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June 18 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings said that the proposed fuel price increases in Indonesia will not impact PT Pertamina (Persero)’s (Pertamina; BBB-/Stable) public service obligation (PSO) or its linkages with the state, which drive its ratings. Also, the proposed price increases, if implemented, will not have a material impact on the financial profile of Pertamina given the structure of the subsidy mechanism.
Early this week the Indonesian parliament approved an increase of fuel prices, which would result in a 44% increase in subsidised petrol and a 22% increase in subsidised diesel. Fitch estimates the proposed price revisions can reduce the annualised state subsidy to Pertamina by about USD8bn at current international oil prices. This compares with a total state subsidy of USD22bn paid to Pertamina in 2012.
Pertamina’s subsidy mechanism ensures that the company receives a margin above the relevant mean of Platts Singapore prices for both subsidised gasoline and diesel it sells under its PSO mandate. The increase in retail selling prices will result in a decrease in the per unit subsidy Pertamina receives from the state, against higher revenue from consumers, resulting in overall unchanged cash flows per unit of fuel sold.
Fitch believes that higher retail prices could impact volumes sold to an extent, although this is unlikely to materially hurt Pertamina’s cash generation. The reduced reliance on state subsidies will be only marginally positive for Pertamina’s working capital requirement, as much of the annual subsidy, typically around 95%, is received on a monthly basis.
Despite the retail price increases of subsidised fuel, these will still be sold below market prices. Over 50% of Pertamina’s sales are derived from the sale of these subsidised products, and its EBITDA would be negative if not for this compensating subsidy. Fitch also believes that the subsidy mechanism would remain in place in the foreseeable as further material increases in retail fuel prices are politically challenging.
Pertamina is one of the most important state-linked entities in executing Indonesia’s national energy policy, and the country’s sole refiner and dominant retailer of petroleum products.