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UPDATE 1-Indonesia to hike subsidised fuel price to cut budget deficit
September 18, 2014 / 7:12 AM / 3 years ago

UPDATE 1-Indonesia to hike subsidised fuel price to cut budget deficit

(Adds market reaction, analyst/business comments)

HONG KONG, Sept 18 (Reuters) - Indonesia’s new government plans to hike the price of subsidised fuel by as much as 3,000 rupiah per litre by November to reduce its budget deficit and allocate more funds for fixing its infrastructure bottlenecks, policymakers said on Thursday.

“I think the program immediately facing is the issue of fuel subsidy and we believe we are going to tackle this very quickly,” Luhut Binsar Pandjaitan, senior advisor to President Jokowi’s team told reporters at a media briefing at CLSA’s annual conference.

“We discussed this with the team of advisors of the president-elect and we are going to hike the fuel subsidy (price) by 3,000 rupiah by November. That can give better allocation to infrastructure,” he said.

Fuel subsidies cost the government about $20 billion a year, or nearly a fifth of its budget, and economists say they mainly benefit the rich in Southeast Asia’s largest economy.

President-elect Joko Widodo, who takes office on Oct. 20, wants to fast-track a cut in fuel subsidies that are the main reason behind a current account deficit that is expected to exceed 3 percent of gross domestic product this year.

Indonesia’s main stock index showed little reaction to the subsidy cuts plan, rising 0.4 percent by the midday break. The rupiah fell 0.6 percent on U.S. Federal reserve rates policy concerns.

Replying to a question from a reporter on whether the new incoming government foresees a problem from its coalition partners while tackling fuel subsidies, Pandjaitan didn’t expect any difficulties.

”Informally, I don’t see a problem with this as I discussed this with some members of Parliament and the chief of Parliament and they agreed on this,’ he said.

Pandjaitan admitted the biggest issue would be to sensitize the broader population on the issue of raising fuel prices.

Local capital markets in the short term may react negatively to the fuel price hike due to inflationary worries, but said this year would be the best time to do it,” said Norico Gaman, head of research at BNI Securities in Jakarta.

“Doing the increase all at once by 3,000 rupiah per litre is better,” he added. “To do the increase by stages will only prolong the inflationary pressures.”

Fuel subsidies are “the biggest burden to our economy” Suryo Sulisto, head of Indonesia’s influential chamber of commerce (KADIN), told Reuters earlier this week.

Reform of fuel subsidies is the most important thing businesses expect from the next administration, said Sulisto, adding that KADIN recommended getting rid of the fuel subsidy totally and then reallocate the funds into infrastructure, education or health. (Reporting by Saikat Chatterjee; Additional reporting by Fransiska Nangoy in JAKARTA; Editing by Michael Perry)

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