Widodo May Raise Indonesian Fuel Prices as Early as October

Sep 03, 2014 6:32 am ET

(Updates with amount of increase being considered in fourth paragraph.)

Sept. 3 (Bloomberg) -- Indonesian President-elect Joko Widodo may raise subsidized fuel prices as early as next month when his term begins, to free up state funds and increase investment in Southeast Asia’s largest economy.

“We can’t avoid this solution” because we are unable to find ways to boost revenue in the short term, Arif Budimanta, a member of Widodo’s economic team, said in an interview in Jakarta late yesterday. “Previously, we expected a price increase this month under the current government, but the current government can’t do it. Maybe we can do it in October or November.”

Indonesian bonds and stocks rose today after Widodo’s show of commitment to fixing the fuel-subsidy program, which has spurred demand for energy imports and deprived the nation of funds for infrastructure development. His team will discuss with the current government how to adjust next year’s budget by reallocating funds from goods expenditure to capital spending, and focus on increasing investment to lift growth to as much as 8 percent after 2015, Budimanta said.

The team is considering three options for raising fuel prices to curb subsidies: a one-time price increase, a gradual adjustment done every quarter or fixing the subsidy amount, Budimanta said in the interview. He told reporters today a price increase of 500 to 3,000 rupiah ($0.26) a liter is being considered.

Food Prices

The administration of Widodo, known as Jokowi, will find ways to prevent spikes in food prices and minimize the impact on public transportation when fuel costs rise, he said. Plans to allocate cash for poor people are also being worked on, he said.

Outgoing President Susilo Bambang Yudhoyono declined to raise fuel prices before he leaves office, saying it’s not a conducive time to do so, Jokowi was cited by news website Tempo as saying last week after a meeting between the two on Aug. 27.

Legally, Jokowi could move to adjust fuel prices this year without needing parliamentary approval, according to Achmad Farial, deputy chairman of parliament’s energy commission. This year’s budget no longer requires legislative approval for a fuel price change, meaning the decision is the government’s, he said last week.

“The longer you postpone the fuel price hike, the sharper the hike will have to be,” Fauzi Ichsan, an economist at Standard Chartered Plc in Jakarta, said before the Budimanta interview. “In response to a fuel price hike and higher inflation expectations, Bank Indonesia is likely to hike its rate by at least 50 basis points,” though if the rupiah rallies the pressure to raise interest rates will be less, he said.

Stocks Rise

The Jakarta Composite Index rose 0.4 percent to close at a record today. Jokowi’s plan to raise subsidized fuel prices is seen as positive news by investors, said Jeffrosenberg Tan, a fund manager at PT Sinarmas Asset Management in Jakarta.

The yield on the 8.375 percent sovereign bonds due March 2024 dropped six basis points, or 0.06 percentage point, to 8.10 percent, according to the Inter Dealer Market Association. Indonesia raised $1.5 billion selling dollar-denominated sukuk at the lowest yield since 2012 amid optimism Jokowi will reduce fuel subsidies and cut red tape.

Subsidy Cost

Shrinking the cost of the fuel subsidy will give Jokowi more room to fund a policy agenda that includes widening access to health care and reducing inequality. Some $24.9 billion has been earmarked for fuel subsidies in the 2015 government budget drafted by Yudhoyono’s administration, or 14 percent of total spending.

The nation would save 48 trillion rupiah with a fuel-price increase of 1,000 rupiah a liter, assuming it happens in January, Finance Minister Chatib Basri told reporters in Jakarta today. The government would save 7 trillion rupiah this year if subsidized fuel prices are raised by the same amount in November, or 21 trillion rupiah if the adjustment is 3,000 rupiah a liter in November, he said.

A 3,000 rupiah increase would add 4.5 percentage points to inflation, while a 1,000 rupiah adjustment would boost consumer- price gains by 1.5 percentage points, Basri said.

Jokowi wants to raise the 2015 growth target to 5.8 percent from the 5.6 percent proposed by the current government, Budimanta said. The government and a parliamentary commission that oversees financial affairs, agreed on a target of 5.8 percent, Olly Dondokambey, head of the commission, said in Jakarta today. The budget assumptions still need to be approved in a plenary meeting.

Adjusting Spending

“We will boost expansion from investment and reallocate ministries budget from goods spending to capital spending,” Budimanta said. “We expect this can save about 20 percent from total ministries’ spending,” he said, referring to the reallocation of funds that could save at least 30 trillion rupiah. The team aims to start revising the 2015 budget in January, he said.

Jokowi, who will take office on Oct. 20, will unveil a plan in December to restructure permit approval processes to make them easier and faster for investors, Budimanta said. The team expects economic growth of about 7 percent to 8 percent after 2015 in the medium term, he said.

“We’re not worried this expansion will trigger a widening current-account deficit as Jokowi plans to boost investment, especially in intermediate industries,” he said. Currently a shortage of intermediate industries has caused the current- account gap to widen because intermediate goods imports are adding to oil imports, he said.

The team is optimistic that the rupiah will average about 11,600 rupiah a dollar next year, compared with the 11,900 level estimated by the current government, he said. Dondokambey said today the government and parliament’s Commission XI agreed on an assumption of 11,600 to 11,900. The Indonesian currency fell 0.1 percent to 11,765 today, prices from local banks show.

--With assistance from Yudith Ho and Harry Suhartono in Jakarta.