his message on the importance of slashing fuel subsidies, warning politicians of the potential for a massive capital outflow if they refuse to settle the issue.
A riptide of capital streaming out of the country could seriously destabilize the economy, he said.
In his first meeting on Monday with the House of Representatives Commission XI on the economy, Chatib was emphatic about the need to increase the fuel price and thereby convince investors that the government is committed to healthy fiscal continuity.
The adjustment of the fuel price is necessary to ease the dual deficit predicament, with deficits running in both the current account and state budget.
'Our twin deficit problem has instigated concerns among investors regarding our macroeconomic stability,' Chatib told lawmakers.
'If investors think that Indonesia has become a risky destination for their investments, then the flow of capital could reverse at any moment.'
Foreigners hold more than a half of stocks traded on the Indonesian Stock Exchange, as well as around 34 percent of government-issued securities on the secondary bond market, official figures show.
Economists have frequently warned of the threat posed by the swelling fuel subsidy, generally reckoned to be the primary factor behind the widening deficits, which in turn are the source of concern for investors holding Indonesian
assets.
The revised 2013 State Budget forecasts that the deficit will increase to 2.48 percent from 1.65 percent.
Bank Indonesia (BI), the central bank, estimates that the current account deficit will top 2.5 percent this year.
A budget deficit occurs when a country's expenditure exceeds its revenue, with the government relying on debt to plug the gap.
A current account deficit happens when a country imports more goods, services and capital than it exports.
BI governor Agus Martowardojo has said that even though a fuel price hike could drive inflation as high as 7.8 percent, it would be of benefit to the domestic economy in the long run.
'The inflationary pressure will be temporary, for only two or three months,' he told lawmakers.
'If there is no action on fuel subsidies, it will harm the sustainability of our economy going forward.'
A rise in the fuel price would also impact beneficially on the current account deficit and, ultimately, on the rupiah, which Agus forecasts to strengthen to 9,500 ' 9,700 per US dollar. That compares with around 9,600-9,800 with no adjustment in fuel prices, he said.
'The fact that BI estimates 9,500-9,700 means only the slightest improvement for the rupiah, a very likely scenario in our view,' said Gundy Cahyadi, economist with the Singapore-based OCBC Bank.
'I think BI states that range to anchor expectations in the market,' she added.
The rupiah fell 0.2 percent to trade at 9,792 on Monday, according to the Jakarta interbank spot dollar rate, which is compiled by BI from prices at local banks .
The President has the authority to increase the fuel price without House approval, according to the 2013 State Budget Law.
However, President Susilo Bambang Yudhoyono has made it clear that any adjustment in the fuel price must come in hand-in-hand with welfare programs for those on low incomes. These assistance programs do require the approval of lawmakers, and that approval is certainly not a foregone conclusion.
Lawmakers at Monday's meeting criticized the plans for financial relief as 'not creative', and called for more original thinking in policies, which have previously failed to serve their purpose.
In April last year, the House drew back from a plan to raise fuel prices following violent protests.
BI deputy governor Hartadi Sarwono called for a swift resolution to the on again, off again fuel debate.
'We must end this uncertainty on fuel subsidies. That's the most important point. Capital outflow will occur if this uncertainty persists,' he said on Monday.
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