W

ith inflation expected to ease after the Ramadhan month, the attention of investors has now turned to President Joko '€œJokowi'€ Widodo'€™s measures to adjust the domestic gasoline fuel price as part of the government'€™s promised fuel subsidy reform.

'€œThe government'€™s stance on fuel pricing policy remains a question mark, with growing concerns on whether the commitment to abolish gasoline subsidies remains intact,'€ said Hak Bin Chua, an economist with Bank of America Merrill Lynch.

The President has promised to eliminate unproductive fuel subsidies, yet his administration has not hiked domestic fuel prices since March, over fears of a potential liftoff in inflation, particularly during the Ramadhan month when price levels are historically high due to surging consumption patterns.

Low fuel prices have been maintained despite the fact that the rupiah'€™s steep depreciation against the US dollar and the rise in oil prices have driven up the cost of fuel imports well above the domestic gasoline retail price.

The current retail Premium fuel price of Rp 7,300 per liter was discounted roughly 40 percent from the actual international price, according to analysis from Trimegah Securities released last week.

Meanwhile, analysis from Bank of America Merrill Lynch calculated that the fair price for 88-octane Premium gasoline stood at around Rp 7,800 (58 US cents) per liter. Their assumption was based on external variables measured on July 1, when Brent oil was priced at US$62 per barrel and the rupiah was traded at around 13,300 per US dollar.

Beginning this year, the government has implemented a new fuel subsidy system in which domestic fuel prices would be adjusted every month, based on an assessment on fluctuations in oil prices and exchange rates. In doing this, President Jokowi has sought to reduce the fuel subsidy bill and instead reallocate the funds to growth-generating infrastructure projects.

Fuel subsidy spending allocation was trimmed down from Rp 350.3 trillion last year, to only Rp 64.7
trillion in the revised 2015 State Budget.

However, risks might amplify if the government continued to refrain from adjusting fuel prices in line with their market prices, economists have warned.

Should the situation persist like it has to date, the state budget might have to pay an extra Rp 40 to 50 trillion in fuel subsidies until the end of the year, economists from Bank Central Asia (BCA) wrote in a recent research note.

Meanwhile, the World Bank has also called for greater consistency and transparency in the implementation of the new fuel pricing system. In its quarterly economic report released this month, the bank lamented the '€œmixed signals'€ sent by the Indonesian government over the fuel subsidy policy, which had so far caused '€œconfusion'€ among investors.

'€œOn the fuel subsidy, we should not backtrack from the policy and we should continue the reform,'€ stated Edimon Ginting, the chief economist of Asian Development Bank (ADB) in Indonesia.

Meanwhile, Energy and Mineral Resources Minister Sudirman Said has said that fuel prices might be evaluated every three months, instead of every month, to help the Indonesian people better adapt to price shocks from the fuel price adjustment.

'€œWhat is certain is that there will be a policy to smooth out the impact of the fuel price adjustment,'€ Finance Minister Bambang Brodjonegoro said recently.

'€œWe will find the solution for this soon, but definitely we will not allocate more funds [for fuel subsidies] in the state budget, or pass a bigger burden onto Pertamina,'€ the minister said, referring to the state-owned oil firm.