http://www.businessweek.com/news/2013-01-27/yudhoyono-buffeted-by-indonesia-fuel-dilemma-as-election-nears

Bloomberg News

Yudhoyono Buffeted by Fuel as Indonesia Election Nears: Economy

January 28, 2013

Indonesian President Susilo Bambang Yudhoyono

Susilo Bambang Yudhoyono, Indonesia's president. Photographer: Dimas Ardian/Bloomberg

Indonesian President Susilo Bambang Yudhoyono is under growing pressure to raise fuel prices and curb oil imports as currency risks persist and the window to act narrows ahead of elections in 2014.

The government will probably need to increase subsidized- fuel prices this year, according to economists at Bank of America Corp., Australia & New Zealand Banking Group Ltd., Standard Chartered Plc, PT Bank Danamon Indonesia and Moody’s Analytics. The country limited the use of partially government- funded diesel last week and the trade minister said Yudhoyono will evaluate energy charges in the next few weeks.

The president has avoided raising fuel prices since protests derailed an increase early last year, highlighting the political minefields in a country where riots spurred by soaring living costs helped oust the dictator Suharto in 1998. Subsidies that keep charges below international market rates have bolstered demand for energy imports in the world’s fourth most- populous nation, contributing to a widening current-account gap and a 5.9 percent drop in the rupiah last year.

“This is a dilemma for the president,” said Fauzi Ichsan, a Jakarta-based senior economist at Standard Chartered and a former Finance Ministry analyst. “If the president raises fuel prices, it won’t be good politically, yet without an increase, the current-account deficit will remain high and the rupiah will continue to decline, adding imported inflation.”

The rupiah, the worst performer among Asia’s 10 most-traded currencies excluding the yen last year, fell 0.6 percent to 9,710 per dollar as of 3:50 p.m. in Jakarta, according to prices from local banks compiled by Bloomberg. A daily fixing used to settle non-deliverable forwards was set at 9,783 today by the Association of Banks in Singapore.

Coalition Support

The central bank has refrained from adding to a February 2012 interest-rate cut to shore up the declining currency, as inflation held above 4 percent for three quarters. 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.

“It’s a trade-off between a difficult political choice and an economic choice,” said Aninda Mitra, Singapore-based head of Southeast Asia economics at ANZ. “He could risk more potential political unpopularity for his party if he doesn’t manage this trade-off skillfully and the benefits are obvious: Your current account would start to get capped, your fiscal deficit would encounter less pressure.”

Fuel subsidies rose to 211.9 trillion rupiah ($22 billion) last year and the country imported about $26 billion of oil products in the 11 months through November, according to official data compiled by Bloomberg.

‘Forced Hand’

The price of Brent crude traded in London, a benchmark for more than half the world’s oil, has risen more than 8 percent in the past six months.

“It’s going to come down to a point where it’s a forced hand,” said Vishnu Varathan, a Singapore-based economist at Mizuho Corporate Bank Ltd. If oil prices keep increasing, “the rising subsidy will compound the current-account deficit factor and that will be even more negative for the rupiah.”

The government should try to reduce fuel subsidies early this year “because 2013 is the year of politics, before the bigger year of politics of 2014,” Trade Minister Gita Wirjawan said in Singapore last week. Yudhoyono has met with the energy, finance and economy ministers on the issue, he said.

Policy Imperative

“I think the president understands that it is a priority and a policy imperative from an economic standpoint, but surely there is a political consideration, and that is something that I know he is evaluating in the next few weeks,” Wirjawan said. “To the extent that it does become something that will be doable, I think he will consider it seriously.”

Elsewhere in the Asia-Pacific region today, South Korean consumer confidence climbed to the highest level in eight months while New Zealand’s services industry grew at a slower pace in December.

In Europe, Hometrack Ltd. said U.K. house prices fell 0.3 percent from a year earlier in January. M3 money supply in the euro area unexpectedly grew at a slower pace in December from a year earlier than in November, a European Central Bank report today showed.

U.S. durable-goods orders and pending home sales probably rose in December, Bloomberg News surveys showed.

Indonesia’s current-account deficit last year was probably 2.4 percent of gross domestic product, Finance Minister Agus Martowardojo said Jan. 7. That would be the largest since 1996.

Domestic Demand

DBS Group Holdings Ltd. said in a Jan. 25 report that Indonesia is unlikely to raise fuel prices to reduce strains on the current account and may instead use monetary policy and other tools to “fine-tune domestic demand growth.”

An elevated subsidy bill prevents Yudhoyono from diverting funds to build the highways, airports and ports needed to lure investment to Southeast Asia’s largest economy and achieve an average growth target of 6.6 percent by the end of his second term in 2014.

The country spends more on energy subsidies for households and companies than it does on capital expenditures or social welfare, Fred Gibson, a Sydney-based economist at Moody’s Analytics, wrote in a May 2012 report.

“This year is the right time to do it when the economy is in a sweet spot and doing well,” Gibson said. “Since minimum wages in Indonesia have also increased, households will have some scope to bear higher costs.”

Raising Prices

To reduce spending on energy subsidies, the government raised power prices by an average 15 percent this month. The increase will save the government 14 trillion rupiah, Energy Minister Jero Wacik has said.

“You can tinker around at the margins with macro- prudential measures and power tariff hikes and so on, but the elephant in the room still is a very low price of gasoline at the retail level,” ANZ’s Mitra said.

The price of subsidized fuel may rise by about 1,500 rupiah a liter to 6,000 rupiah, Rudi Rubiandini, then Deputy Energy and Mineral Resources Minister, said in a Bloomberg Television interview in September. Rubiandini was named head of the country’s oil and gas regulator this month.

Such an increase would lead to a spike in inflation to about 8 percent for about one to three months, according to Anton Gunawan, chief economist at Bank Danamon in Jakarta. Consumer prices rose at a slower pace for the second time last month, climbing 4.3 percent from a year earlier.

“The government has to raise fuel prices this year,” Gunawan said. “March will be an ideal time as normally that will be harvest time, so inflation pressure from foodstuffs won’t be too high.”

Limits on the use of subsidized fuel announced last week won’t be enough to help Indonesia’s balance of payments or budget deficit, according to Bambang Brodjonegoro, head of fiscal policy at the Finance Ministry. “We need to find something bigger,” he told reporters in Jakarta on Jan. 23.

To contact the reporters on this story: Sharon Chen in Singapore at schen462@bloomberg.net; Novrida Manurung at nmanurung@bloomberg.net

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


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