Bloomberg News

Fuel Policies Bedevil Asia as Price Increases Hurt Poor

May 03, 2012

Protesters attempt to pull down a fence outside parliament during protests against planned fuel price hikes, in front of the parliament building in Jakarta, Indonesia, on March 30, 2012. Photographer: Ulet Ifansasti/Getty Images

Protesters attempt to pull down a fence outside parliament during protests against planned fuel price hikes, in front of the parliament building in Jakarta, Indonesia, on March 30, 2012. Photographer: Ulet Ifansasti/Getty Images

For K. Indrani, who cleans homes in Colombo to support her invalid husband and 16-year-old daughter, living on the 600 rupees ($4.70) she earns a day just got harder because the Sri Lankan government raised fuel prices in February.

“We have only three lights in our house, but we try to keep them off as much as possible,” the 46-year-old said. “This is affecting my daughter’s studies. We are forced to keep the fridge running, but we are having to cut down on food as we can now afford less on the same pay.”

Indrani’s plight highlights the dilemma for Asian governments from Indonesia to India as they struggle to rein in rising subsidies for energy and food that are inflating budget deficits. Sri Lanka’s inflation doubled to 5.5 percent in March after the island raised fuel prices the previous month to curb the trade gap, and concern that higher costs will distress the poor and spur voter anger has restrained increases elsewhere.

Even as a 33 percent jump in crude oil prices since September strained budgets, India hasn’t boosted gasoline prices since November, and diesel, kerosene and cooking gas since June. Allies of Prime Minister Manmohan Singh’s ruling Congress party have opposed a provisional plan to deregulate diesel prices, the Hindustan Times reported, and rising living costs have prompted rallies and strikes in recent years. Indonesia’s plan to raise fuel prices earlier this year was derailed by the biggest public protests since 2008, the time of the last increase.

‘Budget Blowouts’

“It’s very difficult to roll back these subsidies,” said Agost Benard, a credit analyst at Standard & Poor’s, which lowered India’s rating outlook and held off from boosting Indonesia’s in April. “Governments find themselves pressurized by rising costs of subsidies and budget blowouts and the political backlash they face.”

Malaysia’s government, facing elections by early 2013, hasn’t announced further changes to its retail fuel policy since reducing subsidies for 95-RON gasoline, diesel and liquefied petroleum gas in 2010, when it also stopped paying to keep prices of the highest grade 97-RON gasoline low.

Subsidies account for about 10 percent of India’s annual budget, according to government estimates, and about 15 percent of state spending in Indonesia, according to Capital Economics Ltd. India’s budget deficit widened to 5.9 percent of gross domestic product in the year ended March 31, from a target of 4.6 percent. Failure by Indonesia to pare spending on energy subsidies would boost the budget deficit to 3.5 percent of GDP, from 1.3 percent last year, President Susilo Bambang Yudhoyono has said.

Hurting Development

“If you look at Indonesia and India, the degree of subsidies is now compromising the development expenditure of these countries,” said Sanjay Mathur, Singapore-based head of research and strategy for non-Japan Asia at Royal Bank of Scotland Group Plc. “They need to start effecting fuel price increases.”

The cost of insuring Indonesia’s sovereign debt for five years using credit-default swaps has climbed about 30 basis points to 172.59 basis points yesterday in New York from a seven-month low reached in March, according to data provider CMA.

The contracts, which typically climb as investor confidence deteriorates and decrease as it improves, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The cost of insuring Malaysia’s debt against non-payment has advanced about 18 basis points to 109.96 basis points from March, when it fell to its lowest level since August. Credit- default swaps on State Bank of India have risen 45 basis points to 325.21 basis points since Feb. 20, when the rate was the lowest since Nov. 1. Some investors consider the state-owned lender, the nation’s biggest, a proxy for the sovereign.

Upgrade Delayed

Some Asian countries keep fuel and food costs low for consumers by paying suppliers to sell goods below the market price. Governments can also lose out on revenue from state-owned companies that are forced to sell at regulated prices.

In Indonesia, S&P kept the country’s credit rating unchanged last month, refraining from joining Fitch Ratings and Moody’s Investors Service in raising the Southeast Asian nation to investment grade after parliament rejected a proposal for a 33 percent increase in subsidized-fuel prices from April 1.

