TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Fuel-price hikes send 'clear signal' of reform
Cash flows: An official checks bundles of banknotes at a Bank Negara Indonesia (BNI) cash center in Jakarta on Tuesday
Change Size
C
span class="inline inline-center">Cash flows: An official checks bundles of banknotes at a Bank Negara Indonesia (BNI) cash center in Jakarta on Tuesday. Bank Indonesia, the central bank, decided to raise its benchmark rate by 25 basis points to 7.75 percent in response to the fuel-price increases. The central bank also pushed up its lending rate by 25 basis points to 7.75 percent, while maintaining its deposit rate at 5.75 percent. JP/Ricky Yudhistira
International rating agencies and analysts foresee a bright outlook for the Indonesian economy and are full of praise for President Joko 'Jokowi' Widodo, after he boldly implemented the unpopular move of increasing fuel prices less than a month after taking office.
The early cut in fuel subsidies showed strong commitment from Jokowi to maintain fiscal prudence, with his latest policy possibly signaling the implementation of stronger economic reforms in Indonesia, rating agencies said.
'The hike in administered fuel prices in Indonesia provides a clear, positive signal of the new government's intentions to swiftly implement its reform agenda,' Fitch Ratings director of sovereign ratings Thomas Rookmaaker told The Jakarta Post on Tuesday.
He noted that Indonesia's fuel subsidy bill was high compared to its peers, and the move to increase the prices of subsidized fuel would create fiscal space for growth-enhancing public capital expenditure and contribute to an improvement in the external balance.
The Finance Ministry has predicted that Jokowi's move to increase fuel prices by 31 percent to Rp 8,500 per liter could save the state budget Rp 120 trillion (US$9.8 billion) annually, while Bank Indonesia (BI) estimated the move could reduce the current-account deficit by at least $2 billion.
Jokowi is widely seen as a leader with strong commitment to reforms and his election saw expectations emerge that the country could receive a rating upgrade, consequently drawing an even stronger influx of foreign investment.
In Indonesia, foreign direct investment (FDI) realization has reached an historic high, while government bonds have been in strong demand after the country won investment grade status from the Fitch and Moody's Investors Service in 2011 and 2012, respectively.
On Tuesday, both rating agencies maintained a stable outlook of Indonesia's credit rating despite the fuel price increases ' meaning the country is unlikely to see a further upgrade soon ' but nevertheless acknowledged the importance of the fuel subsidy reform to the country's economic outlook.
Savings from subsidized fuel cuts will be allocated for:
Agriculture: Rp 16t irrigation, seed subsidy, fertilizer subsidy
Fisheries: Ships, hip machinery, cold storage
Maritime-based infrastructure
Energy: Energy diversification, gas network
IT: Bandwidth
Health: More doctors, increasing BPJS Kesehatan (Healthcare and Social Security Agency) recipients from 86 million people at present
Water security
*71,000 ha irrigation system
*39,000 ha swamp
*21 dams (ongoing)
*9 dams (new)
*513 ponds
*600km flood control
*45km flood rehabilitation
*11m2/second raw water facilities
National connectivity
*258.9 km new roads
*23.32 km toll roads
*100 km railway
*700 km railway capacity increase
*59 bridge infrastructure
*14 river docks
*3 lake docks
*13 pioneering ships/vessel
*167 ports to be improved
*8 airports development
*2 calibration aircraft
*2 pioneering passenger aircraft
*15 units transmitter
*10 units studio
Basic infrastructure
*85.2% electrification rate vs 83.2% now
*70.25% drinking water access vs 70% now ' by improving water supply development system (SPAM)
*62.4% sanitation access rate vs 60.5% now ' by improving waste water infrastructure
*Lowering slums to 9.7% vs 10% now ' by improving infrastructure and facilities in slums
JP/Team
Source: National Planning Agency (Bappenas), Finance Ministry, Energy and Mineral Resources Ministry, Kompas, The Jakarta Post
'The government's decision to raise fuel prices is credit positive for the sovereign because it will result in fiscal savings,' Atsi Sheth, a senior vice president of sovereign risk group at Moody's, said in an email interview.
So far, the only member of the so-called 'Big Three' rating agencies that is yet to award Indonesia an investment grade status is Standard & Poor's (S&P), which rated the archipelago at speculative grade, or one notch below investment grade.
On Tuesday, S&P stated that the fuel price hike was a positive step for the sovereign rating of Indonesia, but warned that the policy could only be a 'stop gap measure' instead of a structural improvement in the fuel subsidy system.
'Unless a comprehensive overhaul of the domestic fuel price mechanism is put in place, Indonesia's fiscal position is still vulnerable to a fluctuation in global oil prices,' said Takahira Ogawa, director of sovereign ratings at S&P.
'Given Indonesia's growing economy, the total size of its fuel subsidy could also increase further even if global fuel prices remain the same,' Ogawa argued.
The local stocks and currency markets strengthened after Jokowi implemented the increases.
The Jakarta Composite Index (JCI) rose 0.9 percent to close at 5,102.4 on Tuesday, the highest close since Oct. 23.
Foreign investors bought Rp 243.7 billion stocks more than they sold, taking up the net foreign buy of local stocks so far this year to Rp 48.94 trillion.
Domestic investors, on the other hand, took profits as they sold a net Rp 244 billion during the day.
Meanwhile, the rupiah posted its biggest gain in three weeks as it strengthened 0.4 percent to touch 12,153 per US dollar, according to Bloomberg.
'The combination of tight monetary policy, fiscal consolidation and policy reforms should improve the longer-term outlook for the economy,' Maybank analysts led by Saktiandi Supaat wrote in a note released on Tuesday.
'We would not be surprised if the credit rating agencies decided to lift Indonesia's ratings.'
