Indonesia may raise fuel prices next month as policy makers seek to reduce subsidies, Deputy Finance Minister Mahendra Siregar said, predicting confidence in the rupiah will improve as fiscal management is strengthened.
The government is studying plans to increase subsidized- fuel prices across all categories or by vehicle type, Siregar said in an interview in his office in Jakarta yesterday. The new policy may encourage Standard & Poor’s to boost Indonesia’s credit rating to investment grade, he said.
President Susilo Bambang Yudhoyono has sought to cut fuel subsidies and allocate more funds to infrastructure to spur expansion. The government limited the use of partially subsidized diesel in January after protests derailed plans to raise prices in 2012, and S&P said this month that a delay in structural reforms, especially rationalization of energy subsidies, is a constraint in Indonesia’s credit quality.
“We have to” raise prices in May, Siregar said. “The situation already has created such a condition that it’s no longer sustainable” in terms of management of the budget and confidence in economic stability, he said.
S&P rates the Indonesia one step below investment grade at BB+. It was returned to investment grade by Moody’s Investors Service last year and by Fitch Ratings in late 2011.
Prices may be increased by at least 2,000 rupiah (21 U.S. cents) a liter from 4,500 rupiah currently, Siregar said. That may limit the budget deficit to 2.4 percent of gross domestic product instead of a shortfall of more than 3 percent, he said.
“The rupiah is affected by the overall confidence of our fiscal management mostly,” Siregar said. While it isn’t clear if the new fuel policy will strengthen the rupiah, “at least in terms of confidence, I would say it helps,” he said.
The rupiah was the biggest loser against the dollar after the Japanese yen last year among 11 Asian currencies tracked by Bloomberg. It has gained 0.8 percent so far this year.
“The time is ripe for fuel-price increases, apart from political risks, but we need more wholesome measures, not piecemeal,” said Enrico Tanuwidjaja, a Singapore-based economist at Royal Bank of Scotland Group Plc, suggesting prices be raised by more than is currently proposed, accompanied by direct cash transfers to the poor. “The rupiah should strengthen but bond yields may go higher amidst inflation risks.”
Yudhoyono, who can’t run for president next year after serving two terms, struggled to win support from within his own coalition for last year’s proposed fuel-price increase. He has said that Indonesia should review its subsidy bill and use the savings to boost infrastructure, calling for fiscal prudence.
In his annual budget announced in August, the president allocated 274.7 trillion rupiah for energy subsidies, compared with 193.8 trillion rupiah for capital spending. The country spent 211.9 trillion rupiah on fuel subsidies in 2012.
Consumer price gains quickened to 5.9 percent last month from a year earlier and Bank Indonesia has held borrowing costs for 14 meetings. 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 commodity prices.
The Indonesian economy probably expanded about 6.3 percent last quarter, Siregar said. The government may lower its target for growth this year to a range of 6.3 percent to 6.5 percent, from 6.8 percent previously, he said.
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