Lawmakers instead allowed the government to raise rates only if the Indonesia Crude Price exceeds the state budgetary assumption of $105 a barrel by 15 percent over a six-month period. President Yudhoyono’s administration now plans to cap the sale of below-market-rate fuel for certain vehicles.

“The failure to push through reform of the fuel subsidy regime is also bad news for Indonesia’s long-run growth prospects,” said Gareth Leather, a London-based economist at Capital Economics. A large subsidy bill “will leave the government with fewer resources to spend on things such as badly-needed infrastructure upgrades and better education.”

Policy Impact

In India, S&P lowered the sovereign credit outlook to negative last month amid concern that Asia’s third-largest economy will fail to stem a growth slowdown and widening budget and current-account deficits.

Beyond the political backlash, the impact on monetary policy and the economy provides another disincentive for governments considering lower subsidies. Rising prices would put pressure on central banks across Asia to tighten monetary policy even as the region grapples with persistent threats to growth from Europe’s debt crisis and a slowdown in China’s expansion.

The euro remained lower following a three-day decline on bets that European Central Bank President Mario Draghi will hint at further stimulus measures to counter the region’s debt crisis after today’s policy meeting. The ECB will keep its benchmark interest rate at a record-low 1 percent today, according to all economists surveyed by Bloomberg News.

Services Growth

Indian services expanded at close to the slowest pace in five months in April, the Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics showed today. In China, a survey by the National Bureau of Statistics and China Federation of Logistics and Purchasing indicated non-manufacturing industries grew at a slower pace in April.

Still, fewer Americans probably filed initial applications for unemployment benefits last week. Jobless claims fell by 9,000 to 379,000 in the week ended April 28, a Bloomberg News survey of 46 economists showed before a report due today.

Taiwan reported April 30 GDP grew 0.36 percent last quarter, the smallest gain since 2009, and rising fuel and electricity prices may hurt consumption and damp growth in the three months ending June 30, said Katrina Ell, a Sydney-based economist at Moody’s Analytics. Indonesia’s economy probably expanded 6.31 percent last quarter, the slowest pace since 2010, according to the median of 16 estimates in a Bloomberg News survey.

Halted Easing

Thailand, Indonesia and the Philippines have halted interest-rate cuts in recent weeks as elevated oil costs revived inflation risks. India’s central bank said price risks might limit the room for further cuts even as it reduced borrowing costs by a more-than-forecast half a percentage point in April.

Sri Lanka has raised rates twice this year and let its currency weaken to a record low in the biggest overhaul of economic policy since the end of its civil war in 2009. Ceylon Petroleum Corp., the state oil company, increased petroleum prices from Feb. 12, leading to a 20 percent jump in bus fares and a fuel surcharge on electricity bills.

The persistence of subsidies also creates uncertainty for businesses as they play a guessing game on when prices would be adjusted.

Teddy Yuliandy, who owns a garment company on the outskirts of Jakarta, says fabric suppliers hoard their materials when they expect fuel costs to increase, hoping to sell at a higher price when the fuel adjustment occurs. He now prices his T- shirts weekly instead of monthly, because he doesn’t know when the government will change its subsidy policy.

Taxis Protest

In Thailand, taxi and truck drivers blocked streets and barricaded government compounds with their vehicles earlier this year, demanding higher transport fares to counter rising fuel costs.

While the country gives tax deductions on diesel prices and has agreed to raise fares for intercity bus services, it has refrained from increasing prices for Bangkok buses and taxis to shield consumers recovering from the nation’s worst floods in almost 70 years. Prime Minister Yingluck Shinawatra’s government continues to subsidize natural gas for vehicles and cooking gas.

Sawake Paipun, a single father 51-year-old taxi driver with two sons from Sisaket province in the northeast, says he may turn to farming within two years as it’s too hard to make ends meet in Bangkok.

“We are suffering from higher costs of everything from oil to food,” he said. “What the government is doing now is not helping us much. I think subsidizing will just prolong the problems. They should let the people face the truth and let the prices adjust in line with their costs.”

To contact the reporters on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Anusha Ondaatjie in Colombo at anushao@bloomberg.net; Novrida Manurung in Jakarta at nmanurung@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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