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BI warns of risks of subsidized fuel
The Indonesian central bank has warned the incoming government that a failure to increase the price of subsidized fuel could have serious consequences for the countryâs economy
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he Indonesian central bank has warned the incoming government that a failure to increase the price of subsidized fuel could have serious consequences for the country's economy.
Bank Indonesia (BI) Governor Agus Martowardojo said on Friday that if the new government prolonged uncertainty over subsidy reforms, then the monetary authority would be forced to enact more painful measures to reduce oil imports, measures that could cause the economy to suffer a 'hard landing'.
'If no optimal measures are taken on the fiscal side ' and at stake here is the confidence of global investors ' then we may be forced to carry out more painful measures to maintain financial system stability,' he said at his Jakarta office.
'Such measures might cause a 'hard landing' [to Indonesia's economy],' the BI governor warned. 'Our response would affect many people, it would affect economic growth.'
Agus made a difficult decision when he raised the benchmark rate by 25 basis points from its historic-low level of 5.75 percent in his first board of governors' meeting in June 2013. Agus made BI the first central bank in Asia to raise its borrowing costs last year.
At that time, Agus' move was contrary to the market consensus, with all 19 economists surveyed by Bloomberg newswire expecting no change to the BI rate.
He then presided over BI's most aggressive monetary tightening in nearly a decade, lifting the BI rate to 7.5 percent, its highest since April 2009.
The BI rate hike has made the central bank a subject of criticism among politicians, as the aggressive monetary tightening has caused significant deceleration in the economy. Indonesia's gross domestic product (GDP) growth fell to 5.1 percent in the second quarter, the slowest pace in almost five years.
However, central bank executives have defended their decision, arguing that the BI rate hike was intended to reduce the current-account deficit and stabilize the economy.
A further increase in the BI rate is likely to impair president-elect Joko 'Jokowi' Widodo's ability to fulfill his campaign pledge of boosting Indonesia's economic growth to 7 percent.
- Incoming govt needs to reduce costly fuel subsidy
- If fuel prices are not increased, cost to economy could be huge
- Bank Indonesia warns of painful monetary measures
Anxiety over a possible BI rate hike recently resurfaced after Indonesia's current-account deficit soared to $9.1 billion, or 4.3 percent of GDP, in the second quarter this year, doubling the previous quarter's figure.
The sizeable current-account deficit was attributed to high oil imports; the low price of the country's subsidized fuel (Rp 6,500 per liter, the lowest in Southeast Asia) is seen as encouraging excessive consumption of fuel.
'BI is convinced of the necessity of reducing fuel subsidies,' BI Senior Deputy Governor Mirza Adityaswara told The Jakarta Post on Friday.
The central bank would not hesitate to implement monetary policy action to narrow the current-account deficit when necessary, including a possible hike in the BI rate, he added.
There have been concerns over uncertainty on the fuel-subsidy issue after outgoing President Susilo Bambang Yudhoyono rejected Jokowi's request to raise fuel prices.
Jokowi, then, may not have the luxury of dithering on the issue, as he would have to increase fuel prices soon, given the threat of financial market shocks stemming from a possible hike in the US Federal Reserve's rate next year, analysts have warned.
'We believe that the timing of the fuel price hike will likely be a key determinant of market reaction,' Morgan Stanley analysts Hozefa Topiwalla and Aarti Shah wrote in a note distributed to clients on Friday.
'If the Fed turns more hawkish before a fuel price hike, tightening of the external funding environment will further aggravate Indonesia's multiple macro vulnerabilities,' they warned.
» Stockpile p5
Antara/Septianda Perdana
Running on empty: A man brings his motorcycle on a truck to a gas station in Merek, Karo regency, North Sumatra, on Thursday. Due to a gasoline shortage in the Karo area, this man was forced to use a truck to transport his motorbike to purchase fuel at the gas station. Despite state oil and gas company Pertamina's claims that it has normalized the supply of gasoline, many people are struggling to obtain fuel.
