Indonesia’s Widodo Raises Fuel Prices

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Wall Street Journal by Ben Otto

November 17, 2014

http://online.wsj.com/articles/indonesia-seen-likely-to-raise-fuel-prices-at-midnight-1416230590

JAKARTA, Indonesia—President Joko Widodo raised subsidized fuel prices by roughly one-third, a crucial step toward his goal of trimming energy subsidies to free up billions of dollars for infrastructure and other programs.

A fuel-price increase in the world’s fourth-largest nation had been discussed for months, even while Mr. Widodo was on the campaign trail, and has been one of the top expectations since his inauguration last month. Economists have called a phasing out of subsidies the biggest priority for the nearly $900 billion economy.

Mr. Widodo, just back from his first international summits overseas, announced the increase late Monday on national television. Prices for subsidized gasoline will climb to 8,500 rupiah ($0.70) a liter from 6,500 rupiah, while prices for diesel will rise to 7,500 rupiah from 5,500 rupiah, effective midnight.

“From time to time, we as a nation are faced with difficult choices,” Mr. Widodo said in a short statement. “The country needs funds to build infrastructure [and] for education and for health care, but such funds have not been available because they were wasted to subsidize fuel prices.”

Subsidies make fuel in Indonesia—with a population of 250 million—some of the cheapest in the region, but the benefit has gone primarily to the relatively wealthy who can afford cars. The bill has soared in recent years amid fast growth and rising consumption, which has put more cars and motorcycles on the roads. Little has been left over in the state’s discretionary budget for the new ports and roads that the Southeast Asian nation needs to reduce bottlenecks and raise growth rates from a five-year low.

Economists called the 2,000-rupiah increase significant, though less than the 3,000-rupiah increase many were hoping for several months ago. Economists said the move would save Indonesia almost $8 billion through the end of 2015, less than the $12 billion Mr. Widodo’s advisers had once suggested they were targeting.

“The market has somewhat expected the lower increase as global oil prices have fallen,” said Eric Sugandi, economist for Standard Chartered , but will welcome the move nonetheless “because it shows [Mr. Widodo] is doing what he promised to do.”

Franky Welirang, director at PT Indofood Sukses Makmur , one of Indonesia’s largest food producers, said the increases would benefit Indonesia in the long term and that major corporations wouldn’t be hard hit because they don’t consume subsidized fuels.

“If there’s any company complaining their production costs will increase because of higher fuel prices, they’re liars,” Mr. Welirang said.

The move means a significant increase not only for fuel but also for goods that depend on transportation to reach markets. That will help stoke inflation for about three months, likely pushing a year-on-year reading to near 7.5% next month, from less than 5% currently, economists said.

That could push Bank Indonesia to raise rates slightly from 7.50%, a high implemented last year to rein in domestic consumption and a current account deficit. Aldian Taloputra, chief economist of Jakarta-based Mandiri Sekuritas, said the central bank would likely respond with a 0.25-percentage-point increase in its benchmark policy rate “just to anchor in inflation expectations.”

Mr. Widodo promised to disburse cash aid to the country’s poorest families to mitigate the impact, something former President Susilo Bambang Yudhoyono did as well in previous fuel-subsidy cuts.

The fuel subsidies are a legacy of the more than 30-year rule of former President Suharto, who was ousted in 1998, and have long presented a quandary for Indonesia’s leaders.

Initiated as a measure to stabilize prices and help the poor, the subsidies have increasingly been seen as a gift to the growing consumer class. They now eat up around $20 billion annually. Touching them can be politically sensitive, and efforts in the past have triggered riots.

Mr. Yudhoyono faced turbulence when he tried to cut the popular subsidies during his 10 years in office. Two years ago, faced with violent street protests, he failed to get parliamentary support to raise fuel prices by an average of 33%. That handcuffed government spending and—because Indonesia has been a net fuel importer since the early 2000s—helped blow out the current-account deficit.

Mr. Yudhoyono’s government last year raised fuel prices by that amount anyway after parliament declined to interfere.

The political implications of Monday’s move remain to be seen. Mr. Widodo’s rivals control the legislature and have threatened a strong opposition to him, but he is widely popular and has spent months preparing Indonesians for the eventual increase.

Finance Minister Bambang Brodjonegoro said Monday night that the government would begin working with parliament on where to reallocate the subsidies.

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