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For Jokowi, Real Test on Indonesia Fuel Subsidy Is Starting

by Melissa Cheok
June 22, 2016, 5:00 AM GMT+7
Updated on June 22, 2016, 11:20 AM GMT+7

➞ Gasoline prices declined this year while Brent crude rose 35%

➞ Return to subsidies would put pressure on budget deficit

Joko Widodo. Photographer: SeongJoon Cho/Bloomberg

Rising oil prices have put Indonesian fuel costs back in focus as some economists question whether President Joko Widodo will bring back
budget-draining subsidies.

Within three months of taking office in 2014, Widodo scrapped subsidies <http://www.bloomberg.com/news/articles/2014-12-31/widodo-makes-
biggest-change-to-indonesias-fuel-subsidy-system> on gasoline and capped aid on diesel in a move supported by investors and credit-rating
companies. With oil prices falling at the time, he didn’t face much protest from ordinary Indonesians either.

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6/5/2017 For Jokowi, Real Test on Indonesia Fuel Subsidy Is Starting ­ Bloomberg

Now, with Brent crude rising 35 percent this year to top $50 a barrel and gasoline prices in Indonesia falling, concern is growing about whether
the president -- who is better known locally as Jokowi -- will have the political will to raise fuel costs. Macquarie Group Ltd.
<https://www.bloomberg.com/quote/MQG:AU> said in a note earlier this month that fuel prices are already at least 10 percent below market
prices and there’s only a one-third chance that Indonesia will increase costs in line with international prices.

“It remains to be seen if the commitment will hold firm when faced with surging crude oil prices,” Gundy Cahyadi, an economist at DBS Group
Holdings Ltd. in Singapore, said in an e-mailed response to questions. “A return to a fuel-subsidy regime would mean that the government
needs to allocate less for capital expenditure once again, which would hurt longer-term growth prospects.”

Note: Regulated gasoline prices for Indonesia excluding Java, Madura, Bali.

The government adjusts prices for high octane fuel every three months, basing its calculation on the international price of oil, tax and other
costs. The price of 88-RON gasoline, known as premium, fell 9.8 percent to 6,450 rupiah a liter this year. The next price adjustment is due in
July.

Subsidized fuel has been the norm in Indonesia since the first global oil-price shock in the 1970s. Since then, the nation’s budget has borne
most of the cost differential between market and fixed energy prices. Fuel subsidies would have eaten up
<http://www.bloomberg.com/news/articles/2014-12-31/widodo-makes-biggest-change-to-indonesias-fuel-subsidy-system> 13 percent of the
budget in 2015 if they weren’t removed in January, according to Oversea-Chinese Banking Corp.

If Jokowi’s administration waivers in its commitment to scrap subsidies, the budget may come under additional strain. The government is
already struggling to meet revenue targets as growth in Southeast Asia’s largest economy slows, putting pressure on the budget deficit, which
the government now sees reaching as high as 2.5 percent of gross domestic product.

Stronger Currency

Domestic fuel prices may remain unchanged until September because oil prices are higher, but still within a range the government had
predicted, said Gusti Nyoman Wiratmaja Puja, director general of oil and gas at the Energy and Mineral Resources Ministry.

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“We will still evaluate prices every three months,” he said. “Crude oil prices are rising but still very stable.”

S&P Global Ratings flagged risks related to the fuel subsidy in a review earlier this month in which it withheld upgrading Indonesia’s credit
rating <http://www.bloomberg.com/news/articles/2016-06-01/indonesia-fails-to-win-upgrade-from-s-p-on-fiscal-performance> from junk. It
said the government had “apparent hesitancy” in allowing domestic gasoline prices to fully track international prices.

A stronger currency may have helped to offset the increase in oil prices, giving the government room to hold off on raising gasoline costs, said
Khoon Goh, head of Asia research at Australia and New Zealand Banking Group Ltd. in Singapore. The rupiah has strengthened 3.8 percent
against the dollar this year and was trading at 13,278 as of 11:15 a.m. in Jakarta on Wednesday.

“Indonesia can’t return to fuel subsidies, it’s very expensive,” Goh said in an interview. “Tax revenue is already undershooting. If they go back
to subsidies, they will have to raise taxes elsewhere and that will be difficult.”

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