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Markets await fixed-subsidy scheme
Deep in discussion: Vice President Jusuf Kalla (left) talks with Public Works and Public Housing Minister Basuki Hadimuljono during an event in Central Jakarta on Monday
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Deep in discussion:: Vice President Jusuf Kalla (left) talks with Public Works and Public Housing Minister Basuki Hadimuljono during an event in Central Jakarta on Monday. The Agriculture Ministry, the Public Works and Public Housing Ministry, the National Police, the Attorney Generalâs Office and the Development Finance Comptroller (BPKP) signed a joint circular on measures to shift government subsidies to achieve self-sufficiency in the supply of rice, corn and soybean.(Antara/Widodo S. Jusuf) (left) talks with Public Works and Public Housing Minister Basuki Hadimuljono during an event in Central Jakarta on Monday. The Agriculture Ministry, the Public Works and Public Housing Ministry, the National Police, the Attorney Generalâs Office and the Development Finance Comptroller (BPKP) signed a joint circular on measures to shift government subsidies to achieve self-sufficiency in the supply of rice, corn and soybean.(Antara/Widodo S. Jusuf)
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span class="inline inline-center">Deep in discussion: Vice President Jusuf Kalla (left) talks with Public Works and Public Housing Minister Basuki Hadimuljono during an event in Central Jakarta on Monday. The Agriculture Ministry, the Public Works and Public Housing Ministry, the National Police, the Attorney General's Office and the Development Finance Comptroller (BPKP) signed a joint circular on measures to shift government subsidies to achieve self-sufficiency in the supply of rice, corn and soybean. (Antara/Widodo S. Jusuf)
Indonesia is a whisker away from receiving a credit rating upgrade, with prudent monetary and fiscal management likely to be bolstered by the possible implementation of a fixed-subsidy scheme that has been long awaited by the market.
Finance Minister Bambang Brodjonegoro said recently that he would propose a fixed-subsidy scheme to lawmakers in the deliberations for the revised 2015 State Budget early next year.
A fixed-subsidy scheme, in which fuel subsidies are fixed at between Rp 1,000 to Rp 2,000 per liter, would safeguard the state budget from unwanted fluctuations in the US dollar and oil prices that could threaten the fiscal balance, he explained.
Standard & Poor's (S&P), the only major rating agency that still rates Indonesia below investment grade, seems to be looking for a more comprehensive approach to subsidy rationalization before granting a rating upgrade, argued Euben Paracuelles and Lavanya Venkateswaran, economists with Japan-based fund manager Nomura.
S&P had stated that the move by President Joko 'Jokowi' Widodo to hike fuel prices was only a 'stop-gap measure', with the rating agency suggesting the government should overhaul its fuel-subsidy scheme.
'Deeper reforms need to be pursued if the current-account deficit is to shrink on structural and not just cyclical grounds,' said Lim Su Sian, an economist with the HSBC Bank.
'In this context we look forward to the possibility of a fixed-subsidy model,' she added.
Over the last few years, Indonesia's fuel subsidies have consistently soared above their budget allocation because of the unpredictable movement of oil prices and local exchange rates, with such fiscal uncertainty becoming the major concern among international rating agencies.
The revised 2014 State Budget estimated that fuel subsidies would soar to Rp 246.5 trillion (US$19.5 billion), compared to Rp 210.7 trillion in the initial allocation.
However, the situation may soon change after the implementation of a fixed-subsidy system, as well as after the reallocation of fuel-subsidy spending to infrastructure that is predicted to have a multiplier effect on economic growth.
'By combining the stories of reallocating fuel subsidies to infrastructure with a healthier budget structure and the easing of external risks, we believe the likelihood for the S&P rating agency to change Indonesia's outlook from stable to positive is higher in 2015,' Mandiri Sekuritas analysts, led by Aldian Taloputra, wrote in a note.
In May this year, the Philippines beat Indonesia to earn an investment-grade rating from S&P. Just last week, another rating agency, Moody's Investors Service, even upgraded the Philippines' sovereign debt papers to one level above investment grade.
Nevertheless, that does not mean that the strong foreign inflows that Indonesia's bonds market has enjoyed since earlier this year would revert to the Philippines very soon, analysts said.
'I am positive about Indonesian bonds in the short-term ' with inflationary pressure muted and further tightening by Bank Indonesia unlikely, yields remain relatively attractive,' Eugene Leow, a Singapore-based fixed-income analyst with DBS Bank, wrote in an email interview.
'Even as there may be some flows to Philippine government bonds, it must be noted that the potential for a rise in yields appears higher in the Philippines than in Indonesia,' he explained.
In the fixed-income market, higher yields meant less expensive pricing among investors, with an upward move in yields indicating a decrease in attractiveness in bonds.
Expectations about the economic reforms undertaken by Jokowi and a possible rating upgrade on the country's sovereign debt paper have drawn a robust inflow of funds to Indonesia. Foreign ownership of government bonds rose to a historic high of Rp 482.2 trillion, or 39.5 percent of total bonds outstanding in the secondary market, as of earlier this month.
