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Govt hints at big hike in fuel price
The new government has signaled a steep increase in the price of subsidized fuel, but has asked for forbearance from the Indonesian people and investors as the policy will need meticulous planning in anticipation of the potential upswing in inflation and poverty levels
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he new government has signaled a steep increase in the price of subsidized fuel, but has asked for forbearance from the Indonesian people and investors as the policy will need meticulous planning in anticipation of the potential upswing in inflation and poverty levels.
The government is 'fully aware' of the uncertainty caused by on-again, off-again debates on the plan to hike the prices of petroleum-based fuels, Coordinating Economic Minister Sofyan Djalil told reporters in his Jakarta office on Tuesday.
However, he suggested that the issue would be resolved soon. 'Just wait, there will be an announcement from the government [related to the fuel price-hike plan] in the not-too-distant future,' said the minister.
In his presidential campaign, President Joko 'Jokowi' Widodo pledged to reform Indonesia's burdensome and poorly targeted fuel subsidies, estimated to hit Rp 276 trillion (US$22.7 billion) next year, or eating up around 15 percent of total state spending.
Jokowi's economic advisors have declared that the fuel price hike could be implemented as early as Nov. 1, with the price of subsidized Premium gasoline likely to increase by Rp 3,000 per liter from the current price of Rp 6,500.
However, the market has grown more concerned that the fuel price hike could be put on hold because of the falling global oil prices and the non-conducive political environment, particularly as Jokowi's coalition of parties does not command a majority in the House of Representatives.
On Tuesday, Finance Minister Bambang Brodjonegoro moved to calm investors' concerns. He dropped hints that there would be bold reforms in fuel subsidies in a statement signaling that the new government could proceed with the fuel price hike of Rp 3,000 per liter, in spite of falling global oil prices.
'We do not want just to implement an ad hoc [fuel subsidy] reform with only a short-term effect on the economy,' Bambang told reporters on Tuesday. 'We want to undertake reforms with long-term impacts, something that can cause fundamental improvement in our economy.'
The finance minister, nevertheless, asked for patience from the Indonesian people and global investors, as a fuel price hike is not a policy that can be implemented harshly.
'We need to prepare the support system [for the fuel price-hike policy], such as the cash assistance program and the data on low-income households,' Bambang insisted.
The Jokowi administration has Rp 10 trillion of social assistance funds, Rp 5 trillion from the revised 2014 state budget and another Rp 5 trillion from the 2015 state budget, which could be distributed to the poor to cushion the inflationary impact of a possible fuel price hike.
A fuel price hike of Rp 3,000 per liter could add 3.2 percent to inflation from the current level on 4.5 percent, according to Bank Indonesia Deputy Governor Perry Warjiyo.
The central bank executive, however, said the policy could reduce the current-account deficit by at least $3 billion, meaning that the economic benefits would outweigh the disadvantages from the one-off inflation shock.
Former finance minister Chatib Basri has also estimated that a fuel price hike of such a magnitude could save at least Rp 130 trillion next year, thus freeing the funds that Jokowi needs to build infrastructure projects that have multiplier effects on economic growth.
'A material reduction in fuel subsidies would be instrumental in helping to shrink Indonesia's twin fiscal and current-account deficits, given that below-market prices have encouraged excessive energy consumption,' international rating agency Moody's Investors Service said in a statement released this month.
Fuel subsidy reforms would be 'credit positive' for the Indonesian sovereign rating and a number of key sectors, including infrastructure and oil and gas, Moody's added.
For quite some time, the enormous fuel subsidy has been a structural problem that has weighed on Indonesia's economic potential and stability. Therefore, any postponement or backpedaling when it comes to raising prices would not be greeted positively by the market, analysts have warned.
'While the new Cabinet holds promise for its professional bent, the real test will come when it deals with economic issues at hand, particularly fuel price subsidies,' Maybank analysts led by Saktiandi Supaat wrote in a research note.
'Any delays in reform announcements or a resurfacing of political tensions could spur portfolio outflows and weigh on the rupiah.'
