Bloomberg News

Indonesian Rate Pressure Climbs as Fuel Spurs Price Risk

April 09, 2013

Indonesia Inflation Risks First Asian Rate Rise

A customer waits as an attendant refuels his motorcycle at a PT Pertamina gas station in Jakarta. Inflation may accelerate to 7.5 percent by the end of the year if the government announces a 30 percent increase in fuel prices. Photographer: Dimas Ardian/Bloomberg

Indonesia will probably face more pressure than other Asian nations to raise borrowing costs this year after keeping its benchmark interest rate unchanged tomorrow, as plans to cut fuel subsidies boost inflation (IDCPIY) risks.

All 16 analysts surveyed by Bloomberg expect the key reference rate to stay at 5.75 percent tomorrow even after consumer prices rose the most in 22 months in March. Bank Indonesia will probably raise the 4 percent rate it pays lenders on overnight deposits in the coming months before any increase in the benchmark, according to Australia & New Zealand Banking Group Ltd. (ANZ), Barclays Plc and Standard Chartered Plc.

President Susilo Bambang Yudhoyono is due to announce measures limiting energy subsidies within weeks as oil imports deplete foreign-exchange reserves and weaken the rupiah. Any move to raise gasoline and diesel prices or restrict the use of partially government-funded fuel would add to inflation, in contrast with countries from China to the Philippines (PHGDPYOY) where easing cost pressures have reduced the need to tighten policy.

“The government’s plan to announce a new fuel subsidy policy will feed into inflation expectations and a tightening bias by Bank Indonesia,” said Daniel Wilson, a Singapore-based economist at ANZ. The central bank “is probably under more pressure to tighten than other economies because they do have inflation starting to creep up and the external imbalance.”

Still Consistent

The rupiah has fallen 5.5 percent in the past 12 months, the most after the yen and the Indian rupee in a basket of 11 Asian currencies tracked by Bloomberg. The currency fell for a seventh quarter in the three months through March in the longest losing streak since 1998, while Indonesia’s bonds recorded the worst three-month loss in two years on concerns that the government plan to cut subsidies will spur inflation.

Still, Indonesia sold $3 billion of 10- and 30-year dollar bonds at record-low borrowing costs this week, as it tapped the global market for the first time this year. The nation plans to cut the proportion of bonds sold in foreign currencies to 14 percent in 2013 from 21 percent last year, limiting the potential supply of the debt. The average yield on Indonesian sovereign bonds has fallen 22 basis points to 4.14 percent since climbing to an eight-month high of 4.36 percent on March 28, according to JPMorgan Chase & Co.’s EMBI Global indexes.

‘Cannot Avoid’

Governor Darmin Nasution, whose term ends in May, said last week the central bank “cannot avoid” raising borrowing costs if needed. Inflation, which accelerated a faster-than-forecast 5.9 percent in March, may be 5.3 percent by the end of 2013 compared with an earlier estimate of about 4.9 percent, Perry Warjiyo, executive director for monetary policy and economic research at Bank Indonesia, said this week.

“If the government issues the new fuel policy in April, it will cause higher inflation,” said Eric Alexander Sugandi, a Jakarta-based economist at Standard Chartered. Food prices may also rise this year due to bad weather and restrictions on imports of agricultural products, he said, adding that power tariffs are being raised for a second time in April.

Indonesia spent 211.9 trillion rupiah ($22 billion) on fuel subsidies last year, spurring demand for energy products that contributed to a record trade deficit in October. Containing the subsidy bill will be a key challenge for the successor to Agus Martowardojo, the current finance minister, who is set to replace Nasution at the central bank.

Still Consistent

Yudhoyono will name a new finance minister within a month from April 3, Julian Aldrin Pasha, the presidential spokesman, has said.

The reference rate is still consistent with the central bank’s target for inflation, unless the government unveils a new policy to cut fuel subsidies, Warjiyo said. Borrowing costs won’t increase because core inflation will remain stable at about 4.2 percent and the acceleration in March was temporary, he said, without giving a time frame for the rate to be held.

Southeast Asia’s biggest economy joined neighbors from the Philippines to Thailand in easing monetary policy and boosting government spending to bolster growth amid a global slowdown. Bank Indonesia cut its reference rate by 100 basis points from October 2011 through February 2012.

“Previously, their easing has been a lot more aggressive than warranted because their growth was still relatively strong,” said Wee-Khoon Chong, a rates strategist in Hong Kong at Societe Generale SA. “Given the current situation in the currency and also potential upside inflationary pressure, it would make sense for them to unwind a little bit.”

Fasbi Rate

Bank Indonesia raised the rate it pays lenders on overnight deposits, known as the Fasbi, in August to 4 percent from 3.75 percent. While gross domestic product has risen above 6 percent for the past nine quarters, the economy expanded in the three months through December at the slowest pace in more than two years as exports fell amid a decline in global commodity prices.

In contrast, the Philippines, Malaysia (MAGDHIY) and Thailand expanded more than economists estimated in the three months through December. Philippine consumer prices rose 3.2 percent in March from a year earlier, while in Thailand they gained 2.69 percent, slowing from 3.23 percent in February.

“It’s not easy for BI to raise the interest rate, but if we have to then we cannot avoid it,” Nasution said on April 5. The central bank will hold a meeting with lawmakers on inflation, which has increased pressure on the rupiah and bonds, he said.

Optimal Policy

The central bank targets price gains of 3.5 percent to 5.5 percent in 2013. Inflation may accelerate to 7.5 percent by the end of the year if the government announces a 30 percent increase in fuel prices, said Sugandi at Standard Chartered.

Delay of structural reforms, especially rationalization of the energy subsidy regime, is a constraint in Indonesia’s sovereign-credit quality, Standard & Poor’s said in a report this month. The optimal policy is a combination of a fuel-price increase and tighter restrictions on the use of subsidized fuel, Bambang Brodjonegoro, head of fiscal policy at the Finance Ministry, said in an April 3 interview.

Indonesia limited use of partially government-funded diesel in January after protests derailed plans to raise prices in 2012. Elsewhere, India has curbed fuel subsidies to narrow a current-account deficit as part of a policy revamp since September.

A new type of fuel that can be sold at a higher price than existing subsidized products is being considered, Martowardojo said April 2. The government hasn’t yet decided whether to restrict the use of subsidized fuel or increase its price, Coordinating Minister for the Economy Hatta Rajasa said yesterday. The new policy will be announced this month, he said.

A tightening bias by Bank Indonesia will help tame expectations, ANZ’s Wilson said. Still, “the government transition is one of the key reasons why they would probably stay on hold” this month, he said.

To contact the reporters on this story: Sharon Chen in Singapore at schen462@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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